Ethics

Firms must include terminated composites on the firm's list of composite descriptions for at least _______ years after the composite termination date.

5

Firms should update GIPS compliant presentations _____________ A.) Quarterly B.) Monthely C.) Semi Annually

A.) quartely

Which of the following situations most likely helps to explain why the GIPS standards were created? A.) Firms only including top performing funds to represent their performance history. B.) Asset managers including the performance of all portfolios including those no longer managed in their performance history. C.) Consistency amongst fund managers when making investment performance presentations. Solution

**A is correct** The GIPS standards were created to help prevent misleading practices such as Representative Accounts, whereby firms select top-performing portfolios to represent the firm's overall investment results for a specific mandate.

an equity trader at Global Investment Bank (GB). Figeczky traded the bank's investment portfolio profitably for the past three years and earned significant bonuses for his efforts. Subsequently, internal auditors of GB formally accused Figeczky of exceeding his trading authority and engaging in unauthorized trades. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, Figeczky should most likely: A.) disclose the complaint to CFA Institute. B.) refuse further bonuses until the issue is resolved. C.) request a temporary suspension of his CFA Institute membership.

A is correct as members and candidates must self-disclose on the annual Professional Conduct Statement all matters that question their professional conduct, such as involvement in civil litigation or a criminal investigation or being the subject of a written complaint. B is incorrect as the Code and Standards do not prohibit a member from accepting a bonus while an investigation into his professional behavior is conducted.

According to GIPS For periods beginning on or after 1 January 2008, real estate investments must be valued at least ___________ A.) Quarterly B.) Monthely C.) Semi Annually

A is correct

The CFA Institute Code of Ethics and Standards of Professional Conduct are most likely designed to foster and reinforce a culture of: A.) responsibility and professionalism. B.) regulatory compliance. C.) service to the firm.

A is correct

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 is correct

To comply with the GIPS standards, firms most likely must: A.) apply standards on a firm-wide basis. B.) be verified before they can claim compliance. C.) be defined as separate legal entities.

A is correct

What is the theory that best describes the process by which financial analysts combine material public information and nonmaterial nonpublic information as a basis for investment recommendations even if those conclusions would have been material inside information had they been communicated directly to the analyst by the company? A.) Mosaic theory B.) Economic theory C.) Probability theory

A is correct

Which CFA Institute Standard of Professional Conduct most likely includes a sub-section entitled "Communication with Clients and Prospective Clients"? A.) Investment Analysis, Recommendations, and Actions B.) Conflicts of Interest C.) Duties to Clients

A is correct

Who most likely determines whether a violation of the CFA Institute Code and Standards or testing policies has occurred and what sanction should be imposed? The: A.) Professional Conduct Staff and the Disciplinary Review Committee B.) Professional Conduct Staff C.) Disciplinary Review Committee

A is correct

___________________ maintains oversight and responsibility for the **Professional Conduct Program** A.) CFA Institute Board of Governors B.) Disciplinary Review Committee C.) Professional Conduct Division

A is correct

Ensuring that a country's interests are taken into account when effectively implementing the GIPS standards on a country-wide basis most likely relies on which of the following entities? A.) A local sponsoring organization B.) The local regulator(s) C.) Local independent valuation firms

A is correct. Effective implementation of the GIPS standards in countries is highly reliant on a local sponsoring organization. The local sponsoring organization ensures that the country's interests are taken into account as the GIPS standards are developed.

Albert Nyakenda, CFA, was driving to a client's office where he was expected to close a multi-million-dollar deal when he was pulled over by a traffic policeman although he did not believe he had violated any traffic laws. When Nyakenda realized the policeman planned to wrongly ticket him for speeding, he offered to buy him "lunch" so that he could quickly get to his client's office. The lunch would cost significantly more than the ticket. The alternative was to go to the police station and file a complaint of being wrongly accused that would also involve going to court the next day to present his case. Did Nyakenda most likely violate the CFA Code of Ethics?

A is correct because Nyakenda was effectively trying to bribe the policeman so that he would not issue a speeding ticket. This action violates the Code of Ethics. Despite feeling he was wrongly accused, it is only his opinion, and may not be based on fact or in a court of law. Nyakenda has a responsibility to act with integrity and in an ethical as required by the Code of Ethics.

Which of the following is most likely found in the CFA Institute Standards of Professional Conduct, Standard I-Professionalism? Members and candidates must: A.) not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. B.) place the integrity of the investment profession and the interest of clients above their own interest. C.) maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

A is correct B and C are found in the code of ethics

Alexandra Zagoreos, CFA, is the head of a government pension plan. Whenever Zagoreos hires a money management firm to work with the pension plan, she finalizes the deal over dinner at a nice restaurant. At these meals, Zagoreos also arranges for the money manager to provide her payments equal to 10% of the management fee the manager receives from the pension plan with no formal documentation of this agreement. Zagoreos keeps half of the payments for her own use and distributes the remainder as cash incentives to a handful of her most trusted staff. Zagoreos *least likely* violated which of the following CFA Institute Code of Ethics and Standards of Professional Conduct? A.) Referral fees. B.) Loyalty, Prudence and Care. C.) Additional Compensation Arrangements.

A is correct C is self explanatory incorrect Loyalty, Prudence, and Care, which requires that members act for the benefit of their clients, and places their client's interests before their employer's or their own interests.

A company engaged in real estate transactions had an exceptionally successful quarter and as a result it has selectively structured a few of the most profitable deals to qualify as *installment sales*. Structuring deals this way: A.) Allows the firm to boost future margins. B.) Results in lower taxes for the accounting period. C.) Hurts near-term margins but boosts long-term margins.

A is correct Having a successful quarter gives the company incentive to smooth revenue and net income by deferring profits to future periods. Arranging the most profitable of these transactions as installment sales allows them to spread these into the future, boosting future margins. Choice "b" is incorrect. The tax consequences would result from the difference between the depreciated value of the property and the sale price. Structuring a sale as an installment would defer taxes to future periods, but would not change the amount of capital gain. Choice "c" is incorrect. This would be true under the cost recovery method, where profit is not recognized until all the costs of the transaction have been recovered by the seller. With an installment sale, profit is recognized in each period.

All of the following affect an investor's risk tolerance EXCEPT: A.) tax bracket. B.) family situation. C.) years of experience with investing in the markets.

A is correct Tax concerns play an important role in investment planning. However, these constitute an investment constraint, not an investment objective (i.e. risk tolerance).

When Abdullah Younis, CFA, was hired as a portfolio manager at an asset management firm two years ago and was told he could allocate his work hours as he saw fit. At that time, Younis served on the board of three nonpublic golf equipment companies and managed a pooled investment fund for several members of his immediate family. Younis was not compensated for his board service or for managing the pooled fund. Younis' investment returns attract interest from friends and co-workers who persuade him to include their assets in his investment pool. Younis recently retired from all board responsibilities and now spends more than 80% of his time managing the investment pool for which he charges non-family members a management fee. Younis has never told his employer about any of these activities. To comply with the CFA Institute Standards of Professional Conduct with regards to his business activities over the past two years, Younis would least likely be required to disclose which of the following to his employer? A.) Board activities B.) Family investment pool management C.) Non-family member management fees

A is correct because golf equipment is a business independent of the financial services industry such that any board obligations would not likely be considered a conflict of interest requiring disclosure according to Standard IV(B)-Additional Compensation Arrangements. Standard IV(B) requires members and candidates to obtain

Eileen Fisher, CFA, has been a supervisory analyst at SL Advisors for the past ten years. Recently, one of her analysts was found to be in violation of the CFA Institute Standards of Professional Conduct. Fisher has placed limits on the analyst's activities and is now monitoring all of his investment activities. Although SL did not have any compliance procedures up to this point, to avoid future violations, Fischer has put in place procedures exceeding industry standards. Did Fisher most likely violate any CFA Institute Standards of Professional Conduct? A.) Yes. B.) No, because she has taken steps to ensure the violations will not be repeated by the analyst. C.) No, because she is taking steps to implement compliance procedures that are more than adequate.

A is correct because under standard IV(C) a member should exercise reasonable supervision by establishing and implementing compliance procedures prior to the possibility of any violation occurring, which has not been done in this case.

According to the Fundamentals of Compliance—Requirements section of the GIPS standards, a firm must: A.) include in total firm assets those assigned to a sub-advisor selected by the firm. B.) alter historical composite performance after a significant change in the firm's organization occurs. C.) represent that the calculation methodology used by the firm is "in accordance with the Global Investment Performance Standards" when presenting performance.

A is correct. According to GIPS Provision 0.A.14, total firm assets must include assets assigned to a sub-advisor provided the firm has discretion over selecting the sub-advisor.

Which of the following groups is most likely responsible for maintaining oversight and responsibility for the *Professional Conduct Program* (PCP)? A.) CFA Institute Board of Governors B.) Disciplinary Review Committee C.) Professional Conduct Division

A is correct. 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).

When claiming GIPS compliance, a firm will *least likely* have to apply all of the required provisions in the first five major sections of the GIPS standards when investing in: A.) Separately managed accounts. B.) Equity mutual funds or unit trusts. C.) Commodity related portfolios.

A is correct. Certain provisions of Sections 0-5 do not apply to real estate investments, private equity investments and/or separately managed accounts.

Yao Tsang, CFA, has a large percentage of his net worth invested in the Australian mining company Outback Mines, which he has held for many years. Tsang is in the process of moving to a new employer where he is responsible for initiating research on mining companies. Shortly after his move, Tsang is asked to complete a research report on Outback. In order to meet the CFA Institute Standards of Professional Conduct concerning his stock holding, which of the following actions is most appropriate for Tsang to take? A.) Disclose his stock holding to his employer and to clients. B.) Sell his stock holdings to eliminate any potential conflict of interest. C.) Refuse to write the report and ask his employer to assign another analyst to complete the analysis.

A is correct. Full disclosure should be made as required by Standard VI(A). This standard does not preclude an analyst from owning shares in a covered company but any ownership needs to be adequately disclosed.

Can an asset management firm who follows the GIPS standards for select performance composites claim that it is GIPS compliant? A.) No. B.) Yes, but only if those composites meet GIPS performance reporting requirements. C.) Yes, but only if it uses the GIPS required return calculation requirements for all composites.

A is correct. GIPS compliance is a firm-wide process that cannot be achieved or claimed on just a single product or on selected composites. To be eligible to claim compliance, an asset management firm must fully comply with all requirements of the GIPS standards and claim compliance through the use of the GIPS Compliance Statement.

Reliable Data Corp offered to pay all the expenses of Lindsey Robinson, CFA, an equity analyst who covers the company, to attend the company's upcoming annual shareholder meeting. Robinson declined their offer and explained to the company that if she had accepted their offer she would most likely be in violation of: A.) Standard I-Professionalism B.) Standard II-Integrity of Capital Markets C.) Standard III-Conflicts of Interest

A is correct. If Robinson were to accept Reliable Data Corp's offer to pay all her expenses to attend the company's upcoming annual shareholder meeting she would be in violation of Standard I(B)-Independence and Objectivity. Members and candidates must use reasonable care and judgement to achieve and maintain independence and objectivity in their professional activities. Members and candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity.

in the CFA Institute Standards of Professional Conduct, Standard III-*Duties to Clients* most likely includes which of the following subsections? A.) Performance Presentation B.) Knowledge of the Law C.) Independence and Objectivity

A is correct. Performance Presentation is a sub-section of Standard III-Duties to Clients. The other sub-sections include: Loyalty, Prudence and Care, Fair Dealing, Suitability, and Preservation of Confidentiality. B is incorrect because knowledge of the Law is a sub-section of Standard I-Professionalism. C is incorrect because independence and Objectivity is a sub-section of Standard I-Professionalism.

Which CFA Institute Standard of Professional Conduct most likely includes a sub-section entitled "Communication with Clients and Prospective Clients"? A.) Investment Analysis, Recommendations, and Actions B.) Conflicts of Interest C.) Duties to Clients

A is correct. Standard V-Investment Analysis, Recommendations, and Actions includes the sub-section Communication with Clients and Prospective Clients. The other sub-sections within Standard V include Diligence and Reasonable Basis and Record Retention.

To claim compliance with the GIPS standards, a firm is required to: A.) adhere to certain calculation methodologies. B.) conduct an independent third-party verification of its claim of compliance. C.) perform periodic internal compliance checks of its investment performance process.

A is correct. The GIPS standards require firms to adhere to certain calculation methodologies and to make specific disclosures along with the firm's performance. B is incorrect because firms may choose (but are not required) to have an independent third-party verification to claim compliance with the GIPS standards. Verification is merely a recommendation of the GIPS standards. Being verified is considered best practice. C is incorrect because the GIPS standards strongly encourage (but do not require) firms to perform periodic internal compliance checks of their investment performance process.

Ensuring that a country's interests are taken into account when effectively implementing the GIPS standards on a country-wide basis most likely relies on which of the following entities? A.) A local sponsoring organization B.) The local regulator(s) C.) Local independent valuation firms

A is correct. Effective implementation of the GIPS standards in countries is highly reliant on a local sponsoring organization. The local sponsoring organization ensures that the country's interests are taken into account as the GIPS standards are developed.

For firms to claim compliance with the GIPS standards they most likely must: A.) take responsibility for their claim of compliance and maintaining that compliance. B.) hire an independent third party to test a sample of their composites. C.) increase the consistency and quality of the firm's compliant presentations.

A is correct. Firms claiming compliance with the GIPS standards are responsible for their claim of compliance and for maintaining that compliance. That is, firms self-regulate their claim of compliance. B is incorrect because verification is performed to test the process with respect to an entire firm, not on specific composites or a sample of composites.

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

In the CFA Institute Standards of Professional Conduct, Standard III-Duties to Clients most likely includes which of the following subsections? A.) Performance Presentation B.) Knowledge of the Law C.) Independence and Objectivity

A is correct. Performance Presentation is a sub-section of Standard III-Duties to Clients. The other sub-sections include: Loyalty, Prudence and Care, Fair Dealing, Suitability, and Preservation of Confidentiality.

In order to achieve compliance with GIPS Standards, it is recommended that firms: A.) adopt the broadest, most meaningful definition of the firm. B.) provide existing clients a compliant presentation applicable to their portfolio, at a minimum of a bi-annual basis. C.) define the firm by including all geographical offices operating under the same firm name.

A is correct. The Fundamentals of Compliance recommend that firms should adopt the broadest, most meaningful definition of the firm. B is incorrect because firms are recommended to provide each client, on an annual basis, a compliant presentation of the composite in which the client's portfolio is included.

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 categories 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 is correct. Within the Standards of Practice Handbook, CFA Institute addresses ethical principles for the profession, including individual professionalism; responsibilities to capital markets, clients, and employers; ethics involved in investment analysis; recommendations, and actions; and possible conflicts of interest.

The value of a forward or futures contract is: Click your answer choice below: A.) typically zero at initiation. B.) specified in the contract. C.) equal to the spot price at expiration.

Ais correct

Verification of a firm's claim of compliance with the GIPS standards is performed: A.) by firm personnel. B.) on a firm-wide basis. C.) to ensure the accuracy of a specific composite presentation.

B is correct. Verification is performed with respect to an entire firm, not on specific composites.

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

Townsend was recently appointed to the board of directors of a youth golf program that is the local chapter of a national not-for-profit organization. The program is beginning a new fund-raising campaign to expand the number of annual scholarships it provides. Townsend believes many of her clients make annual donations to charity. The next week in her regular newsletter to all clients, she includes a small section discussing the fund-raising campaign and her position on the organization's board. A.) Townsend did not violate the Code and Standards. B.) Townsend violated the Code and Standards by soliciting donations from her clients through the newsletter. C.) Townsend violated the Code and Standards by not getting approval of the organization before soliciting her clients.

Answer A is correct. Townsend has not provided any information about her clients to the leaders or managers of the golf program; thus, she has not violated Standard III(E)-Preservation of Confidentiality.

According to the GIPS standards, in cases where country-specific regulations conflict with GIPS, firms must follow: A.) GIPS standards only. B.) local laws only. C.) local laws and disclose the nature of the conflict with GIPS.

C is correct because local laws should be followed when a local or country-specific law or regulation conflicts with the GIPS standards, and the nature of the conflict should be disclosed.

which of the following is included under *conflicts of interest* A.) Fair dealing B.) Knowledge of the law C.) Priority of transactions D.) Loyalty

C is correct the 3 subsections of conflicts of interest are referral fees priority of transactions disclosures of conflict

Most societies would least likely consider ethical principles to include: A.) Justice. B.) Duplicity. C.) Diligence. D.) Fairness

B is correct. Most societies acknowledge the ethical principles of honesty, fairness or justice, diligence, and respect for the rights of others. Duplicity or deception would be in violation of most ethical principles.

According to the Duties to Clients standard, suitability requires members and candidates in an *advisory relationship* with a client to: A.) place their clients' interests before their own interests. B.) consider investments in the context of the client's total portfolio. C.) not knowingly make misrepresentations relating to recommendations.

B is correct. Standard III.C.1c Suitability states that when members and candidates are in an advisory relationship with a client, they must judge the suitability of investments in the context of the client's total portfolio.

The Standards of Practice Handbook provides guidance: A.) regarding the penalties incurred as a result of ethical violations. B.) to which all CFA Institute members and candidates must adhere. C.) through explanatory material and examples intended to be all inclusive.

B

Which of the following BEST DESCRIBES both forward and futures contracts? A.) Futures contracts trade on an organized futures exchange while forward contracts are regulated by the OTC market. B.) A forward contract is considered a flexible derivatives instrument while a futures contract is relatively inflexible. C.) Forward contracts require standardized contract terms while futures contracts can be customized.

B Flexibility is a characteristic of a forward contract, not a futures contract.

Which of the following is least likely a requirement of the GIPS standards? Firms are required to: A.) have their performance records verified by an independent third party. B.) include all discretionary, fee-paying portfolios in at least one composite. C.) present a minimum of five years of annual investment performance compliant with GIPS standards.

B and C are requirements A is correct because it is a recommendation but not a requirement that firms obtain independent third-party verification to claim GIPS compliance. Firms are required to include all discretionary, fee-paying portfolios in at least one composite. They must also present a minimum of five years of annual investment performance compliant with GIPS standards.

Holly Baker, CFA is explaining the CFA Institute Code of Ethics to a client. Which of the following statements could Baker make to most likely reflect disciplinary sanctions the CFA Institute may impose? Sanctions include: A.) fines for violations. B.) revocation of membership. C.) banishment from the industry.

B is correct

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

The GIPS standards are instrumental in: A.) enabling regulatory enforcement of investment performance reporting. B.) establishing best practices for calculating and presenting investment performance. C.) eliminating barriers to entry in markets with no investment performance standards.

B is correct

The GIPS standards are instrumental in: A.) enabling regulatory enforcement of investment performance reporting. B.) establishing best practices for calculating and presenting investment performance. C.) eliminating barriers to entry in markets with no investment performance standards.

B is correct

The goals of the CFA Institute Code of Ethics would *least likely* include: A.) publicly communicating established principles. B.) addressing past ethical failings. C.) fostering public confidence.

B is correct

Which category is suitability fall under? A.) Professionalism B.) Duties to Clients C>) Duties to employers D.) Investment Analysis, Recommendations and Actions

B is correct

Which of the following statements is *correct* under the Code and Standards? A.) CFA Institute members and candidates are prohibited from undertaking independent practice in competition with their employer. B.) Written consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with a member's or candidate's employer. C.)Members and candidates are prohibited from making arrangements or preparations to go into a competitive business before terminating their relationship with their employer.

B is correct

Firms claiming GIPS compliance must make every reasonable effort to provide a compliant presentation to which of the following? A.) Existing clients B.) Prospective clients C.) Both existing and prospective clients

B is correct because GIPS standards (0.A.9) state "firms must make every reasonable effort to provide a compliant presentation to all *prospective clients*." *As long as a prospective client has received a compliant presentation within the previous 12 months, the firm has met this requirement*. It is a GIPS recommendation, not a requirement, that all clients receive a compliant presentation on an annual basis (0.B.4). A is incorrect because firms are not required to provide a complaint presentation to existing clients, only prospective clients. However, it is a recommendation that existing clients receive at least annually a compliant presentation.

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.

which of the following is included under *conflicts of interest* A.) Loyalty B.) Referral fees C.) performance presentation D.) market manipulation

B is correct A--> Loyalty is under (Duties to employers) C --> Performance presentation is under (Duties to clients) D --> Market manipulation is under (integrity to capital markets)

Which one of the following alternatives best describes the primary use of inferential statistics? Inferential statistics are used to: Click your answer choice below: A.) summarize the important characteristics of a large data set based on statistical characteristics of a smaller sample. B.) make forecasts, estimates or judgments about a large set of data ) based on statistical characteristics of a smaller sample. C.) make forecasts based on large data sets.

B is correct Inferential statistics are used mainly to make forecasts, estimates or judgements about a large set of data based on statistical characteristics of a smaller set of data.

Lewis McChord, CFA, a research analyst at an investment bank, covers the auto industry. McChord recently read a report on an auto manufacturing company written by Pierce Brown. Brown's report provided extensive coverage of the company's newly launched products indicating that sales volume, not yet publicly available, would raise future profits. Intrigued by the report, McChord called a senior executive at the company whom she has known personally for years. The officer gave her specific details on new vehicle sales, indicating that profits would double in the current quarter. McChord added this data to Brown's report and then circulated it within her firm as her own report. McChord *least likely* violated which of the following CFA Institute Standards of Professional Conduct? A.) Misrepresentation B.) Preservation of Confidentiality C.) Material Nonpublic Information

B is correct because Standard III(E)-Preservation of Confidentiality has not been violated. The analyst has a personal relationship with the officer of the auto company, and he is not a current, former, or prospective client, so there is no obligation for the analyst to maintain client confidentiality. However, the analyst did violate Standard I(C)-Misrepresentation when she represented another analyst's work as her own.

Justin Blake, CFA, a retired portfolio manager, owns 20,000 shares of a small public company that he would like to sell because he is worried about the company's prospects. He posts messages on several internet bulletin boards. The messages read, "This stock is going up once the pending patents are released, so now is the time to buy. The stock is a buy at anything below $3. I have done some close research on these guys." According to the Standards of Practice Handbook, Blake most likely violated the Standard or Standards associated with: A.) Integrity of Capital Markets and Conflicts of Interest. B.) Integrity of Capital Markets, but not Conflicts of Interest. C.) Neither Integrity of Capital Markets nor Conflicts of Interest.

B is correct because Blake violated the Integrity of Capital Markets by engaging in a practice that is likely to artificially inflate trading volume [Standard II(B)]. A is incorrect because the Conflicts of Interests [Standard VI(A)] requires disclosure of conflicts to clients, prospective clients, and employers, which is not the case in this example.

Henrietta Huerta, CFA, writes a weekly investment newsletter to market her services and obtain new asset management clients. A third party distributes the free newsletter on her behalf to those individuals on its mailing list. As a result, it is widely read by thousands of individual investors. The newsletter recommendations reflect most of Huerta's investment actions. After completing further research on East-West Coffee Roasters, Huerta decides to change her initial buy recommendation to a sell. To avoid violating the CFA Institute Standards of Professional Conduct it would be most appropriate for Huerta to distribute the new investment recommendation to: A.) newsletter recipients first. B.) asset management clients first. C.) newsletter recipients and asset management clients simultaneously.

B is correct because according to Standard III(A)-Loyalty, Prudence, and Care, members and candidates must place their clients' interests first before their own interests. The temptation may be to release the changed recommendation to newsletter recipients simultaneously with or even before the asset management clients to try to obtain new clients. However, to avoid violating Standard III(A)-Loyalty, Prudence, and Care, Huerta must ensure that any change in an investment recommendation is first distributed to her asset management clients before any newsletter recipients, who are not necessarily clients (that is, they receive the newsletter for free from a third party distribution list).

A profession is most likely described as a group of people that: A.) has a common level of basic knowledge about a particular subject. B.) monitors its members based on an agreed-on code of ethics. C.) puts the interests of its members first.

B is correct. A profession is practiced by members who share and agree to adhere to a common code of ethics, and a profession is based on a specialized knowledge and skills and service to others.

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 is correct. 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.

What is the minimum period of compliant performance that a 12-year-old firm must present to comply with the GIPS standards? A.) Five years B.) Ten years C.) Twelve years

B is correct. After a firm presents a minimum of 5 years of GIPS-compliant performance, the firm must present an additional year of performance for each year since its inception, building up to a minimum of 10 years of GIPS-compliant performance. Accordingly, a firm in existence for 12 years must present, at a minimum, 10 years of compliant performance to comply with the GIPS standards.

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

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 is correct. Ethical conduct includes those actions that are perceived as beneficial and conforming to the ethical expectations of society.

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

Which of the following least likely forms the basic structure for enforcement of the CFA Institute Professional Conduct Program? A.) Bylaws B.) Rules of Procedure C.) Board of Governors

C

*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

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 is correct

According the GIPS standards, for periods beginning on or after 1 January 2011, the aggregate fair value of total firm assets most likely includes all: A.) fee-paying discretionary accounts. B.) fee- and non-fee-paying discretionary accounts. C.) fee- and non-fee-paying discretionary and non-discretionary accounts.

C is correct

Each composite of a GIPS-compliant firm must consist of: A.) multiple portfolios. B.) portfolios selected on an ex post basis. C.) portfolios managed according to a similar investment strategy.

C is correct

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 is correct 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.

A futures strategy generally used when a market participant expects to acquire an asset in the future but is concerned that the asset's price might rise before the asset is received is called a(n): A.) Arbitrage strategy. B.) Short hedge. C.) Long hedge.

C is correct A long hedge involves purchasing a futures contract to hedge against a price increase in an asset expected to be bought at a future dat

The CFO of Axis Manufacturing is evaluating the introduction of a new product. The costs of a recently completed marketing study for the new product and the possible increase in the sales of a related product made by Axis are best described (respectively) as: A.) opportunity cost; externality. B.) externality; cannibalization. C.) sunk cost; externality.

C is correct The study is a sunk cost, and the possible increase in sales of a related product is an example of a positive externality.

Which of the following statements about moneyness is most accurate? When the stock price is: A.) below the strike price, a call option is in‐the‐money. B.) above the strike price, a put option is in‐the‐money. C.) above the strike price, a put option is out‐of‐the‐money.

C is correct When the stock price is above the strike price, a put option is out-of-the-money. When the stock price is below the strike price, a call option is out-of-the-money.

Alexandra Smirnov, CFA, is a pension consultant to the Springwell Pension Fund. After reviewing Springwell's three-year performance presentation showing the fund's underperformance relative to its investment objectives and agreed benchmarks, Smirnov recommends that the fund hire new asset managers. Smirnov proposes that the fund hire Newday Managers on the basis of recent meetings she has had with the firm. Lengthy discussions at these meetings included Newday's investment strategy, its suitability to manage pension funds, its ability to adhere to its stated strategy, the firm's historical investment performance, and its adoption of the CFA Institute Code and Standards. Smirnov turned down Newday's offer of an introduction fee when recommending its services, but did not inform Springwell trustees of this offer. Which of the following CFA Institute Standards does Smirnov most likelyviolate? A.) Referral Fees B.) Loyalty, Prudence, and Care C.) Diligence and Reasonable Basis

C is correct because Smirnov violated Standard V(A)-Diligence and Reasonable basis because she recommended an external advisor without first understanding the adviser's compliance and internal control procedures

Benefits of compliance with the CFA Institute Global Investment Performance Standards (GIPS) *least likely* include: A.) strengthening of internal controls. B.) participation in competitive bidding. C.) elimination of in-depth due diligence for investors.

C is correct because compliance with the GIPS standards does not eliminate the need for in-depth due diligence on the part of the investor.

Priscilla Moab, CFA, is the director of marketing at Red Lantern Investments. Red's investment approach uses technical and fundamental analysis as well as portfolio construction to minimize risk. Moab plans to market an online investment newsletter to retail clients. Moab decides to let prospective clients have access to Red's buy and sell recommendation list by posting this information on a social media site. The posting also provides information on Red's basic investment process and logic. To avoid violating the CFA Institute Code of Ethics and Standards of Professional Conduct, Moab should most likely: A.) describe the investment approach in detail. B.) update investment process changes annually. C.) indicate that additional information and analysis are available.

C is correct because if recommendations are contained in capsule form (such as a recommended stock list), members and candidates should notify clients that additional information and analysis are available from the producer of the report as required by Standard V(B)-Communication with Clients and Prospective Clients. In this case, a clear statement on the website that more information is available upon request would be required.

Thomas Turkman recently hired Georgia Viggen, CFA, as a portfolio manager for North South Bank. Although Viggen worked many years for a competitor, West Star Bank, the move was straightforward since she did not have a non-compete agreement with her previous employer. Once Viggen starts working for Turkman, the first thing she does is to bring a trading software package she developed and used at West Star to her new employer. Using public information, Viggen contacts all of her former clients to convince them to move with her to North South. Viggen also convinces one of the analysts she worked with at West Star to join her at her new employer. Viggen most likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct concerning her actions involving: A.) clients. B.) the analyst. C.) trading software.

C is correct because the portfolio manager violated Standard IV(A)-Loyalty by taking proprietary trading software from her former employer. Although the manager created the software, it was during a period of time when West Star employed her, so the software is not her property to take with her to her new employer. The member contacted clients using public information, so she did not violate Standard IV(A)-Loyalty. Because Viggen was not obligated to abide by a non-compete agreement that would likely restrict recruitment of former colleagues, Viggen is most likely free to recruit the analyst from his former employer.

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 is correct. 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.

From the point of view of an investor, unethical behavior by investment professionals can most likely lead to which of the following? A.) Increased willingness to accept risk B.) Rise in the demand for investments C.) Demand for a higher return

C is correct. Unethical behavior erodes and destroys trust. Investors with low levels of trust are less willing to accept risk and, therefore, will likely demand a higher return for the use of their capital. They may also choose to invest elsewhere or to not invest at all.

Which of the following statements concerning the Global Investment Performance Standards (GIPS) is most likely correct? A.) Clients or prospective clients benefit from the Standards because the historical track record of compliant firms is accurate and precise. B.) The Standards eliminate the need for in-depth due diligence by investors. C.) Compliance with the Standards enhances the credibility of investment management firms.

C is correct. Compliance with the GIPS standards enhances the credibility of investment management firms. A is incorrect because the GIPS standards do not ensure that the historical track record of compliant firms is accurate and precise, only that the record is complete and fairly presented.

Under what circumstances could a client possibly win a lawsuit against a financial adviser despite the financial adviser abiding by all regulatory and legal requirements? A.) The adviser benefiting more from the relationship than the client B.) The adviser not being subject to a code of ethics C.) The adviser violating his employer's published code of ethics

C is correct. If the client could prove the firm marketed its code of ethics (i.e., putting the interests of the client first) as a reason to hire the firm and the adviser violated the code, the court may rule in the client's favor.

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 is correct. 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.

To maintain trust, the investment management profession must be interdependent with: A.) regulators. B.) employers. C.) investment firms.

C is correct. The investment management profession and investment firms must be interdependent to maintain trust. Employers and regulators have their own standards and practices, which may differ from regulations and standards set by professional bodies.

which of the following is *NOT* under *Investment analysis, recommendations and actions*? A.) Diligence on a reasonable basis B.) Record retention C.) Performance presentation D.) Communication with clients and prospective clients

C is incorrect Performance presentation is under *duties to clients*

Which category does record retention fall under? A.) Conflicts of interest B.) Duties to employers C.) Integrity of capital markets D.) Investment Analysis, Recommendations and Actions

D is correct

Which of the following statements is a stated purpose of disclosure in Standard VI(C)-Referral Fees? A.) Disclosure will allow the client to request discounted service fees. B.) Disclosure will help the client evaluate any possible partiality shown in the recommendation of services. C.) Disclosure means advising a prospective client about the referral arrangement once a formal client relationship has been established.

The correct answer is B. Answer B gives one of the two primary reasons listed in the Handbook for disclosing referral fees to clients under Standard VI(C)-Referral Fees

Which of the following statements is correct under the Code and Standards? A.) CFA Institute members and candidates are prohibited from undertaking independent practice in competition with their employer. B.) Written consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with a member's or candidate's employer. C.) Members and candidates are prohibited from making arrangements or preparations to go into a competitive business before terminating their relationship with their employer.

The correct answer is B. Under Standard IV(A)-Loyalty, members and candidates may undertake independent practice that may result in compensation or other benefit in competition with their employer as long as they obtain consent from their employer

Which one of the following actions will help to ensure the fair treatment of brokerage firm clients when a new investment recommendation is made? A.) Informing all people in the firm in advance that a recommendation is to be disseminated. B.) Distributing recommendations to institutional clients prior to individual accounts. C.) Minimizing the time between the decision and the dissemination of a recommendation.

The correct answer is C. This question, which relates to Standard III(B)-Fair Dealing, tests the knowledge of the procedures that will assist members and candidates in treating clients fairly when making investment recommendations. The step listed in C will help ensure the fair treatment of clients. Answer A may have negative effects on the fair treatment of clients

Adherence to the GIPS standards is reinforced by: A.) the sanctioning authority of sponsoring organizations. B.) the higher priority placed on compliance with GIPS over conflicting regulations. C.) a strong commitment to ethical integrity in fair representation and full disclosure.

c is correct

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