Ethics Application

Ethical and Professional Standards. Worth 15 to 20 percent of the exam. One session: the lesson, the rules, the method, then the questions.

Ethical and Professional StandardsEthics Application
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The lesson

Runtime 11 minutes 47 seconds, measured from the published video.

The reading

Five to ten minutes on this one unit: what the exam wants, the idea in plain words, then straight into the trap and the practice.

This module asks you to evaluate a described practice, policy, or piece of conduct against the Code and Standards, and to explain in plain terms whether and why it violates one. There is no new rule here; it is the whole of Ethics applied at once, in the vignette format the real exam actually uses.

By this point you know the six principles and the seven Standards on their own. This module's job is different. It trains you to read four or five sentences about a named person. Then you decide, quickly, whether what they did was fine, borderline, or a violation. And which Standard it touches.

One pattern repeats across almost every scenario: the gap between what is legal and what the Standards require. The exam's wrong choices live inside that gap. A research report that borrows another firm's work without credit is a misrepresentation violation, and it stays a violation even if the borrowed part is small and the client is happy with the report. Client satisfaction and originality are two separate questions, and only the first one is in the client's control. A guarantee of a specific investment outcome is a violation the moment it is made, however careful the underlying research was: a member may describe best efforts, never promise a result. Small gifts inside a firm's own written policy are usually fine. The same gift outside any policy, or large enough to raise a real question about independence, is not fixed just by writing it down afterward.

Two habits carry across every scenario. First, separate what is technically allowed from what is most appropriate. An exam stem asking what a member 'should most likely do' wants the best action given every duty in play. It does not want an action that merely survives a narrow reading of one rule. Second, resist the passive choice. Reporting a colleague's suspected violation to a supervisor is an active step, and so is declining a client instruction that would force a Standards violation, and so is correcting a materially wrong statement once you learn of it. Staying quiet is almost never the answer the exam wants, because it does not resolve the underlying conflict, it only delays whoever finds it next.

The trap

A scenario where 'most of the report is original work' or 'the client was satisfied with the outcome' is offered as a reason to excuse a violation; neither fact changes whether the specific act, plagiarism, a guarantee, an undisclosed conflict, itself violated a Standard.

What this unit turns on

Read these before the questions, not after them. Everything here traces to this module's own lesson and to the 2026 outline.

Three pressure sources, one required response

Investment-banking pressure, corporate-issuer pressure (a company threatening to pull its business), and sales-force pressure (a client threatening to leave) are three different sources of the same violation: any rating change or softened language that is not driven by new analytical information breaches Standard I(B), regardless of who is applying the pressure.

Best-efforts coverage is allowed; guaranteed conclusions are not

A firm may commit to "best efforts" research coverage as part of winning an investment-banking mandate. What it may never do is guarantee a specific rating or a favorable conclusion. The line is between a promise to look (permitted) and a promise about what will be found (prohibited).

The analyst quiet period is not the insider lock-up

FINRA Rule 2241 sets a 25-day quiet period for a lead underwriter's analysts (10 days for co-managers) before they may publish on a company the firm just took public. The 180-day figure that shows up in the same fact patterns is a completely different rule, the lock-up restricting company insiders from selling their own shares.

A firewall exists precisely so research and banking cannot swap favors

Sharing a proprietary research model with the investment-banking side of the firm, even for an unrelated deal, breaches the information barrier Standard I(B) relies on to keep research independent. It is a violation regardless of the model's quality, because once banking has it, banking can pressure the analyst to keep its assumptions favorable.

An employer's instruction cannot require a Standards violation

Standard IV(A), Duties to Employers, requires following reasonable employer instructions, but it carves out an explicit exception: no employee must follow an instruction that requires violating the CFA Standards. A manager relaying pressure to change a rating does not create an obligation to comply.

The client-benefit test decides what soft dollars may pay for

Research paid for with client commissions is permissible only when it is actually used in managing client accounts, not merely capable of benefiting clients someday. Real-time data feeds and portfolio-analytics tools used in client decisions qualify; office rent, personal hardware and marketing materials do not, because they serve the manager's business, not the client's portfolio.

Mixed use is split, not disclosed away

When research serves both the client and the manager personally, the split must be paid proportionally: the client-benefit share may run through soft dollars, and the personal-benefit share must be paid in hard dollars. Disclosing the arrangement is a separate, additional requirement, not a substitute for the hard-dollar payment.

Section 28(e) is a legal floor, not an ethical ceiling

Section 28(e) of the U.S. Securities Exchange Act protects a soft-dollar arrangement from breach-of-fiduciary-duty claims under U.S. law. It is a separate, lower bar than the CFA Standards; an arrangement can be fully legal under 28(e) and still violate Standard III(A) or VI(A).

Best execution is multi-factor, not lowest commission

Seeking best execution means weighing price, speed, likelihood of completion, market impact and research value together, not chasing the cheapest commission. Paying an above-market commission for research that genuinely improves client outcomes can still satisfy best execution on balance.

Client-directed brokerage does not cancel the duty to seek best execution

When a client names the broker to use, the manager must still seek the best available execution through that broker, and must tell the client if that broker cannot deliver it. Directing brokerage in exchange for a personal benefit to the manager, such as referral compensation, remains a Standard III(A) loyalty violation even with the client's consent.

The trick

Best efforts, guarantee gone

A coverage commitment is fine; a rating guarantee ends careers. The two G's: one gets the mandate, the other gets an analyst barred from the industry.

25 to 40 days versus 180 days

The analyst quiet period is short (25 days for a lead underwriter, sometimes 30 to 40 by conservative firm policy). The insider lock-up is long, 180 days. Short rule for analysts, long rule for insiders selling their own stock.

Does the research WORK FOR the CLIENT?

The one-question soft-dollar filter: W for work, C for client, not the manager. If the answer is no, or only partly, hard dollars must cover the manager's share.

Legal floor, not ethical ceiling

Section 28(e) sets the minimum a court requires. The CFA Standards sit above it. Passing 28(e) proves nothing about passing the Standards.

Blodget, $1.435 billion

Henry Blodget publicly rated internet stocks Buy while privately calling them a dog. The 2003 Global Analyst Research Settlement, $1.435 billion across ten firms, is the real-world shape of every investment-banking-pressure question on this module.

The method

The order to work a question of this type in, every time, before you touch the numbers.

  1. Identify the pressure source (banking, issuer, sales force) or the money flow (whose commissions are paying for what).
  2. Ask whether the action taken was driven by new analytical information. If nothing new was found, any rating or language change is a violation regardless of who asked for it.
  3. For a coverage-commitment question, separate a promise to look (best efforts, permitted) from a promise about the answer (a guaranteed rating, prohibited).
  4. For a soft-dollar question, run the client-benefit test on the service itself, then check whether the arrangement is mixed use, and if so, whether the personal share is paid in hard dollars.
  5. Check for a second standard hiding in the same facts: an undisclosed conflict usually also breaches VI(A); an outside referral payment usually also breaches IV(B).

The practice run

Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen in a session, so answer honestly: it sends the unit back to learning and puts it at the front of your revision queue.

Question 1Exam level

An equity research analyst at a bulge-bracket firm is assigned to cover a technology company that is also a client of the firm's investment banking department, which is advising the company on a pending acquisition. The IB department head asks the analyst to maintain a 'Buy' rating on the company throughout the deal process to avoid jeopardizing the firm's advisory fees. The analyst believes the company's valuation is fair at current prices and that a 'Hold' rating is appropriate. To comply with Standard I(B), the analyst should MOST appropriately:

How sure are you?

Correct: B. Standard I(B) requires analysts to maintain independence and objectivity regardless of economic or other pressure. The analyst's rating must reflect their honest assessment. Disclosure (Answer B) is a required procedure but does not substitute for independence. The analyst cannot issue a misleading 'Buy' and cure it with disclosure. Answer A directly violates I(B). Answer D is not required. The standard does not require recusal, it requires independence.
A. Disclosure is a recurring correct answer in CFA ethics questions, so candidates pattern-match to 'disclose = correct.' This is the most dangerous wrong answer. Disclosure is required IN ADDITION to independence, not instead of it. If the analyst's honest view is 'Hold,' issuing 'Buy' with a disclosure footnote is still a violation of I(B). Disclosure cannot cure a false rating.
C. Recusal sounds like the most conservative, ethical choice. 'if there's a conflict, step away.'. Standard I(B) does not require analysts to recuse themselves from covering companies where IB relationships exist. It requires them to maintain independence. Firewalls and disclosure are the firm-level mechanisms; the analyst's obligation is to issue honest research.

Unit: ethics-application

Question 2Exam level

A technology company is a major investment banking client of the firm. After an analyst downgrades the company's stock from 'Buy' to 'Sell,' the company's CFO calls the analyst's manager and threatens to move all of the company's investment banking business to a competitor if the rating is not reversed. The manager relays this message to the analyst and asks her to reconsider. Under Standard I(B), which of the following BEST describes the analyst's obligation?

How sure are you?

Correct: B. Corporate issuer pressure, including threats to withdraw banking business, is explicitly called out in the Guidance for Standard I(B) under 'Public Companies.' The analyst's obligation is to maintain the rating that reflects honest analysis. Standard IV(A) (Duties to Employers) cannot override Standard I(B). When Standards conflict, the more restrictive applies, and I(B) cannot be waived by employer instruction.
A. Standard IV(A) says members must follow employer instructions. You might conflate this with a general duty of obedience. The manager is relaying an instruction. Standard IV(A) explicitly carves out an exception: employees need not follow instructions that require violating CFA Standards.
C. Compromise sounds like professional judgment. 'Hold' is a real rating that might reflect genuine uncertainty. If the analyst's honest assessment is 'Sell,' moving to 'Hold' to placate the issuer is a violation of I(B). The issue is whether the rating change is driven by analysis or by pressure. A rating change not based on new analytical information violates the standard.

Unit: ethics-application

Question 3Harder

A sell-side analyst at a regional broker-dealer is covering an energy company that recently completed its IPO. The firm acted as underwriter in the IPO. Forty-five days after the IPO closes, the analyst publishes a research report initiating coverage with a 'Hold' rating. Which of the following statements BEST describes whether this is consistent with Standard I(B) and relevant industry guidance?

How sure are you?

Correct: B. FINRA Rule 2241 establishes a 25-day quiet period for IPO lead underwriters and a 10-day period for co-managers before analysts can publish. Some firms adopt 30 or 40-day policies as a conservative best practice. At 45 days post-IPO, the quiet period has elapsed. Publishing an honest 'Hold' rating is consistent with I(B).
A. 180 days sounds like a substantial restriction. You might confuse the lock-up period (which applies to insiders' stock sales) with the analyst quiet period. The 180-day figure is the insider lock-up period restricting officer and director stock sales post-IPO. The analyst quiet period under FINRA Rule 2241 is 25 days for lead underwriters. These are two entirely different restrictions.
C. Disclosure is always required for conflicts. You might apply this reflexively. But the question asks about Standard I(B) compliance, not Standard VI(A). Disclosure of the IB relationship is a Standard VI(A) (Disclosure of Conflicts) requirement, not a precondition for publishing under Standard I(B).

Unit: ethics-application

Question 4Harder

An investment bank's equity research department and investment banking department are separated by a firewall. A research analyst receives a call from an IB colleague asking for the analyst's proprietary revenue model for a company the analyst covers, stating it will help the IB team price a bond offering for that company. The analyst provides the model to the IB team. This action MOST likely:

How sure are you?

Correct: B. Firewalls between research and IB departments are a core recommended procedure under Standard I(B). The purpose of the firewall is to prevent exactly this: IB using research models to benefit deal work, which creates future pressure on the analyst to maintain ratings favorable to IB clients. Once the IB team has the model, they may pressure the analyst to maintain assumptions that support deal pricing. Sharing information across the firewall undermines research independence.
A. Internal information sharing within a firm sounds innocuous. 'it's our own firm's data.'. The firewall exists precisely because 'same firm' sharing creates independence problems. The bank is organized into separate business units for regulatory and ethical reasons. Internal sharing across the firewall is the violation, not external disclosure.
C. Standard II(A) (Material Nonpublic Information) involves sharing non-public information for trading advantage. A high-profile standard that candidates apply broadly. Standard II(A) addresses trading decisions based on material nonpublic information. The scenario is about sharing an analytical model, not insider information that would constitute a trading advantage.

Unit: ethics-application

Question 5Harder

A fixed income analyst at a securities firm is asked by a potential investment banking client to guarantee that the firm will issue a 'favorable' research report if the client awards the firm its upcoming bond underwriting mandate. The analyst responds that the firm 'will use best efforts to produce research coverage' on the company if it wins the mandate, but cannot guarantee the conclusions. This response is MOST consistent with:

How sure are you?

Correct: B. This is a bright-line rule in Standard I(B) Guidance: firms may commit to providing 'best efforts' research coverage as part of winning IB mandates. What is prohibited is guaranteeing favorable research conclusions or specific ratings. The analyst's statement. 'best efforts to produce research coverage' but no guarantee of conclusions. Is precisely the language permitted under I(B). This distinction appears frequently on the exam.
A. Any link between research and IB sounds like a conflict. Candidates who memorize 'IB pressure = violation' without learning the best-efforts exception will choose A. The CFA curriculum explicitly permits best-efforts coverage commitments. The prohibition is narrower: guaranteeing specific conclusions or ratings. Coverage commitments are a normal business practice.
C. Standard V(A) (Diligence and Reasonable Basis) requires analysis before recommendations. Pre-committing to coverage without analysis sounds like it violates V(A). A best-efforts coverage commitment is not a recommendation. It's a commitment to do the analysis. V(A) would be violated if the analyst issued a rating without analysis, not by agreeing to cover a company in the future.

Unit: ethics-application

Question 6Exam level

A sales associate at a broker-dealer tells the equity research analyst: 'Our largest client is extremely upset about your downgrade of MegaCorp. He's threatening to move his $50 million account to a competitor. Can you at least soften the language in your report or change it to a Hold?' The analyst's MOST appropriate response under Standard I(B) is to:

How sure are you?

Correct: B. Sales force pressure is explicitly addressed in Standard I(B) Guidance under 'Sales and Trading Pressure.' The standard is unambiguous: analysts may not change ratings or soften report language in response to client displeasure. The only basis for changing a rating or language is new information that analytically supports the change. The $50 million account size is an irrelevant pressure factor. It tests whether the candidate will bend under significant economic pressure.
A. Changing language without changing the formal rating seems like a minor concession. 'Softening language' might not feel like the same as changing the rating. Research report language is as much a communication of analyst opinion as the rating itself. Softening language to appease a client, without analytical basis, is a violation of I(B) even if the star rating doesn't change.
C. Escalation sounds like a responsible, institutional response. 'let management handle it.'. Senior management cannot authorize a Standards violation. Escalating to ask permission to violate I(B) does not protect the analyst. The analyst's obligation is to maintain the independent rating regardless of management's instructions (see Standard IV(A) exception for Standards violations).

Unit: ethics-application

Question 7Exam level

A research analyst signs a research report with the following certification: 'The views expressed in this report accurately reflect my personal views about the subject securities and issuers. No part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report.' This certification is most likely described as:

How sure are you?

Correct: A. The text quoted is the exact language of Regulation Analyst Certification (Reg AC), adopted by the SEC in 2003, which requires equity research analysts at registered broker-dealers to certify that their research reports reflect their personal views and that their compensation is not tied to specific recommendations. Reg AC was adopted as a regulatory response to the same conflicts documented in the 2003 Global Analyst Research Settlements. The CFA curriculum discusses Reg AC in the Standard I(B) context as an example of how securities law codified what CFA Standards already required.
B. Standard V(B) addresses communications with clients and requires that reports accurately reflect analyst views. This certification seems to fulfill that requirement. Standard V(B) does not require a signed certification. The specific language and the signed-certification format is Reg AC. V(B) compliance is ongoing and conduct-based, not a point-in-time certification.
C. Some firms do have internal policies that go beyond regulatory minimums, and candidates unfamiliar with Reg AC may guess this is one such policy. Reg AC is an SEC rule (17 CFR Part 242), not a voluntary firm policy. It applies to all research analysts at registered broker-dealers. Failure to include the certification carries regulatory consequences.

Unit: ethics-application

Question 8Exam level

An analyst at a sell-side firm has been covering RetailCo for three years and has maintained a 'Buy' rating throughout. RetailCo's investor relations team invites the analyst on an all-expenses-paid trip to the company's flagship stores in five cities, framing it as a 'channel check' that will provide research insight. The analyst's supervisor approves the trip. Under Standard I(B), which of the following BEST describes the analyst's situation?

How sure are you?

Correct: C. Standard I(B) Guidance specifically addresses corporate issuer-sponsored trips. The key test is whether the benefit could reasonably be expected to compromise independence. A brief, value-appropriate trip for genuine research purposes may be acceptable. An elaborate multi-city all-expenses-paid trip raises the question of whether the value is designed to influence the analyst. Supervisor approval is relevant as a firm procedure but does not make a violating trip acceptable. The word 'reasonably expected to influence' is the exact standard from the CFA curriculum.
A. Channel checks are genuinely legitimate research. Supervisor approval sounds like full institutional endorsement. The method (channel check) is legitimate; the vehicle (issuer-sponsored lavish trip) creates an independence concern. Supervisor approval does not cure a Standards violation.
B. Any benefit from an issuer sounds like a conflict. You might over-apply the independence rule. The standard is not absolute. Modest, legitimate research-facilitating benefits are acceptable. The test is whether the benefit 'could reasonably be expected to compromise independence,' not whether any benefit exists.

Unit: ethics-application

Question 9Exam level

In the late 1990s, telecom analyst Jack Grubman of Salomon Smith Barney maintained 'Buy' ratings on WorldCom and other telecom stocks while the firm earned hundreds of millions in investment banking fees from those same companies. Grubman later admitted that the IB fees influenced his ratings. The most specific CFA Standard that Grubman violated was most likely:

How sure are you?

Correct: C. Grubman's conduct violated multiple Standards simultaneously. Standard I(B) was violated because IB considerations compromised his independence. His ratings did not reflect independent analysis. Standard V(B) was violated because his reports, by not reflecting his honest views, were misrepresentations communicated to clients. The CFA curriculum teaches that a single act can violate multiple Standards, and the exam sometimes tests this. Reg AC (adopted post-Grubman) was specifically designed to prevent this by requiring certification that reports reflect personal views and that compensation is not tied to specific recommendations.
A. Inflated ratings affecting stock prices sounds like market manipulation. Standard II(B) Market Manipulation involves creating false impressions of trading activity or pricing through transactions, not through research reports. Biased research is an I(B) and V(B) issue, not a II(B) manipulation issue.
B. I(B) is the most directly applicable Standard and the one most associated with analyst independence failures. While B alone is the 'most specific' Standard for independence failure, Answer D is more accurate because the conduct also violated V(B). CFA exams frequently test candidates' ability to identify when multiple Standards are simultaneously violated.

Unit: ethics-application

Question 10Harder

A portfolio manager at an asset management firm (buy-side) receives a report from a sell-side analyst rating a stock 'Buy.' The buy-side analyst knows that the sell-side firm has an active investment banking relationship with the company. The buy-side portfolio manager uses the sell-side report as one input in her own analysis and concludes that the stock is appropriately valued as a 'Hold.' She does not disclose her reliance on the sell-side report in her client communications. Which of the following BEST describes the buy-side analyst's conduct?

How sure are you?

Correct: B. The buy-side analyst used the sell-side report as one input, a legitimate research practice, and reached an independent conclusion that differed from the sell-side rating. She maintained independence. Standard I(B) does not prohibit using potentially conflicted inputs; it requires that the analyst's own conclusions reflect independent judgment. Since she reached her own 'Hold' conclusion rather than adopting the IB-influenced 'Buy,' she maintained independence. There is no V(B) or III(B) violation in this scenario.
A. Using a conflicted source sounds like it taints the analysis. If the sell-side analyst violated I(B), perhaps the buy-side analyst does too by relying on it. Standard I(B) requires independence in forming conclusions, not independence from all external inputs. Using a sell-side report as one data point, while forming an independent conclusion, is standard practice and does not violate I(B).
C. Standard V(B) requires communications to disclose basic format and source. Disclosure of sources sounds required. Standard V(B) requires that communications are fair, accurate, and complete, and that basic format and source of analysis is disclosed. Routine use of sell-side research as one input among many does not require explicit attribution in every client communication.

Unit: ethics-application

Question 11Exam level

Which of the following actions by a research department most likely exemplifies a recommended procedure under Standard I(B)?

How sure are you?

Correct: C. A formal information barrier (firewall) between research and IB is a specific recommended procedure in Standard I(B) Guidance. It prevents IB from influencing research conclusions by restricting information flow in both directions. Answers A and B are either over-restrictive (A) or directly violating (B. Having IB approve research defeats independence). Answer D is a form of disclosure, which is required but is a V(B)/VI(A) mechanism, not the I(B) structural safeguard.
A. A blanket prohibition sounds like the most conservative protection for independence. Standard I(B) does not require prohibiting analyst coverage of IB clients. This would be impractical and is not recommended. The requirement is independence, not prohibition. Firms routinely cover their own IB clients provided structural safeguards exist.
B. 'Pre-publication approval' sounds like a quality control measure. A compliance procedure. This is the opposite of an independence procedure. Having the IB department head approve research reports gives IB veto power over analyst conclusions. A direct violation of I(B). This is exactly what the 2003 settlements were about.

Unit: ethics-application

Question 12Harder

The 2003 Global Analyst Research Settlements required ten major broker-dealers to pay a combined $1.435 billion in penalties, disgorgement, and investor education funds. The firms included Merrill Lynch, Citigroup/Salomon Smith Barney, Morgan Stanley, and others. The settlement terms included structural reforms. Which of the following structural reforms was most likely directly mandated by the settlements?

How sure are you?

Correct: B. One of the landmark structural reforms in the 2003 Global Analyst Research Settlements was the requirement that participating firms provide clients with independent third-party research alongside the firm's own research. Precisely because the firm's own research could not be trusted to be conflict-free. This created a new market for independent research providers. The settlements also mandated physical separation of research and IB, prohibited IB compensation of analysts, and restricted analysts from IPO allocations. Answer B is directionally correct regarding IB compensation but overstates the prohibition on pitch meetings.
A. Prohibiting IB-related compensation sounds directly responsive to the compensation-for-ratings scheme that Grubman and Blodget operated. The settlements prohibited analysts' research compensation from being tied to specific IB transactions.
C. GIPS is a CFA Institute performance standard. It sounds relevant in a settlements context involving research quality. GIPS (Global Investment Performance Standards) addresses investment performance presentation, not research independence. GIPS was not part of the 2003 settlements.

Unit: ethics-application

Question 13Exam level

Marcus Webb, CFA, is a sell-side equity analyst at a major investment bank. His firm has an active investment banking relationship with TechCo, a software company Webb covers. TechCo's CFO calls Webb directly and tells him: 'We're planning a secondary offering in 60 days. I hope our existing analyst relationships will remain supportive.' Webb's current rating on TechCo is 'Buy' and his 12-month price target implies 18% upside. After the call, Webb reviews his model and concludes the fundamentals still support his Buy rating. He publishes a research note reiterating his Buy rating and price target without disclosing the CFO's call. Which CFA Institute Standard has Webb MOST LIKELY violated?

How sure are you?

Correct: A. Standard I(B) requires members to maintain independence and objectivity and to disclose conflicts of interest that could compromise research. The CFO's implicit pressure ('I hope analyst relationships will remain supportive') is a soft threat to Webb's independence. Even if Webb's fundamental view is unchanged, he must disclose the nature of the call and the banking relationship in his research note. The violation is the non-disclosure of the pressure, not his rating decision itself.
B. The CFO disclosed a secondary offering. That sounds like material nonpublic information, and Standard II(A) explicitly covers MNPI. Candidates who identify the MNPI element first often anchor on B. Webb did not trade on the information or change his recommendation based on it. He re-evaluated his model independently and reached the same conclusion.
C. He is 'reiterating' a recommendation. That sounds like a communication. Standard V(B) covers the basis for recommendations. Standard V(B) concerns the adequacy of information supporting a recommendation. Webb's model still supports his Buy. The problem isn't what he communicated about the recommendation. It's what he DIDN'T communicate about the conflict.

Unit: ethics-application

Question 14Harder

Sandra Kim, a portfolio manager, overhears two strangers at a conference discussing DataStream Inc., a company she follows: one says the Q3 numbers will be brutal because a product launch was delayed six months and nobody outside the company knows yet. Kim does not know either speaker or whether they are authorized to discuss DataStream's financials. Kim takes no action on DataStream herself, but mentions what she overheard to analyst Ray Chen, who covers DataStream; Chen then issues a Sell rating downgrade. With respect to Standard II(A), Kim and Chen's situation is most likely:

How sure are you?

Correct: B. Standard II(A) prohibits members from acting on OR causing others to act on material nonpublic information. 'Material' means information that a reasonable investor would consider important. A six-month product launch delay is clearly material. 'Nonpublic' means it has not been disseminated to the general investing public. Kim violated II(A) the moment she passed this information to Chen. Causing another person to act on MNPI is itself a violation even if Kim herself never traded. Chen violated II(A) by issuing the downgrade based on the information.
A. Kim did not trade. You might believe the violation requires a trade. 'She just talked to a colleague. Where's the harm?'. Standard II(A) explicitly covers 'causing others to act' on MNPI. Passing the information to Chen, who then acted on it, is the violation. Trading is not required. This is the most common II(A) wrong answer.
C. Chen is the one who actually did something. He issued the downgrade. You might focus on the action and conclude only the person who acted violated the standard. Kim is also culpable. By sharing the overheard conversation with Chen knowing it could influence his analysis, she violated the 'cause others to act' clause of II(A). Both parties violated the standard.

Unit: ethics-application

Question 15Harder

Patricia Novak, CFA, manages both a large institutional pension fund (Client A, $500M AUM) and a smaller retail portfolio for individual investors (Client B, $2M AUM). Novak identifies an attractive investment opportunity in a small-cap stock with limited liquidity. She estimates the market can absorb approximately $10M in purchases before the price moves adversely. She purchases $8M for Client A and $1.5M for Client B, filling Client A first because 'the pension fund is our biggest client and deserves first priority.' Novak has MOST LIKELY violated:

How sure are you?

Correct: B. Standard III(B) Fair Dealing requires members to deal fairly (not necessarily equally) with all clients when taking investment action. When a limited-liquidity opportunity exists, members must have a pro-rata or otherwise equitable allocation policy. Not a policy based on client size or relationship importance. Filling Client A first because it's the 'biggest client' violates fair dealing. It is not specifically about allocation between clients. III(B) is the more specific standard for this fact pattern.
A. Favoring one client over another sounds exactly like a breach of duty/loyalty. Standard III(A) explicitly mentions 'loyalty'. How could this not be III(A)? III(A) addresses the fiduciary duty to each individual client. Acting in their best interest, not preferring personal interests over client interests.
C. Standard VI(B) covers priority of transactions. Doesn't this sound like a transaction priority question? Standard VI(B) Priority of Transactions concerns the ordering of MEMBER/EMPLOYER transactions relative to CLIENT transactions. Specifically front-running. It does not govern how to allocate between different client accounts. Client-to-client allocation is governed by III(B).

Unit: ethics-application

Question 16Exam level

David Park, CFA, is an analyst at Meridian Advisors. He has been quietly planning to leave Meridian and start his own independent investment advisory firm. Over the past two weeks, while still employed at Meridian, Park has: (1) copied client contact information from Meridian's CRM system to a personal USB drive, (2) informed three of his largest clients that he will be leaving and asked if they'd consider following him, and (3) drafted marketing materials for his new firm on Meridian's computers after hours. Which of Park's activities constitutes a violation of Standard IV(A) Loyalty to Employer, most likely?

How sure are you?

Correct: C. All three activities violate Standard IV(A). (1) Copying confidential client information is explicitly prohibited. Client lists are employer property. (2) Soliciting Meridian clients before departure. Even informing them of his plans and suggesting they follow him. Is a violation regardless of whether clients initiate contact. Candidates may leave and even take clients who follow them voluntarily AFTER departure, but solicitation during employment is prohibited. (3) Using employer resources (computers) for competing business is a direct violation of the duty not to deprive the employer of advantage.
A. Copying client data is obviously wrong. You might assume activities (2) and (3) are permissible. 'He's just keeping his clients informed' and 'He did it on his own time after hours.'. Activity (2) is a violation regardless of timing or the clients' response. Pre-departure solicitation is explicitly prohibited.
B. Activities 1 and 2 seem clearly wrong. Activity 3 seems like a grey area. 'he's using his own time, just borrowing a computer.' Candidates who are uncertain about (3) often choose B. Using employer resources (computers, software, office space) to advance a competing business venture is explicitly covered under IV(A). The 'after hours' element does not change this analysis.

Unit: ethics-application

Question 17Exam level

Jennifer Zhao, CFA, is a financial advisor at Summit Wealth Management. On her firm's website and in client pitch materials, she uses the tagline: 'Managed by CFA Charterholders. The Gold Standard of Investment Management.' She also states in her bio: 'Jennifer has 12 years of investment experience,' counting the 3 years she spent as a bank teller and 2 years as an insurance sales agent at the beginning of her career. Zhao has MOST LIKELY violated:

How sure are you?

Correct: A. Standard I(C) Misrepresentation prohibits false or misleading statements about qualifications, services, or performance. Two violations here: (1) Claiming 12 years of 'investment experience' when 5 of those years were as a bank teller and insurance salesperson is a misrepresentation of professional qualifications. Experience must be reasonably related to investment management activities. (2) 'The Gold Standard of Investment Management' implies guaranteed superior results. An indirect performance guarantee, which I(C) prohibits. While Standard VII(B) is relevant to CFA designation use, the PRIMARY violations involve misrepresentation of qualifications and implied performance claims, which fall under I(C).
B. The CFA designation IS being used in marketing materials. Candidates who learned that VII(B) covers designation usage immediately go to B when they see CFA used in marketing. Using 'CFA Charterholder' in marketing is permissible under VII(B) as long as it accurately describes a credential the member holds.
C. Marketing pressures. Making yourself look better than you are. Could sound like an objectivity issue. Standard I(B) Independence and Objectivity concerns research and investment recommendations being free from external pressures. It is not about personal biography accuracy. The misrepresentation of qualifications is specifically I(C).

Unit: ethics-application

Question 18Exam level

Robert Ellis, CFA, is a quantitative analyst who has developed a proprietary screening model for selecting small-cap stocks. The model has backtested well over a 5-year historical period. Ellis begins recommending stocks to clients based solely on the model's output, without conducting any fundamental analysis on individual companies. One recommendation is Gamma Technologies, which the model selects. Ellis has not reviewed Gamma's financial statements, read any analyst reports on the company, or verified the data inputs the model uses for Gamma. Ellis has MOST LIKELY violated Standard V(A) Diligence and Reasonable Basis because:

How sure are you?

Correct: B. Standard V(A) requires a reasonable and adequate basis for recommendations, supported by appropriate research. Using a quantitative model is permissible (choice A is wrong), but the analyst must still verify the quality and completeness of the inputs for each recommendation. Ellis's failure is not using a model. It is his failure to validate data inputs and ensure the basis is sound for each specific recommendation. The model's historical backtest does not substitute for verifying that the data driving the current recommendation is accurate and complete.
A. You might assume quantitative models are inherently less rigorous than fundamental analysis and that Standard V(A) requires company-level fundamental review. CFA Institute explicitly recognizes quantitative models as a legitimate basis for investment recommendations. The standard does not mandate fundamental analysis specifically. It requires ADEQUATE basis.
C. Disclosure seems important. Shouldn't clients know how their recommendations are generated? While disclosure of methodology can be a component of V(B) Communication with Clients, the primary violation here is under V(A). Ellis lacks a reasonable basis because he has not verified the inputs. Disclosure of method does not substitute for having a sound basis. C addresses a secondary concern;

Unit: ethics-application

Question 19Harder

Alice Thornton, CFA, is an equity analyst at Westgate Securities. She personally owns 5,000 shares of MedTech Corp, a company she covers. Westgate has a written policy requiring analysts to disclose personal holdings in covered securities in all research reports. Thornton has followed this policy in all her published research. Westgate's investment banking division is also working on a merger advisory assignment for MedTech's largest competitor, CompMed. Thornton is not involved in the banking deal and does not know its details, but she is aware that Westgate has a banking relationship with CompMed. In her next research report on MedTech, Thornton should most likely disclose:

How sure are you?

Correct: B. Standard VI(A) requires disclosure of all actual and potential conflicts of interest, including those of the analyst's employer. A competitive M&A advisory relationship between Westgate and CompMed, MedTech's largest competitor, is a material conflict for Thornton's MedTech research. Even though she is not involved in the deal, her employer's business interest could be perceived as influencing her analysis of MedTech. Both personal holdings (which she already discloses) AND the employer's conflicting business relationship must be disclosed. Compliance with firm policy is not a safe harbor. Standard VI(A) requires all material conflicts, whether or not the firm's policy specifically requires it.
A. She's already disclosing her personal holdings per firm policy. 'She's done everything required. What more is needed?' Candidates who conflate firm policy compliance with Standards compliance often choose A. Firm policy compliance is a floor, not a ceiling. The Standards require disclosure of ALL material conflicts.
C. She's followed the policy. The policy exists. Policy compliance = Standards compliance in many candidates' mental models. Same error as A. The exam explicitly tests this trap: firm policy compliance does not equal Standards compliance. VI(A) is not satisfied merely by following a policy that happens to be less demanding than the Standards.

Unit: ethics-application

Question 20Exam level

Michael Torres is a CFA candidate working as a junior analyst in Country X. Country X securities law requires that analysts file a disclosure report within 30 days of purchasing shares in any company they cover. The CFA Code and Standards require disclosure but do not specify a time limit. Torres purchases shares in a company he covers and files his disclosure report on day 45. Within the CFA Standards' general requirement but violating Country X's 30-day rule. Under Standard I(A) Knowledge of the Law, Torres, most likely:

How sure are you?

Correct: B. Standard I(A) requires members and candidates to comply with the MORE STRINGENT of applicable law, regulation, or the CFA Standards. This is the core rule of I(A). Country X's 30-day rule is more stringent on timing than the CFA Standards' general requirement. Torres must comply with BOTH. And he failed to comply with Country X law. His compliance with the CFA Standards does not excuse the local law violation. Standard I(A) explicitly requires compliance with applicable laws in addition to the CFA Standards.
A. He disclosed. Isn't that the point? The CFA Standards require disclosure and he disclosed. Candidates who remember 'comply with the stricter standard' sometimes misidentify WHICH standard is stricter in this context. The 30-day rule IS stricter than 'disclose generally.' Stricter = more specific timing requirement. Torres violated the more stringent rule.
C. You might assume the CFA Standards only govern CFA-specific conduct, not general securities law compliance. Standard I(A) explicitly covers compliance with applicable laws and regulations. Not just CFA-specific rules. Members and candidates must comply with applicable law wherever they operate. Regulatory violations in your jurisdiction are I(A) violations.

Unit: ethics-application

Question 21Exam level

Laura Chen, CFA, is a portfolio manager who sends a quarterly newsletter to all clients. In the latest newsletter, she states: 'Based on our proprietary analysis, we expect the S&P 500 to return 12-15% over the next 12 months. Our model has predicted market direction correctly in 8 of the past 10 years.' The newsletter does not include any mention that past performance does not guarantee future results, nor does it note the limitations of the model or the basis for the prediction. Chen's newsletter MOST LIKELY violates:

How sure are you?

Correct: B. Standard V(B) requires that communications to clients include the risks and limitations of any analysis or recommendation, and disclose the basis for projections and recommendations. Chen's 12-15% projection without disclosing the model's basis, assumptions, and limitations violates V(B). The '8 of 10 years' accuracy claim, while potentially accurate, does not constitute adequate disclosure of risk. It actually worsens the communication by implying historical accuracy predicts future results. A compliant communication must include material limitations.
A. Implying guaranteed performance sounds like misrepresentation. 'Our model has predicted correctly 8 out of 10 years'. Isn't that a misleading performance representation? Standard I(C) Misrepresentation applies to false or misleading statements. If the 8/10 accuracy claim is factually true, it is not a misrepresentation in the I(C) sense. It is an inadequate disclosure of limitations.
C. Marketing pressure and performance claims. That sounds like an objectivity issue. Standard I(B) concerns external pressures on the member's investment analysis and recommendations. Not the quality of client communications. Writing a client newsletter that includes performance claims does not compromise the member's independence.

Unit: ethics-application

Question 22Exam level

James Okafor is a CFA Level 2 candidate. After sitting for the CFA Level 1 exam, he posts on a finance forum: 'Just took the Level 1 exam. The Ethics section heavily focused on Standard I(B) and there were several questions that tested the difference between III(A) and III(B) in allocation scenarios. There was one really tricky question about an analyst who received a gift from a company he covers.' The post does not include any specific question text or answer choices. Okafor has MOST LIKELY:

How sure are you?

Correct: B. Standard VII(A) prohibits candidates from disclosing confidential exam information. CFA Institute's exam confidentiality agreement covers not just specific questions but also the topics covered, the weighting of topics, and the nature of questions encountered. Okafor's post identifies specific standards that were tested, reveals that the exam focused on I(B) and the III(A)/III(B) distinction, and describes the nature of a specific question (gift from covered company). Each of these disclosures breaches the exam confidentiality obligation. The fact that he did not reproduce verbatim question text is not a defense.
A. He didn't share actual questions. He just discussed impressions. This is what candidates do all the time on Reddit and forums. It feels normal. 'Everyone does this, it can't be a violation.'. The confidentiality obligation covers the CONTENT of the exam experience. Not just verbatim questions.
C. He might be misrepresenting difficulty or misleading future candidates. There is no indication his impressions are false. Standard I(C) requires a false or misleading statement. The primary violation here is confidentiality of exam content under VII(A), not misrepresentation.

Unit: ethics-application

Question 23Harder

Helen Foster, CFA, manages a discretionary portfolio for Thomas Wang, age 68, whose Investment Policy Statement (IPS) specifies: 'Conservative allocation: 70% investment-grade fixed income, 30% large-cap equity. No speculative investments.' Wang calls Foster and says: 'I just attended a seminar on cryptocurrency. I want you to allocate 15% of my portfolio to Bitcoin. I understand the risk and I'm comfortable with it.' Under Standard III(C) Suitability, Foster should most likely:

How sure are you?

Correct: C. Standard III(C) requires members to assess suitability relative to the client's TOTAL financial situation, not just their stated preferences at a point in time. When a client requests a trade that deviates from the IPS, the member's obligation is not to simply refuse OR to blindly comply. The correct procedure is: (1) assess whether the new request, in context of the client's overall situation, is suitable; (2) if appropriate, discuss with the client the deviation from the IPS and the implications; (3) update the IPS through proper documentation BEFORE or alongside execution. Rigid refusal (B) ignores the possibility that Wang's situation or preferences have legitimately changed. The IPS should be a living document.
A. Client autonomy and informed consent are real principles. 'He's an adult, he said he understands the risk.' Candidates who over-weight client direction versus fiduciary duty choose A. Standard III(C) is not satisfied by client consent alone. Foster's duty is to ensure suitability relative to the complete financial picture. Not just stated preference.
B. The IPS says no speculative investments. Bitcoin violates the IPS. 'Just refuse until he updates the IPS in writing.' This sounds procedurally correct. While written IPS amendment IS required before deviation, B's phrasing presents refusal as the default.

Unit: ethics-application

Question 24Exam level

Richard Avery, CFA, is the Head of Research at Sterling Capital. One of his junior analysts, Dan Lee, is found to have violated Standard V(A) by issuing recommendations without adequate research basis. Upon investigation, Avery discovers that Lee had been doing this for several months. During this period, Avery had received quarterly compliance sign-off forms from Lee and had reviewed a sample of Lee's reports without identifying any problems. Avery did not have a systematic supervisory process in place. With respect to Standard IV(C), which statement BEST describes Avery's situation?

How sure are you?

Correct: B. Standard IV(C) requires members in supervisory roles to establish and enforce reasonable procedures to detect and prevent violations by those they supervise. Receiving self-reported compliance forms and reviewing an unspecified 'sample' of work does not constitute adequate supervision when the result is months of undetected violations. The key phrase is 'adequate supervisory procedures'. Avery's process was clearly inadequate given its failure to detect ongoing violations. Importantly, IV(C) holds supervisors to a standard of PROCESS, not just outcome: Avery violated the standard by failing to implement adequate detection procedures, regardless of whether he intended to supervise appropriately.
A. Avery did SOMETHING. He got compliance forms and reviewed reports. 'He tried. How can he be blamed for his subordinate's deceit?' Candidates conflate effort with adequate process. Standard IV(C) requires not just some supervisory activity but ADEQUATE supervisory procedures.
C. Lee is the one who actually violated the Standards. Isn't it unfair to hold Avery accountable for Lee's misconduct? The CFA Standards explicitly create a separate obligation for supervisors under IV(C). Lee violated V(A); Avery violated IV(C). These are independent violations.

Unit: ethics-application

Question 25Exam level

Anna Patel, CFA, is a financial planner. She has an informal arrangement with a law firm: whenever she refers a client to the firm for estate planning, the firm pays her $500. She has a similar arrangement with a mortgage broker. $300 for each referred client. Patel has never disclosed either arrangement to her clients. Which of the following BEST describes Patel's violation?

How sure are you?

Correct: B. Standard VI(C) requires members to disclose to clients any compensation, including referral fees, received from third parties for referring business. Patel's failure to disclose the $500 and $300 referral arrangements is a direct VI(C) violation. The Standard requires disclosure so clients can assess whether the referral is in their best interest or influenced by compensation. While there MAY be an I(B) concern if her referral decisions are influenced by the fees, the question asks for the primary violation, which is the non-disclosure itself. VI(C).
A. She seems to be putting her financial interests (referral fees) ahead of clients. That sounds like a loyalty/duty-of-care violation under III(A). Standard III(A) concerns the overall fiduciary duty to clients in managing their assets and giving advice. The specific, targeted rule for undisclosed referral compensation is Standard VI(C).
C. Both VI(C) and I(B) seem implicated. The referral fees could compromise objectivity. Choosing 'both' feels safe and comprehensive. The question asks for the BEST description. VI(C) directly and specifically covers this fact pattern. I(B) Independence and Objectivity would require evidence that the referral fee actually influenced her referral decisions (objectivity compromised in practice).

Unit: ethics-application

Question 26Harder

Chris Watkins, CFA, is a portfolio manager who was arrested last year for driving under the influence (DUI). The charge was reduced to reckless driving, he paid a fine, and the matter was fully resolved. Watkins did not disclose this to his employer or to the CFA Institute. He continues to hold and use the CFA designation. Six months later, Watkins is passed over for a promotion. He discovers his direct supervisor, Janet Ross, CFA, knew about the DUI incident from a mutual acquaintance and influenced the promotion decision based on this information without disclosing it to HR. With respect to CFA Standards violations in this scenario, most likely:

How sure are you?

Correct: A. Standard I(D) Misconduct applies to conduct reflecting adversely on professional integrity, competence, or fitness to practice. A DUI arrest, even one resolved as reckless driving, may constitute I(D) conduct depending on whether it reflects adversely on his professional reputation. More critically, Watkins's failure to disclose this to his employer (who may require such disclosure) and his continued holding of the CFA designation without disclosure could constitute misconduct. Ross's conduct, while ethically questionable, does not clearly map to a CFA Standards violation: Standard IV(A) Loyalty to Employer concerns the member's duty to the employer. Not how a supervisor treats a subordinate within the employment context. Ross's action was improper from an HR/employment law perspective but is not a CFA Standards violation in this fact pattern.
B. The DUI was reduced, resolved, and is in the past. 'This is a personal matter. How can a resolved personal legal issue trigger a CFA Standards violation?' Candidates who limit I(D) to financial crimes often choose B. Standard I(D) explicitly applies to personal conduct. Not just financial conduct.
C. Ross's behavior feels unethical. Using personal information to influence a promotion without telling HR seems like it should violate SOMETHING in the Standards. Standard IV(A) Loyalty to Employer concerns the member's duty NOT to harm their employer. E.g., by competing, misusing confidential client/employer information for personal gain, or soliciting clients pre-departure.

Unit: ethics-application

Question 27Exam level

Hedge fund manager Steven Grant, CFA, manages a large position in shares of NovaBio, a small biotech company. Grant believes the stock is significantly overvalued. To profit from an anticipated decline, he establishes a large short position in NovaBio. He then contacts three financial journalists and provides them with a detailed, accurate analysis of NovaBio's business model flaws, overstated revenue projections, and excessive management compensation. The journalists publish three separate critical articles about NovaBio. NovaBio's stock declines 22% over the next week, and Grant covers his short position for a substantial profit. Grant has MOST LIKELY:

How sure are you?

Correct: B. Standard II(B) prohibits market manipulation. Actions designed to artificially inflate or deflate prices by distorting the market's information mechanisms. The issue here is NOT whether the information was accurate. The violation is the COORDINATED orchestration of a media campaign to move price in the direction of an existing position. Grant used his access to multiple journalists to CREATE a price-moving event for personal profit. Even if every fact he shared was true, engineering a coordinated negative media campaign while holding a directional position violates II(B). This is the 'short and distort' pattern.
A. The information was ACCURATE. He didn't lie. He just shared real analysis with journalists who exercised their own editorial judgment. 'Sharing accurate information can't be a CFA violation.' This is the hardest wrong answer to resist. Standard II(B) does not require false information.
C. His short position creates a financial incentive that could compromise objectivity. Doesn't that implicate I(B)? Standard I(B) addresses independence in the context of investment analysis and recommendations to clients. Grant is not providing investment recommendations. He is orchestrating media activity. The appropriate standard for coordinated market-moving activity is II(B), not I(B).

Unit: ethics-application

Question 28Exam level

A portfolio manager directs 100% of client trades to Broker X, which charges commissions 15 basis points above the market rate. In return, Broker X provides the manager with economic research reports used exclusively in client portfolios. The manager discloses this arrangement to clients annually in writing. Under CFA Standards, this arrangement is most likely:

How sure are you?

Correct: A. The correct answer is Permissible provided the research genuinely benefits clients and the manager can demonstrate best execution on balance. Disclosure is necessary but must be accompanied by evidence that the research benefit to clients justifies any commission premium. This is the soft dollar safe harbor: research that benefits clients, disclosed, meets the standard..
B. You might learn 'disclose conflicts' as the fix for most ethics violations. Disclosure alone is insufficient. The manager must also demonstrate best execution is being achieved on balance and that the research benefits clients. Not just the manager.
C. Best execution sounds like 'lowest commission'. Best execution is not lowest cost. It is the best overall terms considering price, commission, speed, and likelihood of execution. Research value can justify above-average commissions.

Unit: ethics-application

Question 29Exam level

An equity research analyst at a large investment bank is covering a company that is also a client of the bank's underwriting department. The investment banking group asks the analyst to change a 'Sell' recommendation to 'Hold' before the client's secondary offering. The analyst believes the 'Sell' rating is justified by the fundamentals. Under Standard I(B), the analyst should most likely:

How sure are you?

Correct: A. The correct answer is Maintain the 'Sell' recommendation. Standard I(B) requires members to use only their independent judgment and not be influenced by investment banking pressure. Changing the rating to accommodate a banking client violates the standard regardless of any financial benefit to the firm..
B. Disclosure seems to resolve the conflict. Disclosure does not permit issuing a recommendation the analyst does not genuinely hold. The integrity of the recommendation itself is the issue, not just disclosure of the conflict.
C. Withdrawing seems like the safest ethical choice. While withdrawal is sometimes appropriate, the primary obligation is to maintain independence. The standard does not require withdrawal. It requires that issued recommendations reflect genuine independent views.

Unit: ethics-application

Question 30Exam level

A portfolio manager receives research services from Broker Y paid for through soft dollar commissions. 40% of the research is used for client portfolio decisions; the remaining 60% benefits the manager's personal investment activities. Under CFA Standards, the manager must most likely:

How sure are you?

Correct: A. The correct answer is Pay 60% of the cost of the research in hard dollars (cash) and may use soft dollars only for the 40% that benefits clients. In a mixed-use scenario, the manager must allocate costs proportionately. Using client commissions to subsidize the 60% personal-use portion violates Standard III(A) Loyalty, Prudence, and Care..
B. Disclosure feels like the full solution. Disclosure is necessary but not sufficient. The 60% personal-use portion must be paid in hard dollars. Using client commissions for manager benefit is a loyalty breach regardless of disclosure.
C. Client consent sounds like it resolves the conflict. Client consent for use of their commissions to benefit the manager is not a recognized safe harbor under the standards. Proportional hard-dollar payment is required.

Unit: ethics-application

Question 31Harder

A client instructs her portfolio manager to direct all brokerage to a specific broker as compensation for referring new clients to the manager's firm. The manager follows these instructions. This arrangement most likely violates which standard?

How sure are you?

Correct: A. The correct answer is Standard III(A) Loyalty, Prudence, and Care. Although the client is directing her own brokerage, the arrangement effectively uses client assets (in the form of elevated commissions) to compensate for client referrals that benefit the manager's firm. The manager owes the client best execution. Directing brokerage for the manager's referral benefit places the manager's interests above the client's..
B. Client-directed brokerage with client consent appears fully permissible. The client cannot instruct the manager to breach the duty of loyalty. If the arrangement compensates the manager (through referrals) using the client's assets (commissions), it is still a III(A) violation.
C. Referral arrangements trigger disclosure requirements. Disclosure is required but the primary violation is III(A). The manager is not acting in the client's best interest by accepting brokerage direction that benefits the manager at the client's expense.

Unit: ethics-application

Question 32Exam level

Which of the following services paid for through soft dollar commissions would most likely be permissible under CFA Standards?

How sure are you?

Correct: A. The correct answer is Real-time market data feeds used by portfolio managers to make investment decisions. Market data that directly aids the investment decision-making process for clients qualifies as permissible research under soft dollar arrangements. It benefits clients directly..
B. Office space supports the investment management business which serves clients. Office rent is a general overhead expense. It benefits the manager, not specifically the clients. It does not qualify as research or brokerage service under safe harbor or CFA Standards.
C. The manager works from home, so it could be argued it supports client work. Personal hardware is a personal expense. It is the quintessential example of a soft dollar misuse. The exam uses this example explicitly to test the line between permitted and prohibited.

Unit: ethics-application

Question 33Harder

A research analyst writes a report with the phrase 'we will use our best efforts to maintain coverage of this company.' Under CFA Standards, this language most likely:

How sure are you?

Correct: A. The correct answer is Potentially violates Standard I(B) if the commitment to maintain coverage was made to the covered company as a condition of access or to obtain investment banking business. Committing to favorable coverage conditions research independence. However, if 'best efforts' simply reflects resource constraints rather than a quid pro quo, it may not constitute a violation..
B. 'Best efforts' sounds like a soft, non-binding qualifier. The commitment to cover (even on a best-efforts basis) can constitute a material quid pro quo if made in exchange for company access or banking revenue. The legal softness does not eliminate the ethical concern.
C. Clients rely on coverage continuity, so it could be seen as misleading. The primary standard at issue is I(B) Independence and Objectivity. The conflict is between the analyst's research independence and the implied obligation to the covered company, not the communication to clients.

Unit: ethics-application

Question 34Exam level

A portfolio manager uses soft dollar commissions to purchase a research service. 70% of the research directly benefits client portfolios; 30% is used for personal investment analysis. The manager discloses the arrangement to clients but does not separate hard-dollar payment for the 30%. Which standards are most likely violated?

How sure are you?

Correct: A. The correct answer is Both Standard III(A) Loyalty, Prudence, and Care AND Standard VI(A) Disclosure of Conflicts. The failure to pay hard dollars for the 30% personal-use portion violates III(A) by using client assets for the manager's benefit. Additionally, merely disclosing the arrangement without properly allocating costs means the disclosure is incomplete. A fully compliant disclosure would include the allocation methodology..
B. The disclosure satisfies VI(A) so only III(A) might remain. You might often overlook the disclosure being incomplete. Both standards are violated: III(A) because client commissions fund personal research, and VI(A) because a complete disclosure must include the allocation methodology and proportional hard-dollar payment.
C. The loyalty breach is the most obvious violation. VI(A) is also violated because the disclosure, while present, is incomplete without describing the allocation split and the hard-dollar obligation for the personal-use portion.

Unit: ethics-application

Question 35Exam level

A brokerage firm offers portfolio managers a 'step-out' arrangement: the manager executes trades through Broker A but 'steps out' a portion of the commission to Broker B, which provides the manager with research. Under CFA Standards, this arrangement, most likely:

How sure are you?

Correct: A. The correct answer is Is permissible if the research from Broker B benefits clients, the total commission paid is reasonable given the execution quality from Broker A plus the research value, and the arrangement is disclosed to clients. Commission sharing (step-out) arrangements are a recognized form of soft dollar arrangement..
B. Splitting commissions between two brokers sounds structurally suspicious. Commission sharing arrangements are explicitly recognized as permissible under the standards when research benefits clients, commissions are reasonable in total, and disclosure is made. The structure is not inherently prohibited.
C. Best execution sounds like it requires undivided transaction focus. Best execution is about overall terms and value. A step-out arrangement can satisfy best execution if the combined value (execution quality + research) represents the best available package for the client.

Unit: ethics-application

Question 36Exam level

An analyst is pressured by her firm's investment banking department not to downgrade a company before its upcoming bond issuance, as the downgrade could jeopardize the deal. The analyst believes a downgrade is warranted. Her most appropriate action under the CFA Standards is to:

How sure are you?

Correct: A. The correct answer is Issue the downgrade based on her independent analysis. Standard I(B) requires that investment recommendations reflect the member's genuine, independent judgment. Pressure from investment banking does not constitute a legitimate reason to alter a recommendation. The analyst should document the pressure and escalate through compliance if necessary..
B. Timing the downgrade after the deal minimizes harm and seems like a reasonable compromise. Deliberately delaying a material research conclusion to protect banking revenue is a clear I(B) violation. The timing of the recommendation must be driven by the analyst's investment view, not banking calendars.
C. Withdrawal eliminates the conflict entirely. While withdrawal can be appropriate in some circumstances, the standards require that the analyst's issued opinions be independent. Withdrawal to protect banking revenue is itself suspect and does not serve investors relying on the coverage.

Unit: ethics-application

Question 37Harder

A portfolio manager discloses to clients that she uses soft dollar commissions to pay for research. A client then asks the manager to direct 20% of brokerage to Broker Z, which the client uses for his personal trading. The manager complies without obtaining best execution from Broker Z. Under CFA Standards, most likely:

How sure are you?

Correct: A. The correct answer is The manager has violated Standard III(A) Loyalty, Prudence, and Care. Although a manager may follow client-directed brokerage instructions, she retains the obligation to seek best execution on client-directed trades. Complying with direction while abandoning best execution effort violates the loyalty and care duty..
B. Client direction is an explicit instruction that the manager should follow. Client-directed brokerage does not extinguish the best execution obligation. The manager should inform the client that best execution may not be achievable through Broker Z and document that limitation. Simply abandoning execution quality is a breach.
C. Prior disclosure of the soft dollar arrangement seems to cover the manager's obligations. Disclosure of soft dollar arrangements and compliance with client-directed brokerage are separate obligations. Prior soft dollar disclosure does not satisfy the ongoing best execution duty on directed trades.

Unit: ethics-application

Question 38Exam level

Which of the following is the most accurate description of 'best execution' under CFA Standards?

How sure are you?

Correct: A. The correct answer is Best execution is the trading process that seeks the most favorable terms for client transactions given the circumstances. It is a multi-factor obligation that considers price, commission, speed, likelihood of execution, and other relevant factors. Not simply the lowest available commission..
B. Minimizing cost for clients is a core duty under loyalty. Best execution explicitly is not a lowest-cost requirement. The exam uses this wrong answer to test whether candidates understand that speed, certainty of execution, and research value can justify above-minimum commission levels.
C. Documentation and reporting are compliance best practices. Documentation is a risk management practice. It does not define best execution. Best execution is about the quality of the trading process itself, not the reporting of results.

Unit: ethics-application

Question 39Exam level

An investment manager receives a research report from Broker X paid for with soft dollar commissions. The report contains macroeconomic analysis used in managing all client accounts. However, 25% of the content specifically relates to the manager's personal investment thesis. The manager does not allocate any cost to hard dollars. This is most likely:

How sure are you?

Correct: A. The correct answer is A violation of Standard III(A) and Standard VI(A). The 25% personal-use portion should be paid with hard dollars, as using client commissions to fund personal investment research violates the duty of loyalty. Full disclosure of the mixed-use nature and proportional hard-dollar payment for personal-use portions is required..
B. Macro research seems inherently client-focused. The question specifies 25% relates to the manager's personal thesis. That portion, regardless of asset class or research type, benefits the manager, not the client. The subject matter does not determine the beneficiary.
C. Using client commissions under a false premise could be characterized as misrepresentation. The primary violations are III(A) loyalty and VI(A) disclosure. Misrepresentation under I(C) is a separate and more specific standard not directly implicated by the undisclosed mixed-use arrangement.

Unit: ethics-application

Question 40Above the exam

A portfolio manager discloses a material conflict of interest (a large personal holding in a stock she recommends) to her employer but not to her clients, reasoning that employer disclosure satisfies her obligations. Combining Standard VI(A) (Disclosure of Conflicts) with the broader duty of loyalty to clients under Standard III(A), her approach is most likely:

How sure are you?

Correct: B. Standard VI(A) requires members to disclose material conflicts of interest to CLIENTS and prospective clients, in a manner sufficient to allow them to evaluate the conflict, in addition to any internal disclosure the firm requires. Disclosing only to the employer addresses the firm's own risk management but does not satisfy the member's independent duty, under both VI(A) and the general duty of loyalty in Standard III(A), to let the client itself judge the conflict.
A. Employer disclosure and client disclosure serve different purposes and are both required; satisfying an internal firm policy does not substitute for the client-facing disclosure Standard VI(A) specifically requires so the client can evaluate the conflict for themselves.
C. A material personal holding in a security the manager is actively recommending is a textbook example of a disclosable conflict of interest under Standard VI(A); ownership size and relevance to the recommendation are exactly what make it material and reportable.

Unit: ethics-application

Question 41Above the exam

An analyst is asked by his employer to remove a negative section from a research report because a client complained. The analyst believes the negative section is factually accurate and material to the investment decision. Applying Standard I(B) (Independence and Objectivity) together with Standard V(B) (Communication with Clients and Prospective Clients), the analyst's most likely correct course of action is to:

How sure are you?

Correct: B. Standard I(B) requires members to maintain independence and objectivity and resist pressure that could compromise their judgment; caving to a client complaint by removing material, factually accurate information is exactly this kind of compromise. Standard V(B) separately requires that communications to clients distinguish fact from opinion and include the basic characteristics of the investment, which a report stripped of material negative information would fail to do.
A. An employer's business interest in keeping a client happy does not override the analyst's independent professional judgment or his duty under Standard V(B) to give clients complete, accurate information; the Standards apply regardless of internal pressure to conform.
C. Removing material information from the WRITTEN report while privately telling only one client it still applies creates an inconsistent, misleading record and does not cure the Standard V(B) problem for anyone who relies on the written report itself, including other clients who never receive the private caveat.

Unit: ethics-application