CFA Level 1 Ethical and Professional Standards
Sanctions imposed by CFA Institute for violations of the CFA Institute Code of Ethics or Standards of Professional Conduct least likely include: monetary fines. public censure. revocation of a CFA Charter.
A
Which of the following statements is most accurate? Ethical principles are sets of beliefs centered around: A: societies' views on what is considered good or bad conduct. B: acceptable conduct based on the direct and indirect consequences on others. C: rules established by a government with regard to what is acceptable behavior.
A Ethical principles can be described as societies' beliefs about what is considered good or bad conduct. Ethics can be described as a set of shared beliefs or moral principles regarding standards of behavior expected or required by a community or societal group.
Which of the following is least likely a phase in an ethical decision-making framework? A: Multiple iterations of analysis B: Reflection on the outcome versus what was anticipated C: Consideration of situational influences, additional guidance, and alternative actions
A Multiple iterations of analysis is not a phase in the ethical decision-making framework. The ethical decision-making process includes multiple phases, and the process of developing the framework involves multiple iterations. The iterative aspect of developing the framework is essential to the process, but it is not a phase in the ethical decision-making process.
The goals of the CFA Institute Code of Ethics would least likely include: publicly communicating established principles. addressing past ethical failings. fostering public confidence.
B Addressing past ethical failings is not a goal of the CFA Institute Code of Ethics. Fostering public confidence and publicly communicating established principles are both goals of the CFA Institute Code of Ethics.
Which of the following is least likely to be a situational influence challenging ethical conduct? Loyalty to coworkers The bystander effect An overconfidence bias
C An overconfidence bias is not a situational influence, nor is it determined by external factors; instead, it is determined by a person's judgment about his or her own capabilities or those of others with whom the person is associated. Loyalty to coworkers (or colleagues) and the bystander effect are examples of situational influences challenging ethical conduct.
The Investment Analysis, Recommendations, and Actions standard states that members and candidates must: A: find an investment suitable for their client before making a recommendation. B: make reasonable efforts to ensure that performance presentation is fair, accurate, and complete. C: distinguish between fact and opinion in the presentation of investment analysis and recommendations.
C The V.B.4 Communications with Clients and Prospective Clients section of the Investment Analysis, Recommendations, and Actions standard states that members and candidates must distinguish between fact and opinion in the presentation of investment analysis and recommendations.
A code of ethics most likely plays an important part in establishing a profession because: A: clients are assured a standardized level of care from all industry professionals. B: customers rely heavily on ongoing specialized services to achieve their desired outcome. C: a client relationship is based on trust whereby the professional puts his or her client's interests first.
C A code of ethics plays an important part in establishing a profession because a client relationship is based on trust, whereby the professional puts his or her client's interest first. The code enables a relationship to be established on the basis of trust, because clients rely heavily on the specialized knowledge and skills of professionals to achieve their goals. The code also requires the interests of the clients to be placed above those of the professional
Albert and Tye, who recently started their own investment advisory business, have registered to take the Level III CFA examination. Albert's business card reads, "Judy Albert, CFA Level II." Tye has not put anything about the CFA designation on his business card, but promotional material that he designed for the business describes the CFA requirements and indicates that Tye participates in the CFA Program and has completed Levels I and II. According to the Standards: A: Albert has violated the Standards, but Tye has not. B: Tye has violated the Standards, but Albert has not. C: Both Albert and Tye have violated the Standards.
A
Edo Ronde, CFA, an analyst for a hedge fund, One World Investments, is attending a key industry conference for the microelectronics industry. At lunch in a restaurant adjacent to the conference venue, Ronde sits next to a table of conference attendees and is able to read their nametags. Ronde realizes the group includes the president of a publicly traded company in the microelectronics industry, Fulda Manufacturing, a company Ronde follows. Ronde overhears the president complain about a production delay problem Fulda's factories are experiencing. The president mentions that the delay will reduce Fulda earnings more than 20% during the next year if not solved. Ronde relays this information to the portfolio manager he reports to at One World explaining that in a recent research report he recommended Fulda as a buy. The manager asks Ronde to write up a negative report on Fulda so the fund can sell the stock. According to the CFA Institute Code of Ethics and Standards of Professional Conduct Ronde should least likely: A: revise his research report. B: leave his research report as it is. C: request the portfolio manager not act on the information.
A
Standard III(C)-Suitability of the CFA Institute Standards of Professional Conduct most likely requires members and candidates to judge the suitability of an investment in the context of the client's: total portfolio. total assets. net worth.
A
The most important factor in promoting ethical decision making among an investment firm's employees is: A: a strong culture of integrity by the firm's senior management. B: adoption of a code of ethics that clearly defines the firm's ethical principles. C: the investment professional's natural desire to do the right thing.
A
Which of the following is least likely part of the CFA Institute Standards of Professional Conduct, Standard V(B)-Communication with Clients and Prospective Clients? Members and candidates must: A: make reasonable efforts to ensure that when communicating investment performance information it is fair, accurate, and complete. B: disclose to clients and prospective clients significant limitations and risks associated with the investment process. C: distinguish between fact and opinion in the presentation of investment analysis and recommendations.
A "When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete." can be found in The CFA Institute Standards of Professional Conduct, Standard III-Duties to Clients (D) Performance Presentation. It is not part of Standard V-Investment Analysis, Recommendations, and Actions (B) Communication with Clients and Prospective Clients.
Which of the following groups is most likely responsible for maintaining oversight and responsibility for the Professional Conduct Program (PCP)? CFA Institute Board of Governors Disciplinary Review Committee Professional Conduct Division
A All CFA Institute members and candidates enrolled in the CFA Program are required to comply with the Code and Standards. The CFA Institute Board of Governors maintains oversight and responsibility for the Professional Conduct Program (PCP).
Which of the following best identifies an internal trait that may lead to poor ethical decision making? Overconfidence Loyalty to employer Promise of money or prestige
A An overconfidence bias can lead individuals to put too much importance on internal traits and intrinsic motivations, such as their own perceptions of personal honesty, that can lead to faulty decision making. Loyalty to an employer and promise of money or prestige are situational influences that can lead to faulty decision making.
Which of the following statements is most likely consistent with the CFA Institute Code of Ethics? CFA Institute members and CFA candidates must: A: promote the integrity and viability of the global capital markets for the ultimate benefit of society. B: practice the highest level of personal and professional integrity and always act in the best interest of their employers. C:maintain their professional competence and require investment professionals under their supervision to adopt the CFA Code of Ethics.
A B is incorrect because there are times when acting in the best interests of an employer may conflict with the Code and Standards or in the best interests of clients C is incorrect because there is no such requirement for supervisors.
Jennifer Ducumon, CFA, is a portfolio manager for high-net-worth individuals at Northeast Investment Bank. Northeast holds a large number of shares in Babyskin Care Inc., a manufacturer of baby care products. Northeast obtained the Babyskin shares when they underwrote the company's recent IPO. Ducumon has been asked by the investment banking department to recommend Babyskin to her clients, who currently do not hold any shares in their portfolios. Although Ducumon has a favorable opinion of Babyskin, she does not consider the shares a buy at the IPO price nor at current price levels. According to the CFA Institute Code of Ethics and Standards of Professional Conduct the most appropriate action for Ducumon is to: A: ignore the request. B: recommend the shares after additional analysis. C: follow the request as soon as the share price declines.
A Ducumon should refuse to recommend the shares as her opinion of the Babyskin shares must not be affected by internal pressure. If Ducumon followed the request from the investment banking department at her company, she would be in violation of Standard I(B)-Independence and Objectivity. Ducumon must refuse to recommend the Babyskin shares until they are an attractive purchase based on fundamental analysis and market pricing.
Standard III(E)-Preservation of Confidentiality of the CFA Institute Standards of Professional Conduct most likely requires members and candidates to keep information about current, former, and prospective clients confidential unless: A: the information concerns illegal activities. B: there is a reasonable and adequate basis for not maintaining confidentiality. C: they understand the limitations and risk associated with the disclosure.
A Standard III(E)-Preservation of Confidentiality requires members and candidates to keep information about current, former, and prospective clients confidential unless the information concerns illegal activities on part of the client or prospective clients.
Nickoli, CFA, is an investment counselor with HHI Capital Management (HHI). A colleague at her local society encourages Nickoli to leave HHI and join her at Vesuvius Asset Advisers. Nickoli eventually agrees and decides to leave at the beginning of the new year. In the weeks before submitting her resignation, she tells her clients that they will likely be working with a new investment counselor because she is leaving HHI. Her clients express surprise, and when asked for details about why she is leaving, Nickoli shares that she is frustrated by the firm's structure, disagrees with the direction the firm is going, lacks confidence in the current leadership, doubts the firm will be able to attract and retain good people, and believes other HHI employees have been mistreated and will also be leaving soon. Several of Nickoli's HHI clients indicate that they would like information about Vesuvius and might be interested in switching their accounts. After submitting her resignation, Nickoli immediately shares the names of the interested clients with Vesuvius, and after the first of the year, she begins soliciting them to transfer their accounts from HHI to her new firm. Nickoli's conduct is: A: a violation of the Code and Standards. B: acceptable because she did not solicit clients until after she left HHI. C: acceptable because she is looking out for her clients' best interests and believes Vesuvius provides better service.
A Standard IV(A): Duties to Employers, Loyalty states that CFA Institute members and candidates "must act for the benefit of their employer and not . . . otherwise cause harm to their employer." Although a departing employee is generally free to make arrangements or preparations to change firms before terminating the relationship, those preparations must not conflict with the employee's continued duty to act in the best interests of the current employer and not otherwise undermine, disparage, or cause harm to that employer. In this case, Nickoli decides to leave HHI and join Vesuvius weeks before she notifies the firm and submits her resignation. During that time, Standard IV(A) obligates her to continue to act in her current employer's best interests and not engage in any activities that would conflict with this duty until her resignation becomes effective. Nickoli violates her duty of loyalty to HHI by making disparaging and harmful statements about the firm to its clients in the weeks before she submits her resignation and by promoting Vesuvius to HHI clients while she is still employed by HHI.
Hui Chen, CFA, develops marketing materials for an investment fund he founded three years ago. The materials show the 3-year, 2-year, and 1-year returns for the fund. He includes a footnote that states in small print "Past performance does not guarantee future returns." He does not claim compliance with GIPS® in the disclosures or footnotes. He also includes a separate sheet showing the most recent semi-annual and quarterly returns, which notes that they have been neither audited nor verified. Has Chen most likely violated any CFA Institute Standards of Professional Conduct? A: No. B: Yes, because he included un-audited and unverified results. C: Yes, because he did not adhere to the Global Investment Performance standards.
A Standards require members to make reasonable efforts to make sure performance information is fair, accurate, and complete. The Standards do not require compliance with Global Investment Performance Standards (GIPS), auditing, or verification requirements [Standard III(D)].
When can a party, nonmember or firm, most likely claim compliance with the CFA Institute Code of Ethics and Standards of Professional Conduct? Once they have: A: ensured that their code and ethics meets the principles of the Code and Standards. B: notified the CFA Institute of their claim. C: verified their claim of compliance with the CFA Institute.
A The Code and Standards apply to individual members of CFA Institute and candidates in the CFA Program. CFA Institute does encourage firms to adopt the Code and Standards, however, as part of their code of ethics. Those who claim compliance should fully understand the requirements of each of the principles of the Code and Standard.
Which of the following statements related to why the GIPS® standards were created is least likely correct? The GIPS standards were created to: A: provide clients certainty in what is presented and allow them to make reasonable comparisons. B: identify a set of ethical principles for firms to follow in calculating and presenting historical investment results. C: establish a standardized, industry-wide approach for investment firms to follow.
A The GIPS standards were created to ensure fair representation and full disclosure of investment performance, not to provide certainty in what is presented.
Maste, CFA, is the sole director of Dov Services (Dov), a firm that sells financial products and advice. Maste directs Dov's authorized representatives to incorporate the Dov Client Protection Policy into their contracts with clients. The protection policy, which sets forth the terms for providing financial advice, states that it "contains a number of client protections designed to ensure that you (the client) receive the best possible advice and the maximum protection available under the law." The protection policy's terms (1) excuse Dov and its authorized representatives from various liabilities arising from their failure to act in a client's best interest, (2) relieve Dov and its authorized representatives of their duty to conduct suitability analyses of clients and investments, and (3) lead clients to believe that they cannot make claims against Dov or its representatives for violating securities law. Maste's actions: A: violate the CFA Institute Code and Standards. B: are appropriate because Dov and Maste fully disclose the terms of the Dov Client Protection Policy to clients. C: are appropriate because Dov and Maste are free to negotiate the terms of advisory agreements with clients.
A The terms of the Dov Client Protection Policy improperly attempt to use disclosure to relieve Dov and Maste of their fundamental ethical (and very likely legal) obligations to clients by limiting liability for failures to act in the client's best interests or to provide appropriate advice. Standard III(A): Duties to Clients, Loyalty, Prudence, and Care sets forth a duty of loyalty on the part of CFA Institute members and candidates to their clients and requires them to act for the benefit of their clients and to place their clients' interests before their own.
Which of the following responses most completely represents an ethical principle of CFA Institute as outlined in the Standards of Practice Handbook? A: Individual professionalism B: Responsibilities to clients and employers C: Ethics involved in investment analysis and recommendations
A Within the Standards of Practice Handbook, CFA Institute addresses ethical principles for the profession in the following Standards: individual professionalism; integrity in capital markets; responsibilities to clients, responsibilities to employers; ethics involved in investment analysis, recommendations, and actions; and possible conflicts of interest. B is incorrect because it represents, and combines, two ethical principles, those relating to the Standards "Duties to Clients" and "Duties to Employers." C is incorrect because the ethical principle (and Standard) relating to ethics in investment analysis and recommendations also includes actions.
Oni Erobo, CFA, the General Partner in a real estate development project, is responsible for completing the project within an 18-month period and within budget. Erobo will receive an equity stake of 20% in the project if it comes within budget. Concerned that project costs could escalate, the Limited Partners require Erobo to cap expenses at 15% above budget. Costs were within expectation up until the last month of construction when imported lighting fixture costs (accounting for roughly 5% of total costs) escalated by more than 50%. As a result, the overall return declined below the partners expected 35% ROI. Erobo did not inform the Limited Partners about the increased costs. Did Erobo most likely violate the CFA Code of Ethics and Standards of Professional Conduct? A: No. B: Yes, because returns are lower than expected by the Partners. C: Yes, because he did not disclose the increased costs to his Partners.
A no violation took place. Erobo was not required to inform the Limited Partners about the increase in lighting fixture cost as the increase would not cause the overall project cost to escalate higher than the 15% budget variance contingency agreed within the partnership.
Khatri, a candidate in the CFA Program, plays on a local cricket team with his friends, including Patel, his brother-in-law and an attorney, and Ahuja, owner of a software development company called ZeroPower (ZP). Patel handles the legal work for ZP. Khatri, Patel, and many other friends in their circle have invested in ZP. Recently, a large global information technology company (GIT) made an offer to buy ZP at a substantial premium over the company's current share price. Patel is working with lawyers from GIT to assist in their due diligence. One weekend, during a particularly intense period of negotiations, Khatri, Patel, and Ahuja are playing in a cricket tournament. Between matches, Khatri overhears Patel speaking with representatives of GIT on his cell phone. Although mention of a ZP acquisition is not made, Khatri hears Patel repeatedly reference the name "GIT". Khatri guesses that the acquisition of ZP is happening soon after seeing Patel and Ahuja huddled in private conversation several times over the course of the weekend. On Monday, Khatri calls his broker and increases his investment in ZP by 5,000 shares. One week later, ZP announces its acquisition by GIT and its share price increases 30%. Khatri's actions are: A: a violation of the CFA Institute Code and Standards. B: acceptable because Khatri's investment was based on his own speculation. C: acceptable because Khatri received the information in a public environment.
A Khatri comes into possession of material nonpublic information by overhearing confidential information from Patel's phone calls and witnessing Patel's interactions with Ahuja that were prompted by those calls. Standard II(A): Integrity of Capital Markets, Material Nonpublic Information prohibits CFA Institute members and candidates from taking investment action based on material nonpublic information in their possession. Patel should have been more careful to keep his phone conversations private, but his failure to do so does not allow Khatri to use material nonpublic information received from overhearing those conversations.
A central bank fines a commercial bank it supervises for not following statutory regulations regarding non-performing loan provisions on three large loans as a result of the bank's loan provisioning policy. Louis Marie Buffet, CFA, sits on the Board of Directors of the commercial bank as a non-executive director, representing minority shareholders. He also chairs the internal audit committee of the bank that determines the loan provisioning policy of the bank. Mercy Gatabaki, CFA, is the bank's external auditor and follows international auditing standards whereby she tests the loan portfolio by randomly selecting loans to check for compliance in all aspects of central bank regulations. Which charterholder is most likely in violation of the Code and Standard? Both. Buffet. Gatabaki.
B
Bryan Barrett, CFA, runs an investment advisory service providing advice on gold and other commodities to several large retail banks. Barrett advertises his services in widely read publications to broaden his business to include retail clients. Because the client base for the institutions that Barrett serves is large, he is comfortable stating in the ads that thousands of his clients have benefited from his advice. Does Barrett's advertisement most likely violate any CFA Institute Standards of Professional Conduct? A: No. B: Yes, related to Misrepresentation. C: Yes, related to Communication with Clients.
B
Victoria Christchurch, CFA, is a management consultant currently working with a financial services firm interested in curtailing its high staff turnover, particularly amongst CFA charterholders. In recent months, the company lost 5 of its 10 most senior managers, all of whom have cited systemic unethical business practices as the reason for their leaving. To curtail staff turnover by encouraging ethical behavior, it would be least appropriate for Christchurch to recommend the company to do which of the following? A: Implement a whistleblowing policy. B: Encourage staff retention with increased benefits. C: Create, implement, and monitor a corporate code of ethics.
B
Decision makers who use a compliance approach are most likely to: A: avoid situational influences. B: oversimplify decision making. C: consider more factors than when using an ethical decision-making approach.
B A compliance approach can oversimplify decision making and may not encourage decision makers to consider the larger picture. A strong compliance culture may be a good start in developing an ethical culture but can become another situational influence that may result in employees failing to consider other important factors.
Which of the following statements best describes an aspect of the Standards of Professional Conduct? Members and candidates are required to: A: ensure any portfolio mandate followed is fair, accurate, and complete. B: promptly disclose changes that might materially affect investment processes. C: have a reasonable and adequate basis for decisions about client confidentiality.
B B is correct. The current Standards of Professional Conduct requires members and candidates to promptly disclose any changes that might materially affect investment processes. A is incorrect because under Standard III.C.2 Suitability, when members and candidates are responsible for managing a portfolio according to a specific mandate, they must take only investment actions that are consistent with the stated objectives of the portfolio. The "fair, accurate, and complete" criterion relates to the Standard III D Performance Presentation. C is incorrect because under Standard III.E.1, 2, 3 Preservation of Confidentiality, members and candidates must keep information about current clients confidential unless the information concerns illegal activities on the part of the client, disclosure is required by law, or the client permits disclosure. No decisions on confidentiality are required, with the "reasonable and adequate basis" criterion related to Standard V.A.2 Diligence and Reasonable Basis.
Situational influences in decision making will most likely be minimized if: A: strong compliance programs are in place. B: longer-term consequences are considered. C: individuals believe they are truthful and honest.
B Consciously considering long-term consequences will help offset situational influences. We more easily recognize and consider short-term situational influences than longer-term considerations because longer-term considerations have fewer immediate consequences than situational influences do.
A general ethical decision-making framework will most likely: A: define a series of actions for each possible situation. B: facilitate the decision-making process for all decisions. C: ensure a decision or plan of action does not harm stakeholders.
B Ethical decision-making frameworks are designed to facilitate the decision-making process for all decisions. They help people look at and evaluate a decision from multiple perspectives, enabling them to identify important issues they might not otherwise consider.
Fiduciary duty is a standard most likely to be upheld by members of a(n): employer. profession. not-for-profit body.
B Fiduciary duty is an obligation to deliver a high standard of care when acting for the benefit of another party. Professionals must act in the best interest of the client, exercising a reasonable level of care, skill, and diligence. Other entities—including employers, regulators, trade associations, and not-for-profit bodies—may also support an industry but are not the same as professional bodies. Unlike professions, these other entities generally do not exist to set and maintain professional standards.
An investment fund manager has a finance degree and over 20 years of experience working for a top-ranking asset management firm. Based only on this information, could the investment fund manager most likely claim to be part of a profession? A:Yes, a person working in this industry requires specialized knowledge and skills. B: No. C: Yes, as part of the industry, he is providing a service to others.
B For the investment fund manager to claim he is part of a profession, the activity must be based on specialized knowledge and skills, must include service to others, and must be practiced by members who share and agree to adhere to a common code of ethics. Investment management is based on providing service to a firm's clients and also requires specialized knowledge and skills, but it would not be considered a profession unless there exists a common code of ethics among similar investment fund managers.
Which of the following activities if undertaken by CFA Institute members and/or candidates would most likely violate the Code and Standards? A: An analyst discloses confidential, sensitive information about a client account as part of an investigation by the CFA Institute Professional Conduct Program. B: A senior trader does not have safeguards in place to determine whether a junior trader under their supervision is following the firm's policies regarding best execution. C: An institutional portfolio manager takes a group of clients to an expensive restaurant to discuss portfolio returns over the recently completed quarter without prior written consent from his employer.
B Standard IV(C)-Responsibilities of Supervisors states that members and candidates must make reasonable efforts to prevent violation of applicable laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority. Interviewing with a competitor during lunch or taking clients out to lunch do not necessarily violate any Standard unless specifically prohibited in company policies. C is incorrect because this action does not create a conflict with their employer. While it may be advisable to get prior approval before this event, this action does not constitute a clear violation of the Code and Standards as long as it does not conflict with any of the company's policies.
Based on the Conflicts of Interest standard, members and candidates must: A: disclose, as required by law, those conflicts interfering with their professional duties. B: disclose, as appropriate, any benefit paid to others for the recommendation of products. C: seek employer approval before prioritizing their investment transactions over those clients.
B The VI.C Referral Fees section of the Conflicts of Interest standard requires members and candidates to disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services. A is incorrect because the VI.A Disclosure of Conflicts section of the Conflicts of Interest standard requires members and candidates to make full and fair disclosure of all matters (not limited to legal requirements) that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer.
Which is an example of an activity that may be legal but that CFA Institute considers unethical? A: Making legally required disclosures in marketing materials B: Trading while in possession of material nonpublic information C: Disclosure by an employee of his or her own company's dishonest activity
B The investment industry has examples of conduct that may be legal but that CFA Institute considers unethical. Trading while in possession of material nonpublic information is not prohibited by law worldwide and can, therefore, be legal, but CFA Institute considers such trading unethical.
Stewart has been hired by Goodner Industries, Inc., to manage its pension fund. Stewart's duty of loyalty, prudence, and care is owed to: A: The management of Goodner. B: The participants and beneficiaries of Goodner's pension plan. C: The shareholders of Goodner.
B Under Standard III(A)-Loyalty, Prudence, and Care, members and candidates who manage a company's pension fund owe these duties to the participants and beneficiaries of the pension plan, not the management of the company or the company's shareholders.
Zhao Xuan, CFA, is a sell side investment analyst. While at a software industry conference, Zhao hears rumors that Green Run Software may have falsified its financial results. When she returns to her office, Zhao conducts a thorough analysis of Green Run. Based on her research, including discussions with some of Green Run's customers, Zhao is convinced that Green Run's reported 50% increase in net income during recent quarters is completely fictitious. So far, however, Zhao is the only analyst suspicious about Green Run's reported earnings. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the least appropriate action for Zhao is to: report her suspicions to Green Run's management. do nothing until other analysts support her analysis. recommend that her clients sell their Green Run shares immediately.
B the analyst has conducted thorough research that indicates the company falsified its financial results, and she should request the company address this issue publicly as recommended by Standard II(A)-Material Nonpublic Information. If a member or candidate determines that information is material, the member or candidate should make reasonable efforts to achieve public dissemination of the information. This effort usually entails encouraging the issuer company to make the information public. If public dissemination is not possible, the member or candidate must communicate the information only to the designated supervisory and compliance personnel within the member's or candidate's firm and must not take investment action on the basis of the information.
Specialized knowledge and skills, a commitment to serve others, and a shared code of ethics best characterize a(n): A: vocation. B: profession. C: occupation.
B A profession has several characteristics that distinguish it from an occupation or vocation, such as specialized knowledge and skills, service to others, and a code of ethics shared by its members. A profession is the ultimate evolution of an occupation, resulting from excellence in practice, a mastery mindest, and expected adherence to a code of ethics and standards of practice.
Ethical conduct is most likely behavior that: A: simply considers both the direct benefit and indirect consequences on others. B: is perceived to be beneficial as per society's ethical expectations. C: conforms to expectations as laid out by laws and regulations.
B Ethical conduct includes those actions that are perceived as beneficial and conforming to the ethical expectations of society.
A current Code of Ethics principle reads in full, "Promote the integrity: A: and viability of the global capital markets." B: of and uphold the rules governing capital markets." C: and viability of the global capital markets for the ultimate benefit of society."
C
Benchmarks for minimally acceptable behaviors of community members are: A: a code of ethics. B: laws and regulations. C: standards of conduct.
C
When an ethical dilemma occurs, an investment professional should most likely first raise the issue with a: A: mentor outside the firm. B: professional body's hotline. C: senior individual in the firm.
C
Merchant Capital Partners, a regional investment bank, acts as a market maker for Vital Link Health Services and other small firms listed on an over-the-counter exchange. For those shares for whom Merchant acts as market maker, it trades for its own book as well as engaging in risk arbitrage trading. Merchant allows staff members to trade in shares once clients and the company have traded. Merchant recently obtained material nonpublic information regarding Vital's planned reverse takeover of a publicly listed competitor. In order to be in compliance with the CFA Institute Code and Standards, which type of trading in Vital shares should Merchant least likely suspend? Personal Risk arbitrage Passive proprietary
C according to Standard II(A)-Material Nonpublic Information, Recommended Procedures for Compliance, if Merchant stopped market making, a form of proprietary trading, due to being in possession of material nonpublic information, it could tip off investors that Vital is likely to be making a major announcement in the near future. This would be counterproductive to the goals of maintaining the confidentiality of information and providing market liquidity. The Standard recommends that market makers remain passive when in possession of material nonpublic information. The Standard also requires personal trading to be suspended when in possession of material nonpublic information, and it is prudent to suspend arbitrage trading to prevent profits from insider trading.
Prudence Charmaine, a CFA charterholder, was recently accused in writing of cheating on a professional accounting exam. She denied cheating and successfully defended herself against the allegation. As part of her defense and as evidence of her character, Charmaine stated that she is a CFA charterholder and upholds the CFA Institute Code of Ethics and Standards of Professional Conduct. On her next annual Professional Conduct Statement, Charmaine does not report this allegation to CFA Institute. Did Charmaine most likely violate the CFA Institute Code of Ethics or Standards of Professional Conduct? A: No B: Yes, she improperly used the CFA Institute Code and Standards to defend herself. C: Yes, she did not report the allegation on her annual Professional Conduct Statement.
C Charmaine should have reported the cheating allegation when making her annual Professional Conduct Statement. Even though she successfully defended herself against the charges and the charges were dropped, she has a responsibility to report the written complaint involving her integrity. The Code of Ethics requires CFA charterholders to practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
As stated in the revised 11th edition, the Standards of Professional Conduct: A: require supervisors to focus on the detection and prevention of violations. B: adopt separate ethical considerations for programs such as CIPM and Investment Foundations. C: address the risks and limitations of recommendations being made to clients.
C Given the constant development of new and exotic financial instruments and strategies, the standard regarding communicating with clients now includes an implicit requirement to discuss the risks and limitations of recommendations being made to clients.
High ethical standards are distinguishing features of which of the following bodies? Craft guilds Trade bodies Professional bodies
C High ethical standards distinguish professions from the craft guilds or trade bodies. Unlike trade bodies, professional bodies also typically have a mission to serve society and enforce professional conduct rules for practitioners.
What is most likely a critical aspect of the Consider phase of an ethical decision-making framework? A: Distinguishing duties to stakeholders B: Contemplating your decision C: Seeking additional guidance
C Seeking additional guidance in the Consider phase of the ethical decision-making framework is a critical step in viewing the situation from different perspectives. It is best to seek guidance from someone who is not affected by the same situational influences or behavioral biases to provide a fresh perspective. Additional guidance can be obtained from the firm's policies and procedures and the CFA Institute Code and Standards.
Corix Bioscience is a startup company in the manufacturing and distribution of cannabidiol (CBD) products. To promote the company, the Corix CEO hires Harrel, an independent research analyst and CFA Program candidate, to write and distribute a research report on the company. The CEO tells Harrel the following: Corix has an agreement with indigenous tribes that allows it to access tribal lands for commercial hemp and cannabis farming and to sell hemp and cannabis products in retail outlets on tribal lands. Corix has a certificate of compliance from the national regulator that permits the company to transport, process, and export industrial hemp products. The prior year's harvest of hemp exceeded expectations in both quality and quantity, resulting in a substantial inventory of product. Harrelson includes all this information in a research report and provides a positive analysis of the company. However, Corix does not have agreements with indigenous tribes; nor does it have regulatory approval, the certificate of compliance is a forgery; and Corix never cultivated, or harvested significant quantities of commercial hemp. Chong, a CFA charterholder and research analyst at Nature's Harvest Investment Management (NHIM), incorporates the information and conclusions from Harrel's research report into his own research on Corix and includes a "buy" recommendation on the company. Chong's report is distributed to portfolio managers at NHIM. Corix is ultimately shown to be a fake operation, leading to substantial losses for NHIM's clients. Which individual(s) most likely violated the CFA Institute Code and Standards? A: Harrel only B: Chong only C: Both Harrel and Chong
C Standard V(A): Investment Analysis, Recommendations, and Actions, Diligence and Reasonable Basis states that CFA Institute members and candidates must exercise diligence and thoroughness in analyzing investments and must have a reasonable and adequate basis that is supported by appropriate research and investigation for any investment recommendation. Harrel and Chong do not meet the requirements of this standard. By relying on the statements given by Corix and not conducting an independent investigation into the accuracy of the information, Harrel did not exercise diligence and thoroughness in analyzing the company. Chong seemingly relied on Harrel's research to formulate his "buy" recommendation without conducting his own independent research.
Reebh, CFA, is the CEO and founding partner of Lux Asset Management (Lux). Reebh provides asset management and allocation services for high-net-worth individuals and several small institutional clients. His services include investing client funds with third-party subadvisers who have a specialty in a particular asset class. Reebh's clients are aware, and approve, of Lux's allocation of their assets to subadvisers. The third-party subadvisers make payments to Lux based on the total value of a client's assets placed or invested in the subadvisers' funds. Reebh's actions are: A: appropriate because Reebh has disclosed the use of subadvisers. B: inappropriate because the payments are an improper referral fee. C: inappropriate unless Reebh discloses the financial arrangement he has with the subadvisers to his clients.
C Standard VI(A): Conflicts of Interest, Disclosure of Conflicts requires CFA Institute members and candidates to "make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients." The payments subadvisers make to Lux based on the value of the client assets Lux places with the subadvisers creates a potential conflict of interest because Reebh is thereby incentivized to hire subadvisers who pay the fee but who might not necessarily be the best subadvisers for his clients.
Taveras, CFA, leads an exam preparation course sponsored by his local society. The society hosts a celebration for the students after the exam is over. During the celebration, several of Taveras's students describe their experience of taking the exam. Most give their opinion on the relative difficulty of the exam compared to their expectations, and some describe their surprise about areas of the curriculum that were not tested. Taveras asks his students for their opinions on the most difficult exam questions. Under the CFA Institute Code and Standards, Taveras is most likely: A: prohibited from discussing the exam with students after it is over. B: free to pass along information about the exam to candidates in future prep courses to help prepare them for the exam. C: allowed to share the opinions of his students about the difficulty of the exam with candidates in future prep courses to emphasize the need to thoroughly prepare.
C Standard VII(A): Responsibilities as a CFA Institute Member or CFA Candidate, Conduct as Participants in CFA Institute Programs states that candidates "must not engage in any conduct that compromises . . . the integrity, validity, or security of CFA Institute programs. For Taveras to share with future prep course participants the opinions of his previous students who found the CFA exam more difficult than expected is acceptable as a way to encourage future students to study the curriculum thoroughly and prepare as much as possible. However, Tavares should not solicit or pass on information regarding the specifics of the exam.
A regulator who requires financial advisers to merely consider the suitability of a product when making recommendations to their clients would most likely be setting: A: both a legal and an ethical standard. B: an ethical standard. C: a legal standard.
C The regulator only sets a legal standard when requiring a financial adviser to merely consider suitability when making recommendations to their clients. Requiring advisers to act as fiduciaries would be setting both a legal and an ethical standard; it would require the interests of the client to be above those of the firm or employee.
Jurgen is a portfolio manager. One of her firm's clients has told Jurgen that he will compensate her beyond the compensation provided by her firm on the basis of the capital appreciation of his portfolio each year. Jurgen should: A: Turn down the additional compensation because it will result in conflicts with the interests of other clients' accounts. B: Turn down the additional compensation because it will create undue pressure on her to achieve strong short-term performance. C: Obtain permission from her employer prior to accepting the compensation arrangement.
C This question involves Standard IV(B)-Additional Compensation Arrangements. The arrangement described in the question—whereby Jurgen would be compensated beyond the compensation provided by her firm, on the basis of an account's performance—is not a violation of the Standards as long as Jurgen discloses the arrangement in writing to her employer and obtains permission from her employer prior to entering into the arrangement. Answers A and B are incorrect; although the private compensation arrangement could conflict with the interests of other clients and lead to short-term performance pressures, members and candidates may enter into such agreements as long as they have disclosed the arrangements to their employer and obtained permission for the arrangement from their employer.
When unethical behavior erodes trust in an investment firm, that firm is more likely to experience: A: lower revenues only. B: higher expenses only. C: lower revenues and higher expenses.
C Unethical behavior ultimately harms investment firms. Clients are not attracted if they suspect unethical behavior, leading to less business and lower revenues. Investment firms may also experience higher relative costs because regulators are more likely to have cause to initiate costly investigations.
Which of the following statements best describes an aspect of the Professional Conduct Program process? A: Inquiries are not initiated in response to information provided by the media. B: Investigations result in Disciplinary Review Committee panels for each case. C: Investigations may include requesting a written explanation from the member or candidate.
C When an inquiry is initiated, the Professional Conduct staff conducts an investigation that may include requesting a written explanation from the member or candidate.
Oliver Opdyke, CFA, works for an independent research organization that does not manage any client money. In the course of his analysis of Red Ribbon Mining he hears rumors that the president of Red Ribbon, Richard Leisberg, has recently been diagnosed with late stage Alzheimer's disease, a fact not publicly known. The final stage of Alzheimer's is when individuals lose the ability to respond to their environment, the ability to speak, and, ultimately, the ability to control movement. Leisberg is the charismatic founder of Red Ribbon, and under his leadership the company grew to become one of the largest in the industry. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the most appropriate action for Opdyke is to: A: immediately publish a sell recommendation for Red Ribbon Mining. B: confirm the president's diagnosis before publishing his research report. C: encourage Red Ribbon Mining management to disclose the president's medical condition.
C because members and candidates should make reasonable efforts to achieve public dissemination of information that is material and nonpublic, as required by Standard II(A)-Material Nonpublic Information. This effort usually entails encouraging the issuer company to make the information public. In this case, if the diagnosis is fact and not rumor, then this information is material and should be disclosed.
Charles Mbuwanga, a Level 3 CFA Candidate, is the Business Development Manager for Sokoza Investment Group, an investment management firm with high-net-worth retail clients throughout Africa. Sokoza introduced listed Kenyan Real Estate Investment Trusts (REITs) to its line of investment products based on new regulations introduced in Kenya so as to diversify its product offering to clients. The product introduction comes after months of researching Kenyan property correlations with other property markets and asset classes in Africa. Sokoza assigns Mbuwanga as part of the sales team in introducing this product to its clients across Africa. Mbuwanga subsequently determines that most of Sokoza's clients' portfolios would benefit from having a small Kenyan property exposure to help diversify their investment portfolios. By promoting the Kenyan REITS for Sokoza's client portfolios as planned, Mbuwanga would least likely violate which of the following Standards? Suitability Knowledge of the Law Independence and Objectivity
C there is no indication Mbuwanga's recommendation is based on any compensation package based on sales targets as being part of the sales team. If he had a sales target as part of his responsibility to promote the new product, it could be conceived his independence and objectively was in question. Mbuwanga does however seem to be in violation of Standard III(C)-Suitability in that while research with regard to correlation was undertaken, an analysis based on each individual client's return and risk objectives was not done. He may also be in violation of Standard I(A)-Knowledge of Law in that he would need to determine if the Kenyan REIT product is allowable in each of the countries where his clients reside.
SBS Bank (SBS) serves as a custody bank for a wide range of clients. SBS offers a variety of services to its clients, including custody, clearing, payment, settlement, and record keeping. SBS charges its clients an asset-based fee for these services. Pursuant to the bank's client agreement, custody clients agree to reimburse the bank for out-of-pocket expenses for items paid by the custodian on their behalf. The majority of these expenses are for messages sent via the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a secure messaging network used by banks and other financial institutions. Although SBS charges custody clients an established rate for SWIFT messages, the rate is greater than the actual cost of providing this service. Mandracken, CFA, a vice president at SBS who oversees client service responsibilities, recognizes this discrepancy and brings it to the attention of his supervisor. In an email, Mandracken states that "although disclosure of charging for SWIFT fees is noted in the clients' fee schedules, the fees have always included an increase over actual cost, so the charge to clients is not a true pass-through because we add a margin." Mandracken's supervisor instructs him to reduce the SWIFT fee rate for new clients and to revisit the rate for existing clients when their contracts are renewed. To meet his obligations under the CFA Institute Code and Standards, Mandracken should: A: implement the corrective procedures as directed by his supervisor. B: implement the corrective procedures as directed by his supervisor but report his objections to the bank's board of directors. C: refuse to participate in any client interactions using the fee schedule until the bank revises the SWIFT rate to reflect the actual cost of the service.
C This case involves how to appropriately address the misconduct of others in carrying out your professional responsibilities. Standard I(A): Professionalism, Knowledge of the Law prohibits CFA Institute members and candidates from knowingly participating or assisting in legal or ethical violations and requires them to dissociate from any such activity. SBS is misrepresenting its reimbursable expenses to its custody clients and overcharging them.
