Standard I(E) Competence

Standard I(E) requires members and candidates to act with and maintain appropriate knowledge, skills, and diligence when they carry out their professional responsibilities so that they provide a high standard of professional service for their clients and employers. The Code of Ethics requires members and candidates to “act with integrity, competence, and diligence” and to “maintain and improve their professional competence and strive to improve the competence of other investment professionals.” Standard I(E) directly supports these requirements of the Code of Ethics.

Given the diverse range of professional services members and candidates engage in, the knowledge, skills, and abilities necessary to successfully fulfill their roles will vary according to the nature of their professional duties. Determining what conduct specifically constitutes competence will differ for each role and will depend on the facts and circumstances applicable to each member or candidate.

While the specific conduct that leads to competence may be different for each member or candidate, the underlying principle of competence is straightforward. To be competent in your role and meet your duties under this standard means having sufficient knowledge, skills, and abilities suitable for a professional to work in that specific role with success. These attributes govern the expertise, experience, and accomplishments that professionals need to perform at the highest level.

• Knowledge is the body of information applied directly to the performance of a function and how effectively it is applied.
• Skills are capabilities to perform a role-specific act or function to complete specific tasks and achieve professional goals.
• Abilities are capabilities and attitudes that support behaviors that result in observable outcomes.

While competence allows members and candidates the opportunity to undertake an activity successfully, lack of competence cannot necessarily be determined by an unsuccessful or a negative outcome. Many competent investment professionals have experienced failure or loss in their professional lives. For example, a competent investment manager may not always make profitable investment decisions. A competent securities analyst may not accurately predict the future prospects of an investment, despite diligent and thorough analysis.

Competence is not limited to an examination of the education level of a member or candidate. A highly educated investment consultant may not have the experience to undertake consulting activities in an unfamiliar area of practice. An accounting professional supremely competent in providing financial statement audits may not be competent in assessing compliance with performance presentation standards, such as the GIPS standards. Or an investment consultant hired to conduct a search for an investment manager focused on sustainable investing may not have the skills needed to competently evaluate managers with that focus.

Over time, the professional responsibilities of members and candidates may change or expand, requiring new or different knowledge, skills, and abilities. Members and candidates will develop and refine their skills and abilities as their careers progress. Standard I(E) imposes the duty to not simply achieve but also maintain competence, emphasizing the need for members to continuously maintain or improve the competence required of their professional position. Although Standard I(E) contemplates ongoing professional development to maintain proficiency and competence, this standard does not mandate participation in a particular continuing education program or professional development plan. Members and candidates can attain and maintain the competence needed to fulfill their professional responsibilities in a variety of ways.

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To achieve and maintain competence, members and candidates should consider the following activities:

• Regularly engaging in a professional development or continuing education program
• Studying for or earning professional certifications or designations
• Attending conferences, seminars, or webinars
• Regularly participating in training offered by their employer
• Diligently engaging in informal continuing education or self-study, such as through outside reading of subject matter articles, treatises, and publications
• Participating in expert groups or organizations
• Becoming proficient with any new skill or knowledge, as necessary, when their professional responsibilities change

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Lee runs a geopolitical consulting firm where she analyzes international political, social, and economic issues and developments to produce research reports for her clients, many of which are investment management firms. Lee has been closely monitoring news regarding a new multinational trade deal that has the potential to significantly boost commercial activity among countries in a certain region of the world. As soon as the trade deal was officially ratified and announced, she quickly downloaded a copy of the agreement and read it to understand its terms and impact. She also consulted with experts in the field to obtain their opinions on the impacts of the trade deal and confirm her understanding of its terms and implications.

Comment: Lee satisfied the requirement of Standard I(E). Lee was able to write a knowledgeable and informative research report for her clients by keeping abreast of developments in her field through news reports, consulting with experts, and studying the trade deal itself to ensure that her knowledge was up to date.

Choe is the director of research at a large sell-side firm. Several of Choe’s clients asked her to incorporate environmental, social, and governance (ESG) ratings into the research reports the firm produces. Until now, the firm’s research reports have been based only on traditional quantitative metrics. Choe hires an experienced ESG analyst for her team, and she requires all research analysts, including herself, to attend ESG-focused seminars and obtain an ESG investment specialist certificate. In due time, Choe and her team begin to incorporate ESG considerations into their research reports.

Comment: Choe extended her competence in her field by educating herself on new considerations relevant to her industry and by hiring someone with ESG expertise to fill a knowledge and skills gap before she and her team incorporated ESG considerations into the firm’s research reports. As such, Choe satisfied the requirement of Standard I(E).

Glusker is a regulatory attorney for a hedge fund who sought to transition to a sales role after impressing senior management with his strong business acumen. There is a licensing requirement involving an examination that an individual must first pass before being qualified to serve in a sales function. Among other things, the examination covers technical rules and regulations designed to ensure fairness when dealing with clients and prospects. Glusker was not familiar with these rules and regulations because he was never asked to provide guidance on them as a regulatory attorney. Glusker did not learn the material or study for the examination and instead relied on his industry knowledge to receive a passing score.

Comment: Glusker failed to satisfy the requirement of Standard I(E). He did receive a passing score on a licensing examination, but passing the examination, by itself, is not adequate to demonstrate competency. Glusker’s failure to learn the applicable rules and regulations relating to fairness when dealing with clients and prospects means that he does not possess the required knowledge to serve in his new role, despite passing the licensing examination.

Evans is one member of a five-person team of analysts at a boutique research firm providing independent research to buy-side firms. Evans primarily covers the energy and transportation sectors. Evans’s boss leaves the firm to return to academia. Firm management promotes Evans to director of research and hires two junior analysts to replace her. Evans now has supervisory responsibility for four analysts and is responsible for all research produced by the firm. Prior to her promotion date, Evans spends a great deal of time and effort getting up to speed on the research projects of the firm that she was not involved in. Although she has never directly managed others in the past, Evans does not spend any time becoming familiar with effectively managing employees, leading teams, or compliance requirements relating to subordinates.<

Comment: Evans violated Standard I(E). Her new position demands competence in other skills, abilities, and knowledge beyond those needed for her previous position. Evans must ensure she extends her competence to cover all responsibilities of her new role. She also must now obtain the skills and knowledge needed for fulfilling her supervisory responsibility of the other analysts. This could include attending conferences or taking professional development courses on management, earning compliance credentials, and internal training on supervisory responsibility.

Mifune is a financial planner for over 150 retail investors. Based on the investment objectives, financial circumstances, and risk tolerance of 40 of his clients, he suggests they purchase life insurance products from Vouchsafe Insurance Company. Mifune researched Vouchsafe and recommended it because it has a high credit rating, strong financials, and a decade-long history of providing affordable, safe insurance products. Within 18 months, as the result of previously unknown financial impropriety and fraud by the company’s chief financial officer, Vouchsafe goes bankrupt and the insurance contracts for thousands of policyholders become worthless. Mifune’s clients claim that he was incompetent in recommending the Vouchsafe policies.

Comment: Assuming that Mifune’s research of Vouchsafe was thorough and appropriate, his failure to uncover the fraudulent practices of the company he recommended, which had misled the investment industry as a whole, does not, by itself, indicate that Mifune is an incompetent financial planner or violated Standard I(E).

Halsey is a portfolio manager for a number of high-net-worth individuals. Several of his clients are impressed by the significant gains in a short time frame that they believe can be achieved by investing in cryptocurrency. They urge Halsey to include cryptocurrency products as part of their portfolios. Although Halsey is generally aware of cryptocurrency and has read several articles about the cryptocurrency investment trend in reputable newspapers, Halsey is unfamiliar with the nature of the asset or the difference between the many cryptocurrency products. Not wanting to seem out of touch with current developments in the market, lose clients, or miss out on a hot market trend by delaying an investment decision until he completes research into the asset, Halsey purchases a cryptocurrency product that has been heavily promoted through social media and online advertising for several of his clients.

Comment: Given his limited knowledge, Halsey is not competent to invest in cryptocurrency for his clients. By hastily investing in cryptocurrency products without understanding the nature of the investment or the suitability of the investment for his clients, Halsey violated Standard I(E).

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