Ethics Practice Problems
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.
High ethical standards are distinguishing features of which of the following bodies? A. Craft guilds B. Trade bodies C. Professional bodies
C is correct. 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.
Fiduciary duty is a standard most likely to be upheld by members of a(n): A. employer. B. profession. C. not-for-profit body.
B is correct. 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.
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. 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.
Examples of the beneficial features of using an ethical decision-making framework least likely includes analyzing: A. the best course of action when alternatives are available. B. the decision maker's perspective of contemplated actions. C. a broader picture from a long-term point of view.
B is correct. An ethical decision-making framework helps a decision maker see the situation from multiple perspectives, not just from her personal perspective, and pay attention to aspects of the situation that may be less evident if a short-term, self-focused perspective is applied.
Tibor Figeczky, CFA, is 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.
The belief that one's ethical standards are above average is most likely a reflection of which of the following behavioral biases? A. Overconfidence B. Short-term focus C. Situational influence
A is correct. The belief that one's ethical standards are above average illustrates an overconfidence bias. An overconfidence bias will most likely lead individuals to overestimate the morality of their own behavior and can lead to a failure to consider important inputs and variables needed to make the best ethical decisions.
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. The single most important factor in promoting ethical behavior within an investment firm is done by the development, maintenance, and demonstration of a strong culture of integrity by the firm's senior management.
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. The statement, "Members and Candidates must 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" can be found in the CFA Institute Standards of Professional Conduct, Standard I-Professionalism (D) Misconduct.
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 is correct. The statement, "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.
Sato Kashingaki, CFA, is a financial advisor who practices in multiple jurisdictions. In his resident country, Country A, he is not required by law to hold a financial advisor's license but he is required to uphold a fiduciary duty to his clients. In Country B, authorities require him to hold a financial advisor's license, but he is not expected to uphold a fiduciary duty to his clients. In Country C, authorities require both a financial advisor's license and an asset management license in addition to upholding a fiduciary responsibility toward clients. In which of the three countries does Kashingaki have the duty to adhere to the CFA Code and Standards over local laws? A. Country A. B. Country B. C. Country C.
B is correct because Standard I-Professionalism requires members and candidates to comply with the more strict law, rule, or regulation in the event of conflicts of any applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct). Country B does not require a financial advisor to uphold a fiduciary duty (as is required by Country A and C), i.e., put the client's interest before their own, therefore the CFA Code of Ethics and Standards of Professional Conduct (Duty to Clients) would be applicable as it is the stricter of the two.
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, a mastery mindest, and expected adherence to a code of ethics and standards of practice.
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.
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.
Most societies would least likely consider ethical principles to include: A. justice. B. duplicity. C. diligence.
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.
If you are characterizing clients, family, colleagues, and market participants and the duties owed to them, you are most likely in which phase of an ethical decision-making framework? A. Decide B. Identify C. Consider
B is correct. The Identify phase is typically the initial phase of the ethical decision-making framework. In this phase, you will identify the important facts available as well as those facts that you wish were available to develop a complete understanding of the situation. In this phase you also identify the stakeholders—clients, family, colleagues, market participants, and others—and the duties to them.
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.
A research analyst is facing a moral dilemma and decides to use an ethical decision-making framework. After looking at the facts at hand and identifying the situational influences, he still cannot make a decision on the best course of action. His least appropriate next step is to: A. determine what additional information is needed. B. decide, act, monitor, and reflect. C. ask someone else to give guidance.
B is correct. The least appropriate action would be for the decision maker to go ahead and make a decision based on insufficient information. By doing so, the decision maker could cause harm and make the situation worse. The ethical decision-making framework is iterative, and users can move between phases rather than undertaking them in any one order. If a decision maker is not yet ready to make a decision, the most appropriate course of action would be to ask someone else to give guidance and determine what additional information is needed to clarify the situation.
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 is correct. When a dilemma occurs, raising an issue internally with a senior employee is often a good starting place and creates an opportunity for an independent internal review. Protecting the client and the firm may take priority over the position of an individual professional raising a concern.
As a condition of his employment with an investment bank, Abasi Hasina, CFA, was required to sign an employment contract, including a non-compete clause restricting him from working for a competitor for three years after leaving the employer. After one year, Hasina quits his job for a comparable position with an investment bank in a country where non-compete clauses are illegal. Lawyers with whom he consulted prior to taking the new position determined that the non-compete clause was a violation of human rights and thus illegal. Did Hasina most likely violate the CFA Institute Code of Ethics and Standards of Professional Conduct? A. Yes B. No, because the non-compete clause violates his human rights B. No, because the non-compete clause is illegal in the new country of employment
A is correct because by failing to adhere to the non-compete clause he agreed to abide by when signing his employment contract, Hasina shows a lack of professional integrity toward his employer. This behavior reflects poorly on the good reputation of members and is a violation of the Code of Ethics, which states that members and candidates must act with integrity, and Standard I(D)-Misconduct, which states that members and candidates must 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. The Code of Ethics at times requires a member or candidate to uphold a higher standard than that required by law, rule, or regulation, or in this case the strict application of the employment agreement.
Carolina Ochoa, CFA, is the chief financial officer at Pantagonia Computing. Ochoa is currently the subject of an inquiry by Pantagonia's corporate investigations department. The inquiry is the result of an anonymous complaint accusing Ochoa of falsifying travel expenses for senior management related to a government contract. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, it is most appropriate for Ochoa to disclose the allegations: A. on her Professional Conduct Statement. B. to CFA Institute when the investigation concludes. C. to CFA Institute if the allegations are proven correct.
A is correct because 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 criminal investigations or being the subject of a written complaint.
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 of and uphold the rules governing capital markets. 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 is correct because the Code of Ethics requires CFA members and candidates to promote the integrity of and uphold rules governing capital markets. While the Code of Ethics requires members and candidates to act with integrity, and the interests of the client are paramount, not all requests of clients are appropriate to follow, particularly if considered unethical or illegal. The Code of Ethics does not require members and candidates to encourage others to pursue the CFA designation, but to improve their professional competence.
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).
an an individual most likely cause the public to lose confidence in the global financial markets? A. Yes. B. No, a negative event would need to be considered systemic. C. No, a single person does not have enough influence.
A is correct. Any negative publicity regarding a financial sector employee can lead to the public losing market confidence and trust in the investment industry. Consequently, it is critical for individuals working in the financial services industry to act in an ethical manner. Without market confidence and trust in investment professionals, investors will remove their capital and the industry and economy will suffer.
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. Both the Professional Conduct Staff and the Disciplinary Review Committee are responsible for determining whether a violation of the Code and Standards or testing policies has occurred and if so what sanction should be imposed. Following their investigation, the Professional Conduct Staff may conclude the inquiry with no disciplinary sanction, issue a cautionary letter, or continue proceedings to discipline the member or candidate which include the charges and a proposed sanction. If that proposal is rejected by the member or candidate, the matter is referred to a panel composed of DRC Members. The panel's task is to determine whether a violation of the Code and Standards or testing policies occurred and if so what sanction should be imposed.
Which of the following statements most likely reflects one of the six components of the CFA Code of Ethics? Candidates must: A. place the integrity of the investment profession above their own interests. B. promote the viability of the global capital markets for their employer's benefit. C. ignore unprofessional conduct displayed by others within the profession.
A is correct. CFA charterholders and candidates must place the integrity of the investment profession and the interests of clients above their own personal interests.
How does ethical conduct most likely compare with what is legally required? A. Ethical conduct goes beyond what is legally required. B. There are no differences between the two; they are the same. C. Doing what is legally required removes the need for ethical conduct.
A is correct. Ethical conduct goes beyond what is legally required and encompasses what most societies, communities, and professional organizations consider to be ethically correct behavior. Good ethical judgement requires considering the interests of a multiple of stakeholders while minimizing their risks.
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.
Lisa Blackstone, a new CFA charterholder, had to explain to the marketing department of her firm that making any claim of superior analytical skills due to her designation would most likely be a violation of: A. Standard VII-Responsibilities as a CFA Institute Member or CFA Candidate. B. Standard V-Investment Analysis, Recommendations, and Actions. C. Standard IV-Duties to Employers.
A is correct. Making claims that the CFA designation was proof of superior analytical skills is a violation of Standard VII(B)-References to CFA Institute, the CFA Designation, and the CFA Program. When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, members and candidates must not misrepresent or exaggerate the meaning or implication of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program.
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 is correct. 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.
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.
Disclosure of confidential CFA exam information will most likely be detected by the Professional Conduct staff through: A. monitoring online and social media. B. analysis of Proctor Reports. C. annual Professional Conduct Statements.
A is correct. Professional Conduct inquiries come from a number of sources including the monitoring of online and social media to detect disclosure of confidential exam information.
Which of the following is not a component of the CFA Institute Code of Ethics? A. Promote financial integrity and seek to prevent and punish abuses in the financial markets. B. Place the integrity of the investment profession and the interests of clients above their own personal interests. C. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
A is correct. Punishing abuses in the financial sector is not included in any of the six components of the CFA Code of Ethics.
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.
Which of the following best outlines the minimally acceptable behaviors expected of a member belonging to a societal group? A. Standards of conduct B. Code of ethics C. A firm's employee handbook
A is correct. Standards of conduct outline the minimally acceptable behaviors expected of a member of a societal group. The code of ethics serves as a general guide for how community members should act.
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 CFA Institute Code of Ethics and Standards of Professional Conduct are designed to foster and reinforce a culture of responsibility and professionalism. The Code and Standards apply to all members and candidates regardless of title, position, occupation, geographic location, or specific situation, and they apply to all professional activities of investment professionals.
Which of the following statements related to requirements for the CFA Institute Standards of Professional Conduct Standard V(B)-Communication with Clients and Prospective Clients is least likely accurate? The standard requires members and candidates to: A. divulge the number of investment related personnel responsible for external communication. B. disclose the basic format and general principles of the investment process. C. distinguish between fact and opinion in the presentation of investment analysis and recommendations.
A is correct. The CFA Institute Standards of Professional Conduct Standard V(B)-Communication with Clients and Prospective Clients does not limit the type or number of staff responsible for external communication.
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 as the CFA Institute may revoke membership for violations of the Institute Code of Ethics.
When an otherwise honest person allows the promise of a bonus to negatively influence her behavior, it is most likely an example of what type of ethical challenge? A. Overconfidence bias B. Situational influence C. Compliance oversimplification
B is correct. Discussions of receiving a bonus can have a disproportionate influence on our decision making because it can cause us to focus on short-term outcomes rather than long-term desired objectives. This is an example of a situational influence, which often causes people to not consider other important considerations when making decisions.
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.
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 is correct. 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.
The relationship between an investment professional and her clients is predominately based on trust, most likelybecause the investment professional: A. sells or gives advice related to tangible products and services. B. has specialized knowledge, leading her to have more power. C. has access to information on which to base investment decisions.
B is correct. Investment professionals have access to specialized knowledge and often have better access to information that gives them an advantage and more power than the client. Clients expect their advisers to use this knowledge and information to their benefit, not for the investment professional to take advantage of them.
Tamlorn Mager, CFA, is an analyst at Pyallup Portfolio Management. CFA Institute recently notified Mager that his CFA Institute membership was suspended for a year because he violated the CFA Code. A hearing panel also came to the same conclusion. Mager subsequently notified CFA Institute that he does not accept the sanction or the hearing panel's conclusion. Which of the following actions by Mager is most consistent with the CFA Institute Standards of Professional Conduct Program? A. Presenting himself to the public as a CFA charterholder. B. Providing evidence for his position to an outside arbitration panel. C. Using his CFA designation upon expiration of the suspension period.
C is correct because the Designated Officer may impose a summary suspension on a member or candidate, which may be rejected or accepted by the member or candidate. If the member or candidate does not accept the proposed sanction, the matter is referred to a hearing panel composed of DRC members and CFA Institute member volunteers affiliated with the DRC. In this case, the hearing panel also affirmed the suspension decision by the Designated Officer and therefore the member loses the right to use his designation for a one-year period. Upon expiration of the suspension period, the analyst would be able to use his CFA designation.
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 is correct. Although the Board of Governors maintains oversight and responsibility for the Professional Conduct Program, the CFA Institute Bylaws and Rules of Procedure form the basic structure for enforcement of the Code and Standards.
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. Additional guidance can be obtained from the firm's policies and procedures and the CFA Institute Code and Standards.
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.
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.
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.
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.
