Which CFA Institute standard is violated when a supervisor ignores a subordinate's unethical trading?

• A. Standard III.C Responsibilities of Supervisors.
• B. Standard III.A Loyalty, Prudence, and Diligence.
• C. Standard IV.B Fair Dealing.
• D. Standard VI.A Disclosure of Conflicts.

Answer: (A)

Supervisors have a duty to actively ensure that subordinates follow ethical standards and firm policies. When a subordinate engages in unethical trading, the supervisor must respond—investigate, correct the behavior, and escalate or discipline as needed to protect clients and uphold the firm’s compliance program. Ignoring such behavior undermines the control environment and breaches the obligation to supervise, monitor, and enforce ethical conduct. This is why the standard that covers Responsibilities of Supervisors is the relevant rule: it specifically requires supervisors to establish procedures to detect and prevent unethical actions and to take appropriate action when violations occur.

Loyalty, prudence, and diligence pertains to the general ethical stance individuals owe to clients and employers, including acting with care and diligence, but it does not specifically address the supervisory duty to monitor subordinates or respond to misconduct. Fair dealing centers on fairness in transactions with clients, not on internal oversight. Disclosure of conflicts deals with informing clients about potential conflicts, not with supervising subordinates’ conduct.