What should Smith, the independent board member, do according to CFAI Standards after discovering illegal activity?

According to CFA Institute Standards, when an independent board member like Smith discovers illegal activity, the appropriate action is to report the illegal activity to the CFA Institute. This response aligns with the principles of acting with integrity and professionalism as outlined in the CFA Institute's Code of Ethics and Standards of Professional Conduct.

Reporting the illegal activity is crucial because it allows the appropriate regulatory bodies to investigate and take necessary actions. It reflects the member's commitment to protecting the interests of investors and upholding the integrity of the financial markets. This obligation to report is particularly important in the finance and investment industry, where unethical or illegal behavior can have significant repercussions for numerous stakeholders.

Other responses, such as conferring with management before taking action or resigning immediately, do not effectively address the gravity of the situation or prioritize accountability and responsibility in the face of illegal activity. Publicly disclosing the actions of the firm may not be appropriate and could violate confidentiality or other legal considerations. Thus, reporting the issue to the CFA Institute is the most responsible and ethical course of action for Smith to take in this scenario.