Practice: Code of Ethics and Standards of Professional Conduct
Ethical and Professional Standards. 14 question(s) in this unit's pool
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Ethical and Professional StandardsCode of Ethics and Standards of Professional Conduct
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Question 1Harder
Maria Gonzalez, CFA, works as a portfolio manager at Apex Asset Management. Her firm's compliance department has reviewed a new municipal bond offering and determined it is suitable for retail clients. Gonzalez personally believes the offering has undisclosed risks. According to the CFA Institute Standards of Professional Conduct, Gonzalez should MOST LIKELY:
How sure are you?
Correct: A. The correct answer is Express her concerns to her supervisor and compliance department in writing, and if she remains uncomfortable, dissociate from the transaction by removing her name from the recommendation. Gonzalez's obligation is to her independent judgment. Compliance department approval does not override her personal professional obligation to assess suitability. Dissociation, not resignation, is the required first step..
B. Most candidates from finance backgrounds are trained to defer to compliance. The compliance department IS the authority in most firms. CFA Standards require member's independent judgment regardless of firm compliance approval. Compliance sign-off reduces legal liability but does not discharge the member's ethical obligation.
C. Candidates who know 'violations must be reported' jump to external reporting. External reporting is a last resort, not a first step. The Standard requires internal escalation first. Immediate external reporting without internal escalation is not the 'most appropriate' response.
David Chen, CFA, is a sell-side analyst covering semiconductor companies. A portfolio manager at a client firm takes Chen and his colleagues on a 5-day fishing trip to Alaska valued at approximately $4,500. Chen's employer has a policy permitting gifts up to $500. According to Standard I(B) Independence and Objectivity, Chen should most likely:
How sure are you?
Correct: A. The correct answer is Decline the trip. The gift exceeds his employer's $500 policy, and gifts of this magnitude from clients create a reasonable question about whether Chen's research independence is compromised. The employer's stricter policy applies, not CFA's general 'modest gift' standard..
B. Disclosure feels like the ethical fix-all. You might believe 'disclose and proceed' is always acceptable. When the gift clearly exceeds the employer's explicit policy ($4,500 vs $500), disclosure does not make acceptance permissible. The employer policy violation is a separate issue from the independence question.
C. Candidates who know there is a travel/entertainment carve-out try to reclassify the fishing trip as 'entertainment.'. The entertainment exception applies to normal business entertainment (dinners, sporting events). A multi-day luxury trip is a gift in substance regardless of how it is labeled.
Sandra Lee, CFA candidate, is preparing a research report on a healthcare company. She uses three paragraphs from a sell-side report published by Goldman Sachs without attribution, and incorporates her own analysis throughout the rest of the report. Lee's client finds the report valuable. Has Lee violated any CFA Standards, most likely?
How sure are you?
Correct: A. The correct answer is Yes, Lee has violated Standard I(C) Misrepresentation by plagiarizing Goldman Sachs' work. Attribution is required even when the work is used within a larger original report, even when clients find it valuable, and even when the plagiarized sections are factual rather than opinion-based. Candidate status does not reduce the obligation. CFA candidates are held to the same Standards as charterholders..
B. Common intuition: a few unattributed paragraphs in an otherwise original 20-page report seems minor. There is no materiality threshold in the plagiarism standard. Any unattributed use of another's work is a violation, regardless of what proportion of the total report it represents.
C. You might genuinely believe the Standards apply only after they earn the charter. CFA candidates are explicitly bound by the Code and Standards from the moment they register for the exam. The Standards of Practice Handbook states this explicitly.
Thomas Muller, CFA, is a portfolio manager. During a golf game, he overhears a conversation between two executives of a publicly-traded company discussing disappointing quarterly earnings not yet disclosed to the public. Muller does not participate in the conversation. The MOST appropriate action for Muller is:
How sure are you?
Correct: A. The correct answer is Muller must not trade on this information and should report what he overheard to his compliance department. Accidentally overhearing material nonpublic information creates the same trading restriction as receiving it directly. The information is nonpublic (not officially disclosed), and the earnings disappointment is clearly material (would move the price)..
B. You might believe that passively overhearing information is different from actively receiving insider information. The Standards do not distinguish between solicited and unsolicited receipt of material nonpublic information. The restriction applies to the information's nature, not how it was received.
C. This sounds like mosaic theory. Combining public and non-material information to reach a conclusion. The overheard information is clearly material. Once a member has material nonpublic information, no amount of additional public research 'cleanses' the taint. Mosaic theory applies when the nonpublic component is non-material.
Rachel Park, CFA, manages separate accounts for two clients: Client A (aggressive growth) and Client B (capital preservation). Park receives a hot IPO allocation of 1,000 shares. Both clients have expressed interest in IPO investments. Under Standard III(B) Fair Dealing, Park should most likely:
How sure are you?
Correct: A. The correct answer is Allocate pro-rata based on the size of each account or on a pre-disclosed systematic basis that does not favor one client over another. Fair dealing does not require equal allocation (same number of shares to each client). It requires equitable treatment based on a systematic, pre-disclosed method. Given the different mandates, the allocation methodology must be defensible and pre-disclosed..
B. Suitability analysis suggests Client A is a better fit for an IPO. This seems like good fiduciary reasoning. Both clients have expressed interest and IPO investment is within scope for both. Allocating 100% to one client when both have expressed interest violates fair dealing. The suitability argument is legitimate but cannot justify a 100-0 split without a pre-disclosed systematic method.
C. Equal sounds like fair. You might confuse 'fair dealing' with 'equal treatment.'. Standard III(B) explicitly states that 'fair dealing does not mean equal treatment.' Equal share allocation ignores account size differences and may not serve either client's best interest.
Which of the following BEST describes the Code of Ethics statement regarding members' obligation to the profession?
How sure are you?
Correct: A. The correct answer is Members must act in a manner that reflects credit on themselves and the investment profession. This is one of the six explicit statements in the Code of Ethics. The profession-level obligation is distinct from duties to clients, employers, and markets. It is the broadest obligation and covers reputational considerations even in non-professional contexts..
B. Client-first is a strong theme throughout the Standards. Candidates who know the Standards content assume this must be in the Code. While Standard III covers duties to clients, the Code of Ethics statement is specifically about the profession's integrity and public trust, not client priority. Client priority is a Standard, not a Code component.
C. Standard I(A) Knowledge of the Law deals with legal compliance. You might confuse Standard I with the Code. The Code of Ethics is a set of principles. The legal compliance obligation is articulated in Standard I(A), not in the Code of Ethics statements themselves.
Femi Adeyemi, CFA, works at a hedge fund. His firm has instructed him to include estimated figures in a client performance report where actual figures are not yet available, and to label them as 'preliminary.' The actual numbers are expected to differ by as much as 8%. Adeyemi should MOST appropriately:
How sure are you?
Correct: A. The correct answer is Decline to include performance figures that he knows may be materially inaccurate. Labeling figures as 'preliminary' does not cure the misrepresentation if Adeyemi knows the estimates may differ by 8% from actual results. A material discrepancy is one that would affect a client's investment decision. 8% variance on performance figures is likely material..
B. Disclosure-fixes-everything reasoning. 'Preliminary' label = informed consent. Disclosure does not cure misrepresentation when the member knows the information is likely materially wrong. The obligation is to not communicate information the member knows to be false or misleading. Disclosure of that falseness is not a cure.
C. This seems like full disclosure. The candidate is adding a larger buffer than the expected variance. The issue is not the size of the disclosure range. The issue is that Adeyemi is communicating performance information he knows to be materially inaccurate. No footnote cures that.
The primary purpose of the CFA Institute Professional Conduct Program is most likely described as:
How sure are you?
Correct: A. The correct answer is To investigate complaints and discipline members and candidates who violate the Code and Standards. The Professional Conduct Program is the enforcement mechanism. Not an education program, not a research function. The exam tests whether candidates understand the governance structure of CFA ethics enforcement..
B. Guidance seems like a logical function for a professional conduct body. Guidance is provided through the Standards of Practice Handbook, not through the Professional Conduct Program. The PCP's function is investigation and discipline, not advisory.
C. Regulatory engagement seems like a plausible function for a professional body. CFA Institute does engage in advocacy, but the Professional Conduct Program specifically is the disciplinary body, not an advocacy function.
Under the CFA Institute Standards, when local law is most likely MORE permissive than the CFA Standards, a member must:
How sure are you?
Correct: A. The correct answer is Follow the CFA Standards, which are stricter. Standard I(A) establishes a clear hierarchy: when laws conflict with the Standards, members must follow whichever is STRICTER. When local law is more permissive, CFA Standards govern. When local law is stricter, local law governs. The member must always comply with the higher bar..
B. Legal professionals and compliance officers are trained that local law is paramount. This is correct in a legal context but wrong for CFA purposes. CFA Standards explicitly require the stricter standard. Local law establishes a floor, not a ceiling for ethical conduct.
C. Practicality sounds reasonable. Real-world professionals constantly make cost-benefit trade-offs on compliance. Practicality is not a criterion in the Standards hierarchy. The hierarchy is purely about strictness, not ease of compliance.
James Okafor, CFA, discovers that his colleague is churning client accounts. Generating excessive trades to earn commissions. Okafor is not personally involved in managing these accounts. According to the Standards, Okafor's MINIMUM required action is most likely:
How sure are you?
Correct: A. The correct answer is Report the violation to his supervisor and/or compliance department. Okafor has no obligation to report to external regulators as a first step. The minimum required action when a member becomes aware of another person's violation is internal escalation. Dissociation is required only if the member cannot stop the violation through internal channels..
B. Churning is a securities law violation as well as an ethics violation. You might with securities law knowledge jump to regulatory reporting. External reporting is not required as a first step under CFA Standards. Internal escalation is the minimum obligation. External reporting may be appropriate subsequently but is not the minimum.
C. Okafor didn't do anything wrong personally. The natural instinct is 'not my problem.'. Knowledge of a violation creates an obligation. 'Do nothing' is almost never the correct answer on CFA Ethics questions. This is the most reliable heuristic on the exam.
The CFA Institute Standards of Professional Conduct are most likely organized into how many Standards, and which Standard covers duties to employers?
How sure are you?
Correct: A. The correct answer is Seven Standards, and Standard IV covers Duties to Employers. The 7 Standards are: I Professional/Fiduciary Duties, II Market Integrity, III Duties to Clients, IV Duties to Employers, V Investment Analysis, VI Conflicts of Interest, VII Responsibilities as CFA Member/Candidate. Standard IV covers loyalty, additional compensation arrangements, and responsibilities of supervisors..
B. You might confuse the 6 components of the Code of Ethics with the number of Standards. Six is a prominent number in Ethics study. There are 7 Standards (I through VII), not 6. The 6 refers to the Code of Ethics components, not the Standards count.
C. Standard III is the longest and most complex standard, covering 6 sub-standards. You might remember Standard III as 'the big duties standard' and assume employers are in there. Standard III covers duties to CLIENTS (not employers). Duties to employers are Standard IV. The distinction between III and IV is frequently tested.
Ahmed Al-Rashidi, CFA, is writing a research report and uses a quantitative model developed by his employer's research team. He does not disclose that the model was developed by others. This is most likely described as a violation of:
How sure are you?
Correct: A. The correct answer is Standard I(C) Misrepresentation, because Al-Rashidi is implicitly claiming personal credit for work that belongs to his firm's research team. Misrepresentation includes creating false impressions about the source of analysis, not just false impressions about results. Attribution is required even for internal firm resources when the analyst is representing the work as their own..
B. The model is legitimately his to use as an employee. Using employer tools is not inherently wrong. Using the model is permitted. Failing to disclose that the model is not his personal creation when presenting it as part of his analysis creates a false impression of his analytical contribution. Which is misrepresentation.
C. Employer IP is a real concern covered in Standard IV. Candidates who scan for key words ('employer,' 'model') may mis-categorize the violation. The question is about attribution and impression creation, not IP use. Al-Rashidi has permission to use the model. The violation is about misrepresenting the source, which is Standard I(C).
A candidate memorizes the seven Standards of Professional Conduct but treats the six components of the Code of Ethics as background color not worth learning in detail. On exam day, a vignette describes a CFA member acting with 'diligence and a reasonable basis' on a research report. The provision being tested is most likely found in:
How sure are you?
Correct: B. The Code of Ethics states broad ethical principles members commit to (such as acting with competence and diligence); the Standards of Professional Conduct translate those principles into specific, enforceable rules. 'Diligence and a reasonable basis' for research is the specific rule found in Standard V(A), not a Code-level generality. Recognizing which of the two levels a fact pattern is testing is itself part of what the exam checks.
A. The Code of Ethics states the general principle of competence and diligence, but the SPECIFIC, enforceable rule about a reasonable and adequate basis for recommendations lives in a numbered Standard, V(A), not in the Code's broad language alone.
C. The Code and the Standards do not overlap completely: the Code is six short, aspirational principles, while the seven Standards (with their many sub-sections) are the specific, detailed rules that operationalize those principles. Treating them as interchangeable misses exactly the structural distinction this LOS tests.
Two candidates each violate a rule during the exam registration process. Candidate X is found to have used a study aid that reproduces actual exam questions from a prior administration. Candidate Y is found to have exceeded the permitted break time by walking around the room. Under the CFA Institute Professional Conduct Program, the most likely outcome is that:
How sure are you?
Correct: B. The Professional Conduct Program's enforcement process weighs the severity of a violation, and conduct that undermines the integrity of the CFA exam itself (obtaining or using actual exam content, a direct Standard VII(A) violation) is treated far more seriously than a minor administrative infraction like exceeding a break. The PCP does have jurisdiction over candidates, not only members, which is exactly why this distinction matters on the exam.
A. The PCP's enforcement process is not a flat, one-size-fits-all system; the severity and nature of a violation drives how seriously it is investigated and sanctioned. Compromising exam integrity is materially different from a minor administrative rule breach.
C. The Professional Conduct Program explicitly covers CANDIDATES in the CFA Program, not only members and charterholders; agreeing to the Code and Standards is a condition of registering for the exam in the first place.