This case relates to Ito’s responsibilities under CFA Institute Standard of Professional Conduct IV(C): Responsibilities of Supervisors, which requires CFA Institute members to make reasonable efforts to ensure that anyone subject to their supervision complies with applicable laws, rules, regulations, and the Code and Standards. In this case, Ito supervised a trader who engaged in market manipulation through “spoof” trades over the course of several months. Arguably, the fact that the misconduct went on so long is an indication that Dachshund’s policies and procedures to prevent this type of fraud by traders were inadequate. But misconduct on the part of an employee under your supervision does not automatically mean that you have violated your responsibilities under Standard IV(C).
In this case, Ito was not responsible for developing those policies and procedures and had only recently been hired. He most likely had not yet had time to become aware of the misconduct or bring any inadequate compliance system to the firm’s attention. When Ito does become aware of the trader’s misconduct, he promptly initiated an appropriate and thorough review to determine the extent of the wrongdoing, reported the misconduct to the appropriate parties, developed and implemented new compliance procedures, engaged in remedial measures, and trained those under his supervision as to the expected and proper standard of conduct. Providing information to entities outside the firm responsible for enforcement of securities regulations and compliance with the CFA Institute Code and Standards is best practice at a minimum and may be required by applicable law. Choice D is the best response.
This case is based on an enforcement action by the US Commodity Futures Trading Commission in October 2019. In recognition of the company’s self-reporting, cooperation, and remediation, the Commission imposed a significantly reduced civil monetary penalty against the firm.