So, of course, knights can only legally have their fealty sworn to nobles or royalty. But let's say your covenant copies the feudal system closely, including treating the magi as "nobility" and having them utilize knights the same way the nobility do for all intents and purposes. Would the usual Virtues and Flaws for knights be appropriate in this circumstance? If not, what Virtues and Flaws would you instead use to describe their social standing and duties?
I think that would depend on the situation. If we are talking about swearing allegiance to a Tremere stronghold in Transylvania they are just knights, because the mages can be nobles without having to swear fealty. If you are in England, they are probably considered outlaws.
England is interesting in that it has a single king, to whom every other noble of the land swears fealty. Swearing fealty to someone else makes you a rebel / traitor / outlaw, because you're now stealing from the king (it's his lands). Magi swearing fealty to the King of England probably could hold vassals, but they're also in serious danger of being Marched.
In the Levant, or Iberia, or Transylvania or Novgorod or large parts of many other tribunals, the magi may well be holding allodial title (i.e. they're a mini-country) and thus they can do pretty much whatever they want. However building a castle and populating it with knights is a good way to annoy your neighbours, for much the same reason that USA got annoyed when Russia tried to put missiles in Cuba.
It's not illegal, though. 
In Iberia, having knights is a matter of having the money to equip them. Nothing illegal about that at all (though as you noted, Every Castle Sends A Message).
It actually makes a lot of sense that covenants would have similarities with their surrounding mundane political environment.
Or at least some covenants would. Others would be democratic flying castles guarded by undead horsemen 
Thanks for the answers, everyone!
As an alternative point of view, depending on how strongly the Order enforces the Code in your games, you might just get away with flaunting it directly, either by swearing fealty, or just ignoring mundane law and being labeled a traitor/whatever. That's how my troupe does it, but that's just mostly because the Code interferes too much with the types of stories and activities my players like, such as supernaturally-assisted (and often heavily romanticized...) mass combat.