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Beware unlicensed advisers who take 'cut' from friends
ONE week into the circuit breaker imposed from April 7 to June 1 in Singapore, the local authorities felt that there were too many people flouting social distancing rules. This prompted the government to toughen the penalty issued to first-time offenders - instead of a mere warning, a fine of S$300 would be issued immediately.
The Latin phrase 'gnorantia juris non excusat refers to the principle that a person cannot claim ignorance of the law to fend off liability or to be used as defence in the court of law. Take for instance the recent circuit breaker - people who don't live in the same household would have contravened the law if they held a barbecue during the circuit breaker period even though they might not have known about the new ruling given that it had come into force in a short time period. Claiming ignorance, even if they were genuinely unaware, would not negate the S$300 fine.
Does ignorantia juris non excusat also apply to investment management professionals?
According to the CFA Institute's Standard of Professional Conduct relating to Knowledge of the Law, investment professionals are required to understand the applicable laws and regulations of the countries and jurisdictions where they engage in professional activities. These activities may include, but are not limited to, trading of securities or other financial instruments, providing investment advice, conducting research, or performing other investment services.
When questions arise, investment professionals should know their firm's policies and procedures for accessing compliance guidance. (They need not become experts, however, in compliance, nor are they required to have detailed knowledge of or be experts on all the laws that could potentially govern their activities.)
Knowledge of what the law entails is especially pertinent during times of changing regulations, especially in the fintech, digital assets and token payment space. New financial products and processes, along with uncovered ethical missteps, create an environment for recurring and potentially wide-ranging regulatory changes. Improved and enhanced methods of communicating with both clients and potential clients - such as mobile applications and Web-based social networking platforms - also mean that procedures and practices should be adjusted to comply with updated requirements.
In many cases, investment professionals may live, work, or provide investment services to clients living in a country that has no law or regulation governing a particular action, or that has laws or regulations that differ from the requirements of the CFA Code and Standards. When applicable law and the Code and Standards require different conduct, the stricter of the applicable law or the Code and Standards should be followed.
In order to keep up with the applicable law and regulation, investment professionals should establish - or encourage their employers to establish - a procedure by which employees are regularly informed about changes in applicable laws, rules, regulations, and case law. In many instances, the employer's compliance department or legal counsel can provide such information in the form of memorandums distributed to employees in the organisation. Participation in an internal or external continuing education programme is another practical method of staying current.
Those in the investment profession should also review, or encourage their employers to review, the firm's written compliance procedures on a regular basis. This is to ensure that the procedures reflect current law and provide adequate guidance to employees about what is permissible conduct under the law and/or the Code and Standards.
Further, readily accessible current reference copies of applicable statutes, rules, regulations, and important cases should be made available.
Today's case is based on a US Securities and Exchange Commission enforcement action from September 2019. Marcus, a baggage handler for a regional airline, learns about investing by reading books during breaks at work and participating in online seminars. He also obtains a few investment-related certificates, including the Investment Foundations certificate from CFA Institute.
He begins to manage the investment accounts of a few friends and other airline employees who hear of his investing hobby by word-of-mouth. For a nominal flat fee of US$300, Marcus "takes over" his colleagues' investment accounts, selects their investments, and makes their trades.
With his colleagues' permission, Marcus trades directly in their accounts by logging into their accounts, having the unit trust investment platform's "activation code" for a trade sent to the account holder, and then getting the account holder to text him the code so he can complete the trade. Some of his fellow employees add Marcus's e-mail address to their account profiles so that the activation codes are sent directly to his e-mail.
Marcus uses a market timing strategy for the unit trust funds he selects. He invests his fellow employees' assets in a single unit trust fund available through the unit trust investment platform, and sells everything when he believes that the price is right. He then invests the assets in a bond fund while waiting to choose the next investment.
When Marcus is added to a Facebook group for airline employees to post interesting selfies, he posts a picture of the monthly statement of one of his friends that shows close to US$1 million in assets. None of the account holder's identifying information is shown. This drives more airline employees to seek out Marcus to manage their investments.
Marcus starts his own Facebook group, which grows to 9,000 members, in which he promotes his investment prowess, answers questions about investing, and posts information about investment strategies. Eventually Marcus manages more than US$110 million in assets for 934 fellow employees collecting more than US$280,000 in fees.
Marcus's actions are:
A. appropriate because he is not an investment adviser but is informally assisting fellow employees.
B. appropriate because he has the full permission of his colleagues to manage their investment accounts in this manner.
C. inappropriate because he is violating the Code of Ethics and Standards of Professional Conduct applicable to those who have earned the CFA Institute Investment Foundations certificate.
E. none of the above.
This case relates to knowledge of the law. Although Marcus is managing money for a group of friends and colleagues, he is engaged in activities that make him an investment adviser or fund manager. He is advertising his services through his Facebook group, providing investment advice, making investment decisions, and trading on behalf of individuals for a fee.
There is no indication that he is licensed with the appropriate authorities as an investment adviser/fund manager, or that he has taken any of the steps required of investment advisers, such as maintaining trading records, creating written client agreements, evaluating suitability of investments, and so forth.
Although he has the permission of his "clients" to manage their investments, he has not been properly licensed to provide investment advice or manage investment portfolios on behalf of others. And even though he has earned the Investment Foundations certificate from CFA Institute, he is not required to abide by the Code and Standards. Choice D is the best response.
And if Marcus were to be hauled into a court of law, he certainly cannot claim ignorance.
This column has been adapted from content by CFA Institute and is printed here with permission from CFA Institute.
- The writers are CFA Charterholders who volunteer with the Singapore society on advocacy issues with a view towards promoting financial literacy among retail investors and improving overall standards and integrity in the industry. Should you have comments and feedback, do write to the CFA Society Singapore Advocacy Committee: email@example.com