Standard IV (C) - Responsibilities of Supervisors

This standard states that if the members have any supervisory responsibilities, they should fulfil them and make reasonable effort to prevent any violation of laws, rules and standards by anyone under their supervision.

This also means that if the member detects that the firm does not have adequate internal compliance systems in place, they should decline to supervise in writing, until the firm adopts reasonable procedures and systems.

Examples of Violation

• Example 1: An investment manager changes her recommendation for stock from Buy to Sell. Before the recommendation is formally published, she orally discusses her new recommendation with one of the executives accountable to her. The executive immediately acts on the information and sells the stock from his client’s portfolio. This is a violation of law as the investment manager was unable to prevent the actions of her subordinate, who acted on the information even before it was formally released.
• Example 2: An investment manager receives information about a possible stock buy from one of her analysts and without crosschecking the credibility of the information passes the recommendation to her portfolio managers. The investment manager later found out the news underlying the recommendation was not credible and the recommendation wasn’t appropriate.
• Example 3: A trader at a firm indulges in highly risky trading activity for a long time. Even though the risk managers reported the activity, the trader’s supervisor does not take any action to halt the activity.