CFA Ethics Part 1

Which of the following best identifies an internal trait that may lead to poor ethical decision making? A. Overconfidence B. Loyalty to employer C. Promise of money or prestige

A is correct. 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 is most accurate? Ethical decision-making frameworks: A. raise awareness of different perspectives. B. focus attention on short-term consequences. C. allocate more weight to those who will directly benefit from the decision.

A is correct. Ethical decision-making frameworks raise awareness of different perspectives.

Which of the following statements best describes how professionals use their specialized knowledge and skills? Professionals use their specialized knowledge and skills: A. in service to others. B. to advance their career. C. for the exclusive benefit of their employers.

A is correct. Professionals use specialized knowledge and skills in service to others. Their career and employer may benefit, but those results are not the primary focus of a professional's use of his or her specialized knowledge and skills.

Using an ethical decision-making framework, which of the following duties would most likely take precedence in the scenario described? The financial adviser's duty to his: A. client. B. employer. C. colleagues.

A is correct. Using an ethical decision-making framework, the financial adviser's relationship with his client would most likely take precedence in this scenario. The adviser should put his client's interests first. The exception to client interests taking precedence occurs when market integrity effects take precedence.

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 is correct. 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.

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 is correct. 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 and expected adherence to a code of ethics and standards of practice.

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 is correct. 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. When decision making is too narrowly focused on short-term factors, we tend to ignore longer-term risks and consequences, and the likelihood of poor ethical decision making increases. A strong compliance policy is a good first step toward developing an ethical culture; a focus on rules adherence may not be sufficient. Emphasis on compliance may not encourage decision makers to consider the larger picture and can oversimplify decision making. Taken to the extreme, a strong compliance culture can become another situational influence that blinds employees to other important considerations. An overconfidence bias can place too much importance on internal traits and intrinsic motivations, such as "I'm honest and would not lie," even though studies have shown that internal traits are generally not the main determinant of whether or not someone will behave ethically in a given situation.

Which of the following statements is most accurate? Investment professionals have a special responsibility to act ethically because: A. the industry is heavily regulated. B. they are entrusted to protect clients' assets. C. the profession requires compliance with its code of ethics.

B is correct. Investment professionals have a special responsibility because clients entrust them to protect the clients' assets.

Which of the following statements is most accurate? A. All legal behavior is ethical behavior. B. Some ethical behavior may be illegal. C. Legal standards represent the highest standard.

B is correct. Some ethical behavior may be illegal. Civil disobedience is an example of what may be illegal behavior that some consider to be ethical. Legal and ethical behavior often coincide but not always. Standards of conduct based on ethical principles may represent a higher standard of behavior than the behavior required by law.

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 is correct. 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.

Which of the following will most likely determine whether an individual will behave unethically? A. The person's character B. The person's internal traits and intrinsic motivation C. External factors, such as environmental or cultural elements

C is correct. Social psychologists have shown that even good people may behave unethically in difficult situations. Situational influences, which are external factors (e.g., environmental or cultural elements), can shape our thinking, decision making, and behavior and are more likely to lead to unethical behavior than internal traits or character.

Using an ethical decision-making framework, the financial adviser would most likely: A. recommend that the elderly client invest at least some of his assets in the highly rated fund. B. research other investments that can provide steady income before making a recommendation to his elderly client. C. disclose the commission he would earn before recommending that the elderly client invest at least some of his assets in the highly rated fund.

B is correct. Using an ethical decision-making framework, the financial adviser would identify the relevant facts, stakeholders, duties owed, and potential conflicts. In this scenario, the financial adviser owes a duty to his client as well as his employer. His client's interests take precedence over all other interests. The bonus and his colleague's desire to help his mother are situational influences. To navigate this situation, the financial adviser should seek additional information; he should research the risk and return parameters and fee structures of other investments that can provide steady income before making a recommendation to his client.

Which of the following statements is most accurate? A profession's code of ethics: A. includes standards of conduct or specific benchmarks for behavior. B. ensures that all members of a profession will act ethically at all times. C. publicly communicates the shared principles and expected behaviors of a profession's members.

C is correct. A profession's code of ethics publicly communicates the shared principles and expected behaviors of a profession's members. The existence of a code of ethics does not ensure that all members will behave in a manner consistent with the code and act ethically at all times. A profession will often establish a disciplinary process to address alleged violations of the code of ethics. A profession may adopt standards of conduct to enhance and clarify the code of ethics.

Which of the following statements is most accurate? An ethical decision-making framework: A.is only beneficial when a firm lacks a code of ethics. B. is used to improve compliance with laws and regulations. C. is a tool for analyzing the potential alternative actions and consequences of a decision.

C is correct. An ethical decision-making framework is a tool for analyzing the potential alternative actions and consequences of a decision.

Which of the following is most accurate? Ethical decision-making frameworks: A. are not needed if behavior is legal. B. identify who gains the most from a decision. C. can help reduce unanticipated ethical lapses and unexpected consequences.

C is correct. Ethical decision-making frameworks can help avoid unanticipated ethical consequences

Which of the following statements is most accurate? Ethics can be described as: A. a commitment to upholding the law. B. an individual's personal opinion about right and wrong. C. a set of moral principles that provide guidance for our behavior.

C is correct. Ethics can be described as a set of moral principles that provide guidance for our behavior; these may be moral principles shared by a community or societal group

Which of the following statements is most accurate? A. Increased regulations are the most useful means to reduce unethical behavior by market participants. B. Regulators quickly design and implement laws and regulations to address practices that adversely affect the fairness and efficiency of markets. C. New laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different, but similarly problematic, conduct.

C is correct. New laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different, but similarly problematic, conduct.

Which of the following statements is most accurate? A. Large financial rewards, such as bonuses, are the most powerful situational influences. B. When decision making focuses on short-term factors, the likelihood of ethical conduct increases. C. Situational influences can motivate individuals to act in their short-term self-interests without recognizing the long-term risks or consequences for themselves and others.

C is correct. Situational influences can motivate individuals to act in their short-term self-interests without recognizing the long-term risks or consequences for themselves and others. Large financial rewards are powerful situational influences, but in some situations, other situational influences, such as loyalty to colleagues, may be even more powerful.

Benchmarks for minimally acceptable behaviors of community members are: A. a code of ethics. B. laws and regulations. C. standards of conduct.

C is correct. Standards of conduct are applied to specific communities or societal groups and identify specific behaviors required of community members. These standards of conduct serve as benchmarks for the minimally acceptable behavior of community members. Codes of ethics serve as a general guide for how community members should act; they communicate the organization's values and overall expectations regarding member behavior, but they do not identify specific behaviors required of community members. Laws and regulations are rules of conduct defined by governments and related entities about obligatory and forbidden conduct broadly applicable for individuals and entities under their jurisdiction.

Which of the following statements is most accurate? Standards of conduct: A. are a necessary component of any code of ethics. B. serve as a general guide regarding proper conduct by members of a group. C. serve as benchmarks for the minimally acceptable behavior required of members of a group.

C is correct. Standards of conduct serve as benchmarks for the minimally acceptable behavior required of members of a group. Some organizations will adopt only a code of ethics, which communicates the organization's values and overall expectations regarding member behavior. Others may adopt both a code of ethics and standards of conduct. Standards of conduct identify specific behavior required of community members and serve as benchmarks for the minimally acceptable behavior of community members.

Which of the following situational influences is likely to have the most effect on the financial adviser's efforts to get new clients to invest in the funds? His relationship with his: A. client. B. employer. C teammates.

C is correct. The financial adviser's relationship with his teammates is likely to have the most effect on the financial adviser's efforts.

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 is correct. 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.

An ethical decision-making framework will most likely: A. include a pre-determined, uniform sequence. B. focus exclusively on confirmable facts and relationships. C. help avoid a decision that has unanticipated ethical consequences.

C is correct. Using an ethical decision-making framework consistently will help you develop sound judgment and decision-making skills and avoid making decisions that have unanticipated ethical consequences. The decision-making process is often iterative, and the decision maker may move between phases of the framework. A decision maker should consider more than confirmable facts and relationships; for example, the decision maker should consider situational influences and personal biases.