CFAI reading 3 soft dollar standards practice problem

As part of this reading it says this pension fund has a policy that “20% of the fund’s brokerage must be directed to three local minority-owned brokers” and that they will “continue to increase diversity by using minority owner brokers…” This policy that the fund has clearly violates the anti-discrimination laws of the US that prohibit discrimination based on race, religion or ethnicity. There was an article in Miami Herald the other day saying that a policy to hire at least 15% minorities for building a stadium was illegal for just that reason. If you go along with the pension fund’s policy aren’t you in violation of Standard 1 A? Isn’t that like having a fund who does not want any more than 10% of brokerage directed to Jewish owed firms? More generally, if a firm you are dealing with has a policy that is in violation of the laws of the country in which it resides (ex labor or environmental) do you have to report or obtain from doing business with them?

First I think the fund or investor has absolute discretion to choose his broker (client directed brokerage) and the nature of stock to invest (unique circumstance). If the fund can designate a broker, I do not see the reason why the fund cannot set the 10% rule of brokerage. If a fund’s policy is not to invest in smoking industry, can you say the fund is discriminating the cigarette manufacturer? I don’t think it is against the anti-discrimination law. If what I said is wrong, is it violation? The code and ethics is applied to CFA members. The fund is not a CFA member. So, I don’t think it is a violation. Finally, if the firm violates the law of the country, the CFA member may have the obiligation to report. The member need to report to his/her supervisor and try to end the illegal activity. Failing this, the member should seek legal advice … and dissociate himself with the fund account. This is about the preservation of confidentiality III(E). (Schweser B1 P.42)