This case relates to CFA Institute Standard I(A): Knowledge of the Law, which requires CFA Institute members to abide by applicable law. The response to this case turns on the regulations governing CPI’s advertising practices. The facts presented do not describe the governing regulations, but the CFA Institute Ethical Decision-Making Framework specifies that investment professionals identify relevant facts when facing an ethical dilemma. If important facts are not known, investment professionals should seek out all information relevant to determining the appropriate course of action. Applicable law is always a relevant and important fact. In this case, the law and regulation applicable to CPI as a US-based adviser stipulates that it is a
fraudulent, deceptive, or manipulative act, practice, or course of business for any investment adviser to, directly or indirectly, publish, circulate, or distribute any advertisement that refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser. [Rule 206(4)-1(a)(1) under Section 206(4) of the Advisers Act]
The radio host’s live commentary accompanying the prerecorded spots constitutes an advertisement for CPI that was a testimonial, which is prohibited by applicable law. Mallouk’s conduct, therefore, violates CFA Institute Standard I(A). Mallouk also violated his firm’s policies and procedures by not reviewing the content of the radio host’s commentary. Mallouk and CPI could have directed that the radio host refrain from making a testimonial or providing extraneous commentary to the preapproved ads. Mallouk also could have monitored the station broadcasts or reviewed transcripts of the live spots to ensure that the advertisement met legal requirements. Even if the comments contained truthful and accurate information and the radio host was making those comments of his own volition with no incentive, the type of advertising violated the law. Choice D is the best answer. This case is based on an 18 September 2018 enforcement action by the US SEC.