Guidance for Standards I-VII

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 StandardsGuidance for Standards I-VII
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The lesson

Runtime 15 minutes 54 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 is almost entirely judgment, not recall: the exam asks you to apply the Code and Standards to a described situation, recommend what a compliant firm's procedures should look like, and tell conforming conduct apart from a violation. Expect a short scenario followed by a question asking what the person should have done.

Every one of the seven Standards eventually gets tested through a scenario rather than through a definition, and the same three traps repeat across all of them. The first is compliance approval. A firm's compliance department signing off on a trade or a communication reduces the firm's legal exposure, but it never discharges a member's own duty to exercise independent judgment. If your compliance department approves something you know is wrong, you still are not clear.

The second trap is disclosure standing in for avoidance. Under many firms' internal policies, disclosing a conflict is enough. Under the Standards, some conflicts must be avoided outright, no amount of disclosure fixes them. A gift large enough to create a real question about your independence has to be declined, not disclosed and accepted anyway. The rule of thumb the curriculum gives: minor conflicts can be disclosed and managed; conflicts that would actually compromise independent judgment must be avoided.

The third trap is the law as a ceiling instead of a floor. Local law, your employer's policy, and the CFA Standards can all say something different about the same situation, and the rule is simple: follow whichever one asks more of you. If local law is more permissive than the Standards, the Standards still apply.

One idea deserves its own space because a single misread word changes the answer: mosaic theory. Combining public information with nonpublic information that is not material to reach an investment conclusion is legal and expected of a good analyst; that is what research is. The instant the nonpublic piece is material, meaning it would move the price if it became public, mosaic theory stops applying entirely, and no amount of additional public research cleans the resulting recommendation. It does not matter whether you sought the information out or simply overheard it; receiving material nonpublic information passively carries the same restriction as receiving it actively.

Reading a Standards vignette well means asking three questions in order: whose interest is primary here, what does the relevant Standard actually require rather than what the employer would prefer, and is there a conflict between law, policy, and the Standards that has to be resolved by following the strictest one.

The trap

'Do nothing' is almost never the right answer on a Standards vignette: when a member becomes aware of a violation or a live conflict, some action is required, at minimum escalating internally to a supervisor before any thought of going outside the firm.

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.

Independence is an objective test, not a subjective one

Standard I(B) bans accepting or offering "any gift, benefit, compensation, or consideration that reasonably could be expected to compromise" independence. The test is whether a reasonable person would see a risk of compromised judgment, not whether the member was actually influenced. There is no dollar threshold anywhere in the Standard; "modest" is a judgment call based on the benefit's size and the giver's relationship to the member's work.

Firm policy is a floor, not a shield

An employer's gift policy (for example, a $100 cap) can be stricter than the CFA Standards, but it can never excuse conduct the Standards prohibit. "My firm's policy allowed it" is not a defense when the benefit still reasonably risks compromising independence.

Entertainment is a gift; there is no carve-out

The Standard's own wording, "any gift, benefit, compensation, or consideration," reaches dinners, tickets and trips exactly as it reaches physical gifts. Whether the benefit is lavish (decline or self-fund, then disclose) or modest (disclose to the employer) depends on scale and source, not on whether it is called "entertainment."

Disclosure does not cure a compromised rating

Standard VI(A) requires disclosing a conflict; Standard I(B) requires that the analysis itself stay independent. A disclosed investment-banking relationship does not excuse a rating that was actually changed because of banking, issuer or sales pressure. Both standards apply, and satisfying one never satisfies the other.

Client brokerage belongs to the client

A manager who directs client trading commissions to a broker in exchange for research (a soft-dollar arrangement) must show the research primarily benefits the specific clients whose commissions paid for it, that the commission is reasonable for what was received, and that the arrangement is disclosed. Research that mostly serves the manager's own business, or other clients, breaches the duty of loyalty even if some client benefit exists.

"Fairly" is not "equally"

Standard III(B) uses the word fairly, not equally. Proportional IPO allocation by account size or documented interest is compliant. What is never compliant is a timing advantage: any recommendation must reach every client at the same time, with no early call to favored accounts.

A client's own request does not establish suitability

Even when a client asks for an investment outright, the manager must still check it against the client's Investment Policy Statement. If it is inconsistent, the manager informs the client, documents the conversation, and declines unless the client explicitly acknowledges the inconsistency and consents after being fully informed. "The client wanted it" is never a complete answer on its own.

Clients first, employer second, the member last

Standard VI(B) sets a strict order of execution: client orders fill first, employer (proprietary) accounts second, and the member's own account last, including any account in which the member holds a direct beneficial interest. Front-running, placing a personal order ahead of a known client order, breaches this at the point the order is submitted, regardless of the price achieved.

A family account managed for the family member is a client account

The common wrong answer is that family accounts always go last. The actual rule asks two questions: is the account managed for the family member's benefit, and does the member have a direct financial stake in it (joint ownership, a dependent's account, a share of the gains)? Managed-for-them with no direct stake means client priority, the same as any other client; a direct stake means the member's own account, which goes last.

Referral fees: three recipients, one timing rule

A referral-fee arrangement must be disclosed to the employer, to existing clients and to prospective clients, and the disclosure to a prospect must happen before the referral is made, not in onboarding paperwork signed afterward. An undisclosed referral fee from an outside party also usually triggers Standard IV(B), which requires the employer's written consent before accepting outside compensation.

The trick

Disclosure is not a free pass

Treat disclosure as necessary but rarely sufficient. It satisfies Standard VI(A)'s duty to reveal a conflict; it never by itself satisfies Standard I(B)'s duty to stay independent, or Standard III(A)'s duty of loyalty.

Employer approval does not equal CFA compliance

A firm's policy sets a ceiling on what its own employees may do; it can never lower the floor the CFA Standards require. Any answer choice that leans on "the firm's policy allowed it" is the trap, not the defense.

CPM: Clients, Partners, Me

The Standard VI(B) execution order in one line: clients first, the employer (the firm's own proprietary account) second, the member's own money last.

Is this their money or my money?

The family-account test in one question. Their money, managed on their behalf, gets client priority. Money the member has a direct stake in goes last, same as the member's own account.

The 2003 Global Analyst Settlement, $1.4 billion

Ten major investment banks paid this for analysts who privately called stocks "junk" while publicly rating them Buy, to protect investment-banking fees. Every analyst-independence question on the exam is a miniature version of this case.

The method

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

  1. Read the last sentence of the question first: which standard, or which two standards, is it actually asking about.
  2. Identify the mechanism in the facts: a benefit changing hands (I(B) or VI(A)), a trade sequence (VI(B)), a client-vs-client difference in treatment (III(B)), a suitability question (III(C)), or an outside payment (VI(C) plus IV(B)).
  3. Check whether the fact pattern combines two mechanisms at once (a disclosed conflict that also changed the actual recommendation): if so, the correct choice usually names both standards, not one.
  4. Reject any answer that treats firm policy, client consent, or genuine personal belief as a complete defense; none of the three overrides a Standard on its own.
  5. Confirm the timing: was the required action (disclosure, client-order priority, consent) taken before the conflict-creating event, not after it.

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

Sarah Chen, CFA, works at a brokerage firm. Her supervisor instructs her to allocate IPO shares to preferred clients before informing other eligible clients. A practice that violates CFA Standards but is not illegal in her jurisdiction. Under Standard I(A), Sarah MUST, most likely:

How sure are you?

Correct: A. The correct answer is Refuse to follow the instruction and disassociate from the activity. Standard I(A) requires members to follow the strictest applicable standard. Here, CFA Standards are stricter than local law, so CFA Standards govern. Sarah cannot participate regardless of the legality..
B. You might confuse 'legal' with 'permissible under Standards.' The exam frequently uses legal-but-unethical scenarios precisely to test this distinction. Standard I(A) requires following the strictest applicable standard. CFA Standards prohibit this practice. Legality is a floor, not a ceiling.
C. You might believe Standard I(A) requires external regulatory reporting whenever they discover a violation. Standard I(A) does NOT require reporting to external regulators unless the law specifically mandates it. Internal escalation is the required path. External reporting is only mandatory when law requires it.

Unit: guidance-for-standards-i-vii

Question 2Harder

James, a CFA candidate, discovers his firm's research department is providing material non-public information to select hedge fund clients. He is not personally involved in these communications. Under Standard I(A), James should most likely FIRST:

How sure are you?

Correct: A. The correct answer is Report the activity through his firm's internal compliance channels. Standard I(A) guidance prioritizes internal reporting first. The member has not participated but is obligated to disassociate from any activity connected to the violation and escalate internally..
B. You might interpret disassociation as simply 'not participating yourself,' which makes option A seem sufficient. Disassociation alone is insufficient when you have knowledge of an ongoing violation. The recommended procedures require attempting to stop the violation. First through internal channels.
C. The moral instinct is to report wrongdoing to authorities. You might from common-law jurisdictions also think this is legally required. Standard I(A) does not require external reporting unless a specific law mandates it. In most jurisdictions, there is no mandatory reporting obligation on employees for employer violations. Internal escalation is required first.

Unit: guidance-for-standards-i-vii

Question 3Exam level

A CFA member works at a firm in a jurisdiction where the local securities law requires less disclosure to clients than the CFA Institute Standards of Professional Conduct. Which of the following is MOST accurate?

How sure are you?

Correct: A. The correct answer is The member must follow CFA Standards because they are more strict than local law. Standard I(A) requires members to comply with the more strict of applicable law and CFA Standards. Where CFA Standards exceed legal requirements, members must meet the CFA standard..
B. This seems logical. If you comply with the law, you've met your legal obligations. Being a CFA member means voluntarily agreeing to Standards that may exceed legal minimums. Compliance with law is a floor. The CFA Code requires members to 'comply with applicable laws' AND the Standards. Whichever is stricter.
C. Seems like the responsible professional thing to do. No such reporting requirement exists in Standard I(A). The standard prescribes conduct, not lobbying obligations.

Unit: guidance-for-standards-i-vii

Question 4Exam level

Maria, CFA, works at an investment bank. She learns that her employer is operating without a required regulatory license that has recently lapsed. Her supervisor assures her the renewal is in process and instructs her to continue normal operations. Under Standard I(A), Maria should most likely:

How sure are you?

Correct: A. The correct answer is Disassociate from any activities that require the license and seek legal counsel to clarify her personal obligations. Maria cannot knowingly assist in activities that violate the law, even if the violation is the firm's rather than her own. She should seek guidance on her personal exposure and escalate internally..
B. The supervisor's assurance seems to transfer the responsibility. You might don't want the 'quit your job' answer. A supervisor's assurance does not eliminate a member's personal obligation under Standard I(A). 'I was told it was fine' is explicitly not a defense in the Standards.
C. If operating without a license is illegal, resignation seems like the 'safe' choice. Resignation is a last resort, not the first step. Maria should disassociate from the specific violations and escalate internally first.

Unit: guidance-for-standards-i-vii

Question 5Exam level

Under Standard I(A), which of the following best describes the term 'disassociation'?

How sure are you?

Correct: A. The correct answer is Removing oneself from participating in or assisting with any activity that violates laws, regulations, or the Standards. Disassociation is an active step. Ceasing involvement. It does not automatically require resignation, reporting to regulators, or any other external action..
B. The most dramatic way to 'disassociate' from a firm seems to be leaving it. Resignation may ultimately be necessary if disassociation is impossible, but it is not what disassociation means. You can disassociate from a specific activity while remaining employed.
C. Seems like the transparent, ethical approach. Standard I(A) does not require informing clients of employer violations. This could itself create legal and contractual problems.

Unit: guidance-for-standards-i-vii

Question 6Exam level

Tom, a CFA candidate still in the exam process, discovers his portfolio management firm is front-running client orders. Tom is not personally involved in the execution side of the business. Which statement is MOST accurate regarding Tom's obligations under Standard I(A)?

How sure are you?

Correct: A. The correct answer is Tom has the same obligations as a CFA member. Standard I(A) applies equally to CFA candidates and CFA charterholders. Tom must disassociate from the violating activity and escalate internally..
B. You might assume their obligations begin upon receiving the charter. The CFA Institute Standards explicitly apply to all candidates enrolled in the CFA Program, not only those who have earned the designation.
C. Tom is not personally front-running, so it seems his personal conduct is clean. Standard I(A) requires more than personal non-participation. Knowledge of an ongoing violation requires disassociation and internal reporting.

Unit: guidance-for-standards-i-vii

Question 7Harder

A CFA member is working in a country where local law explicitly prohibits reporting employer violations to any external authority. The firm is violating CFA Standards but not local law. The member has escalated internally with no result. Under Standard I(A), the member's most likely course of action is:

How sure are you?

Correct: A. The correct answer is Disassociate from the violating activities and consider resignation if continued employment requires participation in violations. Where local law prohibits external reporting, the member cannot be required by Standard I(A) to break local law. Disassociation and, if necessary, departure remain available options..
B. CFA Institute seems like the right body to report to when regulators are blocked. Standard I(A) does not prescribe reporting firm violations to CFA Institute as a required step. CFA Institute enforcement actions are complaint-driven but are not required by the standard.
C. Ethics seems to demand transparency regardless of local law. Standard I(A) never requires members to break applicable law. The standard says to comply with the MOST STRICT of applicable laws and Standards. But breaking a law to comply with Standards is never required.

Unit: guidance-for-standards-i-vii

Question 8Harder

Under CFA Institute Standards, which of the following is most likely a RECOMMENDED PROCEDURE (not a requirement) under Standard I(A)?

How sure are you?

Correct: A. The correct answer is Maintaining written records documenting that the member attempted to comply with or correct violations. The Standards distinguish between what members MUST do (requirements) and recommended procedures that support compliance. Documentation is a recommended best practice, not a mandatory requirement..
B. This sounds like a best practice rather than a hard rule. This is a REQUIREMENT under Standard I(A), not merely a recommendation. Members must follow the strictest applicable standard.
C. Disassociation sounds like a best practice one would choose, not a rule one must follow. Disassociation from known violations is a requirement, not merely a recommended procedure.

Unit: guidance-for-standards-i-vii

Question 9Harder

Which of the following scenarios would MOST LIKELY constitute a violation of Standard I(A) by a CFA charterholder?

How sure are you?

Correct: A. The correct answer is Continuing to prepare marketing materials for a fund while knowing the fund manager is misrepresenting performance figures to investors. The member is not misrepresenting figures herself, but she is assisting in and facilitating the violation. 'Knowingly assist' covers this situation..
B. The member works at the same firm, creating apparent proximity to the violation. Standard I(A) requires knowledge. The member must 'knowingly' participate or assist. Without knowledge, there is no breach. Mere employment at a firm where violations occur is not itself a violation.
C. Legal confirmation seems to provide a defense. If the employer policy is less strict than CFA Standards, the member must follow CFA Standards regardless of legal counsel's confirmation of legality. Legal ≠ compliant with Standards.

Unit: guidance-for-standards-i-vii

Question 10Harder

According to Standard I(A), a CFA member who becomes aware that local law most likely requires an action that violates CFA Standards should:

How sure are you?

Correct: A. The correct answer is Comply with local law. When a conflict exists between local law and CFA Standards where the law REQUIRES something that violates Standards, the member must comply with the law. The member should also notify CFA Institute of the conflict. CFA Standards cannot override binding legal obligations..
B. You might learn 'follow the stricter standard' and over-apply it. They assume CFA always wins. The 'stricter standard' rule applies when both law and CFA Standards are valid choices. When law REQUIRES something that conflicts with CFA Standards, you cannot break the law. You comply with law.
C. Resignation seems like the clean ethical exit. Resignation is not the prescribed response to a law-vs-Standards conflict. Compliance with law plus notification of CFA Institute is the appropriate path.

Unit: guidance-for-standards-i-vii

Question 11Exam level

A portfolio manager, CFA, is instructed by his employer to execute trades in a manner that does not technically violate any securities law but does violate CFA Standard III(B) Fair Dealing. The manager is unsure whether Standard I(A) obligates him to refuse. Which statement is most likely correct?

How sure are you?

Correct: A. The correct answer is Standard I(A) requires the manager to comply with CFA Standards even when no law is being violated. The manager must refuse the instruction and escalate internally. CFA Standards apply regardless of whether a law is also being broken..
B. The name 'Knowledge of the Law' implies the standard is about laws, not internal CFA rules. Standard I(A) covers violations of laws AND regulations AND CFA Standards. The standard's scope is not limited to illegal activities.
C. Seems logical that only the specific violated standard matters. Standard I(A) is the foundational compliance standard. Knowingly assisting in any violation of the Standards, including Standard III(B), is itself a Standard I(A) violation.

Unit: guidance-for-standards-i-vii

Question 12Exam level

Emma, CFA, joins a new firm and discovers that the firm's standard client agreement contains a clause that waives clients' rights to bring legal claims. A practice permitted by local law but prohibited by CFA Standards. Emma's supervisor tells her all client-facing staff must use this agreement. Emma should MOST LIKELY:

How sure are you?

Correct: A. The correct answer is Refuse to use the waiver clause with her own clients, escalate the issue internally to compliance or senior management, and document her objection. Emma cannot use a client agreement that violates CFA Standards even if instructed to and even if legal. She must disassociate from the violating practice while attempting to change it through proper channels..
B. Consistency across client relationships sounds like a legitimate business rationale. Consistency cannot override CFA Standards compliance. Emma's personal obligation under Standard I(A) cannot be discharged by pointing to firm-wide practice.
C. This seems like the decisive ethical action. Internal escalation is required before any external reporting. And even after internal escalation fails, external reporting to regulators is not required by Standard I(A) unless mandated by law.

Unit: guidance-for-standards-i-vii

Question 13Exam level

Sarah Chen, CFA, is a sell-side equity analyst covering the technology sector. A company she covers offers to fly her business class to its annual analyst day at a resort in Napa Valley and pay for two nights of accommodation. The trip cost would be approximately $2,800. Chen's firm has a compliance policy permitting travel paid by covered companies if it relates to a legitimate business purpose. Chen should MOST likely:

How sure are you?

Correct: B. Standard I(B) requires analysts to maintain independence and objectivity. When a covered company pays for lavish travel, the analyst's ability to form independent opinions is compromised regardless of firm policy. The CFA Standards are stricter than most firm policies on this point: the standard is not whether the firm permits it, but whether the arrangement 'reasonably could be expected to compromise' independence. A $2,800 trip to a resort far exceeds 'modest.' The recommended procedure is to arrange travel independently. Employer policy compliance (Answer A) does not satisfy CFA Standards when those policies are less strict. Disclosure (Answer C) may be required but is not sufficient on its own. The analyst must also decline or arrange independently.
A. The firm's compliance policy explicitly permits it, and candidates who focus on 'follow employer rules' without internalizing the CFA Standards hierarchy choose this. CFA Standards require members to follow the MORE restrictive of applicable rules. When employer policy conflicts with CFA Standards, CFA Standards prevail. Standard I(A) establishes this hierarchy.
C. Disclosure is a recommended procedure under I(B), and candidates who believe 'disclose and you're fine' choose this. It feels responsible. Disclosure is necessary but not sufficient when the benefit is lavish. The standard prohibits accepting benefits that 'reasonably could be expected to compromise' independence. And a $2,800 resort trip clearly meets that threshold.

Unit: guidance-for-standards-i-vii

Question 14Exam level

James Okonkwo, CFA, manages a fixed income fund. He receives a case of premium wine valued at $350 from a broker-dealer at year end. The broker-dealer executes trades for Okonkwo's fund. Okonkwo's employer has no explicit gift policy. Okonkwo should MOST likely:

How sure are you?

Correct: C. When no employer policy exists, CFA members apply the Standard directly. The gift comes from a broker-dealer who benefits from trading commissions. A direct conflict of interest. Even if Okonkwo does not believe it will influence him, the standard asks whether it 'reasonably could be expected to compromise' independence. A $350 wine case from a current trading counterparty raises that concern. The recommended procedure is disclosure to employer and careful evaluation of whether to accept. Answer A is wrong because absence of employer prohibition does not equal CFA Standards compliance. Answer B is wrong because the 'modest relative to trading commissions' reasoning is exactly the rationalization I(B) is designed to prevent.
A. No explicit prohibition means no rule is broken in the candidate's mind. CFA Standards apply regardless of whether the employer has a policy. The Standard is self-applying. 'My employer didn't say no' is not a defense.
B. Relative size reasoning feels logical. $350 is trivial compared to hundreds of thousands in commissions. The comparison to trading commissions is irrelevant. The standard does not use a proportionality test. The question is whether the gift could compromise independence from that specific counterparty. And a gift from a broker you execute trades with creates exactly that conflict.

Unit: guidance-for-standards-i-vii

Question 15Exam level

Maya Patel is a CFA candidate working as a junior analyst at an asset management firm. A portfolio company in which her firm holds a large position invites Patel to an industry conference dinner valued at $280. The portfolio manager on the account has already attended three such events from this company. Which of the following BEST describes how Patel should handle this situation?

How sure are you?

Correct: B. Standard I(B) explicitly covers 'entertainment' as a form of benefit that can compromise independence. Answer A is the most dangerous misconception on this topic: entertainment is NOT exempt from I(B). The standard applies to 'any gift, benefit, compensation, or consideration'. Which includes meals and entertainment. Answer C is wrong because CFA Standards set no specific dollar threshold. There is no '$300 threshold' in the Standards. This is a common misreading. The recommended approach is to evaluate the relationship (this company is a portfolio holding, creating a potential conflict), consider whether attendance could impair objectivity, and obtain employer approval if proceeding.
A. The word 'entertainment' sounds categorically different from 'gift,' and many candidates assume the standard only applies to physical gifts or cash. The Standard explicitly covers 'any gift, benefit, compensation, or consideration.' Entertainment, dinners, sporting events, concerts, is explicitly covered. This is one of the most commonly tested misconceptions in Standard I(B).
C. Candidates who have studied FINRA rules or SEC gift limits ($100 FINRA threshold) import those specific dollar figures into the CFA Standards analysis. CFA Standards deliberately contain no specific dollar threshold. The word 'modest' is used intentionally vague to require judgment.

Unit: guidance-for-standards-i-vii

Question 16Harder

A research firm is paid by Meridian Biotech to produce a research report on Meridian's stock. The analyst producing the report discloses at the top of the report that Meridian funded the research. The analyst believes the disclosure fully satisfies her obligations under Standard I(B). Is the analyst correct, most likely?

How sure are you?

Correct: B. Issuer-paid research is treated as a special high-risk category under Standard I(B) guidance. The CFA Institute's position is that when a company pays for research about itself, the financial incentive to produce favorable analysis is so strong that disclosure alone is necessary but not sufficient. The analyst must also: (1) ensure compensation is not tied to the report's conclusions; (2) use the same rigor and methodology as independent research; (3) where possible, seek third-party validation. The Standards state that in some cases of issuer-paid research, 'independence may be so compromised that members and candidates should decline to produce the report.' Disclosure alone does not neutralize a financial incentive structure that rewards positive conclusions.
A. Disclosure is a foundational principle across many CFA Standards, and candidates who rely on 'disclosure cures conflicts' reasoning choose this. Disclosure is necessary but the Standard explicitly states it may be insufficient for issuer-paid research. The financial structure itself creates ongoing bias risk that disclosure does not remove.
C. The word 'material' sounds like a limiting qualifier, leading candidates to think only the most significant conflicts require action beyond disclosure. Issuer-paid research is explicitly highlighted as an area where the bar for adequate independence is higher than standard disclosure. The CFA guidance on this subtopic is unambiguous.

Unit: guidance-for-standards-i-vii

Question 17Harder

Robert Ashford, CFA, is a sell-side analyst. His firm is the lead underwriter for an upcoming IPO of TechNova Inc. Ashford is asked to initiate coverage on TechNova with a research report to support the offering. Ashford believes TechNova is fairly valued at the IPO price. Under Standard I(B), which of the following is MOST accurate?

How sure are you?

Correct: B. The sell-side analyst independence problem is one of the most important subtopics in Standard I(B). When an analyst's firm is the underwriter, there is systematic pressure, implicit or explicit, to issue favorable research. The analyst's sincerity of belief does not resolve the structural conflict. Standard I(B) guidance specifically addresses this: 'members should not allow investment banking relationships to compromise research integrity.' Answer A misses the structural conflict entirely by focusing on the analyst's subjective belief. Answer C (disclosure) may be required but is not sufficient on its own. The structural conflict must also be addressed through firewalls and compliance procedures at the firm level.
A. You might focus on the analyst's honest belief. If you genuinely think the stock is fairly valued, where's the problem? This feels like a reasonable defense. Standard I(B) is about structural independence, not just subjective intent. Even an analyst who sincerely believes their analysis is unbiased may have had their analysis subtly shaped by the banking relationship.
C. Again, disclosure feels like the complete solution. Disclosure is required but the structural conflict must also be managed. Best practice per the Standards is to have organizational firewalls separating research from investment banking and to ensure research conclusions are not reviewed or influenced by banking personnel.

Unit: guidance-for-standards-i-vii

Question 18Exam level

Linda Torres is a CFA charterholder and a buy-side portfolio manager. A company whose stock she holds in her portfolio sends her a $75 gift basket during the holiday season. Torres's employer has a written gift policy accepting gifts up to $100. Which of the following BEST describes Torres's obligations?

How sure are you?

Correct: C. This question is designed to test whether candidates understand that employer policy compliance and CFA Standards compliance are separate obligations. Torres must independently evaluate: (1) does the gift come from a party with a financial interest in her decisions (yes. The company wants her to maintain or increase the position); (2) could accepting it reasonably compromise her independence? Even a $75 gift from a portfolio holding creates a relationship that should be documented. Answer A is incomplete. Employer policy approval is necessary but not sufficient for CFA compliance. Answer B overstates the certainty: the amount is small, but the source matters. The best practice is to disclose to employer regardless of whether the amount is below policy limits.
A. If employer policy allows it, why analyze further? This is the common 'employer policy as safe harbor' error. Employer policy compliance does not substitute for CFA Standards compliance. Members must independently satisfy both.
B. The amount is small ($75), so candidates dismiss the concern as de minimis. The amount is one factor, but the source, a portfolio company, is the key variable. Even small gifts from parties with financial interests in the analyst's decisions require evaluation and disclosure.

Unit: guidance-for-standards-i-vii

Question 19Exam level

A portfolio manager receives compensation from his firm structured so that 30% of his bonus depends on the annual return of a single client's portfolio. Under Standard I(B), this compensation arrangement, most likely:

How sure are you?

Correct: B. Standard I(B) extends to compensation structures that compromise objectivity, not just external gifts. A 30% performance-linked bonus tied to a single client creates a conflict: the manager may take risks inconsistent with the client's stated objectives in order to maximize personal compensation. The Standards note that 'members should not accept compensation, consideration, or other benefits from parties whose interests conflict with their clients' interests unless they make full disclosure to their employer.' The compensation arrangement here should be disclosed and structured carefully. Answer A incorrectly assumes performance alignment cures the conflict. Answer C is wrong. Compensation structures set by employers are within scope if they create incentives that compromise objectivity.
A. Performance-based pay aligning manager and client interests sounds like exactly what should happen. You might conflate 'aligns incentives' with 'eliminates conflict.'. Aligned incentives can still create a conflict: the manager may be incentivized to maximize return even at the cost of appropriate risk management, misrepresentation of performance, or churning the account.
C. You might think Standard I(B) only applies to external benefits (gifts from third parties), not internal compensation structures. Standard I(B) explicitly covers 'compensation or consideration that reasonably could be expected to compromise independence and objectivity'. This includes internal firm compensation tied to specific clients or outcomes.

Unit: guidance-for-standards-i-vii

Question 20Exam level

An analyst at a buy-side firm receives a request from his portfolio manager to upgrade the analyst's rating on a stock from Hold to Buy, citing that a large client has recently increased their position in the stock and would benefit from a Buy rating. The analyst disagrees with the rating change based on his own research. Under Standard I(B), the analyst should MOST likely:

How sure are you?

Correct: B. Standard I(B) protects analyst independence from internal as well as external pressure. Seniority does not override the obligation to maintain independent, research-based conclusions. An analyst who changes a rating because a client holds a large position, rather than because the research supports it, is allowing a business relationship to compromise their objectivity. This is a textbook I(B) violation. The analyst should maintain the Hold rating. If there is ongoing pressure, the analyst should document the disagreement and escalate as appropriate under Standard I(A) (Knowledge of the Law). Answer C is wrong because disclosure does not rehabilitate a compromised rating. The analyst must not issue the compromised rating in the first place.
A. Hierarchy and employment relationships feel compelling. Your manager tells you to do something. You might underestimate the strength of the independence obligation against internal pressure. CFA Standards explicitly protect analysts from internal organizational pressure. The obligation to maintain independent research conclusions is not overridden by seniority or business considerations.
C. Again, disclosure seems like it should fix the problem. You cannot issue a research rating you do not believe in and cure it with disclosure. The violation is the issuance of the compromised rating, not merely the failure to disclose. Disclosure cannot rehabilitate the fundamental integrity problem.

Unit: guidance-for-standards-i-vii

Question 21Harder

A CFA charterholder works as a research analyst for an independent research firm. A company whose stock he follows offers to pay for his trip to their headquarters in Switzerland for a facility tour, at a cost of approximately $4,500. The analyst believes the tour would provide material information for his coverage. He should MOST likely:

How sure are you?

Correct: B. Travel paid by an issuer being researched is a classic Standard I(B) trap. The legitimacy of the business purpose (facility tour is genuinely informative) does not resolve the independence concern. The Standards are clear: when a company pays for analyst travel, the analyst becomes beholden to that company in a way that can subtly influence conclusions. The recommended procedure is for the firm to pay for travel to maintain independence. If the analyst's firm cannot or will not pay, the analyst should explore non-travel alternatives (management calls, third-party research services). Answer C (disclosure alone) is insufficient when the travel cost is $4,500.
A. The business purpose is legitimate. A facility tour provides real, material information. Why should a legitimate research activity be refused? The legitimacy of the purpose does not override the independence concern. The Standard is about who pays, not whether the activity is legitimate. If the issuer pays, the analyst is compromised regardless of how good the information is.
C. Disclosure seems to be the proportionate response. Investors reading the report would know about the funded travel. For lavish travel arrangements ($4,500), disclosure alone is insufficient. The Standards recommend that the analyst's firm pay for travel. If that is not possible, the analyst should decline.

Unit: guidance-for-standards-i-vii

Question 22Harder

Under Standard I(B), which of the following situations would MOST likely require an analyst to take action beyond simple disclosure?

How sure are you?

Correct: B. Standard I(B) operates on a spectrum: modest benefits may be accepted with or without disclosure, while significant benefits require action beyond disclosure (typically declining or self-funding). A five-day resort stay paid by a covered company is clearly lavish and falls into the category where the analyst must decline or arrange self-funded travel. Answer A (vendor gift certificate at a firm party) is in the de minimis/modest range. Disclosure to employer is likely sufficient. Answer C (broker lunch during a working meeting) is a widely recognized normal business practice. Modestly priced meals in a professional context are generally treated as acceptable. The distinguishing principle: the resort stay's scale and the fact that the payer (covered company) is the subject of the analyst's research creates a conflict disclosure cannot neutralize.
A. Any gift seems potentially problematic to cautious candidates. A $50 gift certificate at a firm-wide holiday party from a vendor is the classic de minimis scenario. The Standards acknowledge that not every small benefit requires action beyond employer awareness. This is a deliberate 'false alarm' answer designed to test proportionality judgment.
C. Any form of broker providing value (even a meal) sounds like a soft-dollar / I(B) concern. Working lunches and modest meals during legitimate business meetings are widely recognized as normal professional practice. The Standards do not prohibit all forms of modest hospitality in a genuine business context.

Unit: guidance-for-standards-i-vii

Question 23Exam level

Which of the following BEST describes the recommended procedure for a CFA member who is asked by a corporate client to prepare a research report on the client's competitor, where the client will fund the research?

How sure are you?

Correct: B. Third-party funded research (where the party paying has an interest in the conclusions) is permissible under the Standards, but with strict requirements. The member must: (1) disclose the funding arrangement prominently; (2) ensure compensation is not contingent on favorable conclusions about the subject company; (3) maintain the same analytical rigor as independent research; (4) consider whether independence can be maintained given the conflict. Outright prohibition (Answer A) is not required by the Standards. The Standards establish conditions under which such research can be done ethically. Answer C is explicitly prohibited: concealing a material conflict is a clear violation of both Standard I(B) and Standard VI(A) (Disclosure of Conflicts).
A. The conflict here is obvious. A competitor paying for research on its rival. Cautious candidates assume this is automatically prohibited. The Standards permit this type of research if the procedures are followed. Automatic prohibition is not the standard; managed disclosure and independence are.
C. The reasoning (concealment protects report credibility) is facially plausible but obviously wrong on reflection. Concealing material conflicts violates multiple Standards. This is a deliberate 'obviously wrong' third option designed to confirm candidates are not confused about basic disclosure obligations.

Unit: guidance-for-standards-i-vii

Question 24Harder

CFA Institute's Standard I(B) states that members must not accept 'any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity.' Which of the following is MOST accurate regarding the interpretation of 'reasonably could be expected to compromise'?

How sure are you?

Correct: B. This is the most technically precise question on Standard I(B). The 'reasonably could be expected to compromise' language is a deliberate objective standard. It does not require proof of actual influence (A), intent (C), or admission. The test is: would a reasonable, objective third party conclude that this benefit creates a meaningful risk of compromising independence? This is similar to the 'reasonable investor' standard in securities law. The objective standard is harder to satisfy than a subjective 'I wasn't actually influenced' defense, which is why the Standard is framed this way. Candidates who choose A would allow any analyst to escape the Standard by claiming subjective independence.
A. Requiring proof of actual influence seems like a fair, high evidentiary standard. Why penalize someone if their judgment wasn't actually compromised? This would make the Standard nearly unenforceable. Analysts would always claim they were not actually influenced. The 'reasonably could be expected to' language was chosen precisely to avoid this defense.
C. Requiring evidence of intent behind the gift sounds like a logical additional requirement. The giver's intent is not an element of the Standard. Even well-intentioned gifts can compromise independence. The Standard is prophylactic. It prevents compromising situations from arising, not just punishes deliberate corruption.

Unit: guidance-for-standards-i-vii

Question 25Exam level

An analyst at a buy-side firm copies a section of a sell-side research report into her own client note, paraphrasing the language but not using direct quotations. She does not attribute the analysis to the sell-side firm. Has she violated any CFA Standards, most likely?

How sure are you?

Correct: B. The correct answer is Yes, Standard I(C) Misrepresentation, because attribution is required for analysis regardless of whether it is quoted directly.
A. In academic and journalistic contexts, paraphrasing without quotes is often treated differently from direct copying. You might map their prior knowledge incorrectly. CFA Standard I(C) treats attribution as required for analysis and ideas, not just verbatim text. The standard explicitly states that using someone else's work without attribution is a violation.
C. The behavior could seem dishonest, which sounds like I(D). The violation here is the misrepresentation (false impression she originated the analysis), which makes it I(C). I(D) covers dishonest acts that don't involve a false communication. Here the false communication is the primary issue.

Unit: guidance-for-standards-i-vii

Question 26Exam level

Marcus Chen passed the CFA Level II exam two months ago and is currently registered for the Level III exam. His LinkedIn profile states 'Marcus Chen, CFA (Level II).' Which of the following is most accurate?

How sure are you?

Correct: B. The correct answer is This violates Standard I(C) because the CFA designation cannot be used until all requirements for the charter are met.
A. The statement is factually accurate. He is at Level II. You might think accuracy = compliance. Accuracy is necessary but not sufficient. The CFA Institute rules prohibit any use of the 'CFA' designation appended to a name unless the full charter has been earned.
C. Adding the parenthetical seems like it adds context and prevents confusion. The parenthetical makes it worse, not better. It implies 'CFA Level II' is a credential that exists. No such partial credential exists.

Unit: guidance-for-standards-i-vii

Question 27Exam level

A portfolio manager tells a prospective client: 'Based on our historical track record and current market conditions, this strategy has generated 15% annually and should continue to do so.' Which standard is most directly violated?

How sure are you?

Correct: A. The correct answer is Standard I(C) Misrepresentation. Guaranteeing or implying guaranteed future performance.
B. Making a misleading statement sounds like dishonesty = I(D). I(D) covers dishonest acts and general misconduct. When the violation specifically involves a false or misleading STATEMENT in a professional communication, I(C) is the more direct and specific violation. Always apply the more specific standard first.
C. The mention of historical track record makes candidates think of performance presentation rules. The primary violation is the implied guarantee of future returns. While GIPS compliance is relevant to performance presentation, I(C) is more directly violated by the forward-looking guarantee.

Unit: guidance-for-standards-i-vii

Question 28Harder

James Wentworth, CFA, is arrested for driving under the influence (DUI) of alcohol on a Saturday evening. He was not operating in any professional capacity at the time. Under CFA Standards, which of the following is most accurate?

How sure are you?

Correct: C. The correct answer is Possible violation of Standard I(D). The key question is whether the act reflects adversely on his professional reputation, integrity, or competence.
A. Most candidates initially believe professional ethics standards stop at the office door. Standard I(D) explicitly covers 'any act' that reflects adversely on professional reputation. It is not limited to professional activities. Personal conduct can and does violate I(D) when the adverse reflection test is met.
B. If it's criminal, it must be a violation. Not all criminal behavior automatically violates I(D). A minor traffic violation (non-alcohol) would not meet the 'reflects adversely on professional reputation, integrity, or competence' threshold. The standard is not 'any criminal act' but 'any act that reflects adversely.'.

Unit: guidance-for-standards-i-vii

Question 29Exam level

Sandra Lee, a CFA candidate, submits a research report to her employer that incorporates a valuation model she found in a published academic paper. She modifies the model slightly and presents the analysis as her own without referencing the paper. Which is most likely the best characterization?

How sure are you?

Correct: B. The correct answer is Violation of Standard I(C). Using a published model without attribution is plagiarism regardless of modification.
A. Modification feels like creative transformation. If you change something, isn't it yours? Under CFA Standards, modification does not transfer intellectual ownership or eliminate attribution requirements. The test is whether the original creator's work forms a meaningful basis for the output.
C. She deceived her employer, which sounds like dishonesty under I(D). The primary violation is the misrepresentation. Presenting others' work as original. When the violation centers on false attribution in professional communications, I(C) applies. I(D) would apply if the dishonest act was separate from any false statement.

Unit: guidance-for-standards-i-vii

Question 30Harder

A financial advisor sends a marketing email to prospective clients stating: 'Our portfolios have never lost money in any calendar year.' This statement is factually true for the 3-year period since the firm was founded, during which markets were broadly positive. Which standards are MOST likely violated?

How sure are you?

Correct: C. The correct answer is Standard I(C) and Standard III(D). Misleading statement and improper performance presentation.
A. The question seems focused on the misleading nature of the statement. Performance data in marketing materials also triggers GIPS-related obligations under III(D). Both standards can and often do apply simultaneously.
B. Performance presentation = GIPS = III(D). The statement is also independently problematic as a misrepresentation by omission, triggering I(C). You might should look for multiple standard violations when performance claims are involved.

Unit: guidance-for-standards-i-vii

Question 31Exam level

Robert Kim, CFA, is discovered to have fabricated client signatures on account transfer documents to make the process faster. No client was financially harmed. Which standard(s) did he violate, most likely?

How sure are you?

Correct: B. The correct answer is Both Standard I(C) and Standard I(D).
A. Fabricating = false statement = I(C). While I(C) is violated, the fraudulent act also independently violates I(D). Fraud is explicitly listed in I(D)'s text ('dishonesty, fraud, or deceit').
C. No harm, no foul reasoning from contract law. CFA Standards are ethics-based, not tort-based. Harm is irrelevant to whether a violation occurred. The act itself violates the Standards regardless of outcome.

Unit: guidance-for-standards-i-vii

Question 32Harder

An analyst uses Thomson Reuters Eikon consensus earnings estimates in his research report without citing the source. He believed the estimates were 'common knowledge in the industry.' Has he violated Standard I(C), most likely?

How sure are you?

Correct: B. The correct answer is No. Consensus estimates from data providers are factual data points, not proprietary analysis requiring attribution.
A. The overcorrection: 'all third-party anything needs citation.'. The CFA Standards distinguish between factual data and analytical work. Factual data widely available from recognized sources (Bloomberg, Reuters, FactSet) does not require attribution in the same way proprietary analytical conclusions do.
C. Similar reasoning to B but for the wrong reason. 'public = optional.'. Public availability is not the determining factor. The correct distinction is factual data vs. analytical work/intellectual property. Answer B is correct for the right reason; D is the same conclusion for the wrong reason.

Unit: guidance-for-standards-i-vii

Question 33Exam level

Emily Torres is a research analyst who passed CFA Level 1 in 2023 and CFA Level 2 in 2024 but has not yet taken Level 3. Her business card reads: 'Emily Torres. Investment Analyst | CFA Candidate.' Is this an acceptable use of the CFA designation, most likely?

How sure are you?

Correct: B. The correct answer is Yes. If she is registered for the upcoming Level 3 exam.
A. Being more specific seems more accurate and therefore more compliant. While 'CFA Level 3 Candidate' is more specific and also acceptable, the general 'CFA Candidate' is not inherently a violation. The key condition is current registration for an exam.
C. Knowing that the CFA designation is tightly controlled makes candidates rule out all forms. The CFA Institute explicitly permits 'CFA Candidate' in marketing materials and business cards when the person is currently registered for an exam. The prohibition is on misuse of the 'CFA' designation as a credential, not on appropriate use of 'candidate' status.

Unit: guidance-for-standards-i-vii

Question 34Harder

A CFA charterholder is convicted of tax evasion. A financial crime unrelated to his investment management activities. His employer does not terminate him. Which of the following is most accurate regarding CFA Standards?

How sure are you?

Correct: B. The correct answer is Violation of Standard I(D). Tax evasion involves dishonesty and fraud that reflects adversely on professional integrity.
A. Personal tax situation = personal life = not professional conduct. Standard I(D) contains the critical phrase 'any act that reflects adversely on their professional reputation, integrity, or competence.' Financial dishonesty by an investment professional is paradigmatically within this scope. It goes to the heart of what clients trust them to do.
C. He concealed information from the IRS = misrepresentation. I(C) requires misrepresentations 'relating to investment analysis, recommendations, actions, or other professional activities.' Tax fraud, while involving false statements, is not a professional activity under I(C). I(D) is the correct standard for this type of dishonest personal conduct.

Unit: guidance-for-standards-i-vii

Question 35Harder

An analyst at a hedge fund uses a proprietary ranking model that was developed by her previous employer, which she memorized during her tenure there. She now applies this model to generate investment recommendations at her new firm. She does not disclose that the model originates from her previous employer. Which standard is most directly violated?

How sure are you?

Correct: B. The correct answer is Both Standard I(C) and Standard IV(A).
A. It's about employer IP, so IV(A) seems like the primary issue. IV(A) applies but so does I(C). The misrepresentation of the model's origin is a separate and independent violation from the breach of duty to the former employer.
C. Knowledge in your head feels like your own property. Proprietary methodologies remain the intellectual property of the employer regardless of how they were acquired. The CFA Standards do not carve out an exception for memorized versus documented proprietary frameworks.

Unit: guidance-for-standards-i-vii

Question 36Exam level

Maria Chen, CFA, tells a client that her firm has 'top-tier risk management systems,' knowing that her firm's risk systems were rated 'below average' in an independent audit conducted six months ago. Which standard is most likely violated?

How sure are you?

Correct: A. The correct answer is Standard I(C) Misrepresentation. She made a false statement about her firm's capabilities.
B. She was dishonest, which maps to I(D). When the violation is a false statement in a professional communication, I(C) is the primary and more specific standard. I(D) covers dishonest acts and conduct; I(C) covers false communications. The exam favors the more specific standard.
C. She withheld information about the audit, so this sounds like a disclosure issue. Standard V(B) is about adequately communicating investment characteristics and risks. The violation here is an affirmative false statement, not merely a failure to disclose. I(C) is more specific and direct.

Unit: guidance-for-standards-i-vii

Question 37Harder

Sandra Chu, CFA, is an equity analyst covering pharmaceutical companies. She meets with the CFO of BioMed Inc. during a scheduled analyst meeting. The CFO mentions that Phase III trial results will be 'very disappointing' and that the company will likely need to restate its drug approval timeline. Chu does not trade on this information but instead conducts further research using public FDA databases before recommending clients sell BioMed stock. Which of the following best describes Chu's actions?

How sure are you?

Correct: A. The CFO's comment about 'very disappointing' trial results is clearly material. It would affect the stock price. It is nonpublic. It has not been broadly disseminated. The fact that Chu layered public information on top does not cure the violation. This is the 'one bad tile destroys the mosaic' rule. Mosaic theory only works when ALL nonpublic tiles are nonmaterial. Here, one nonpublic tile (the CFO's comment) is material, so the entire analysis is tainted.
B. You might confuse 'trading' with 'acting on.' If she did not personally buy or sell, it seems no violation occurred. Standard II(A) prohibits acting OR causing others to act on MNI. Making a sell recommendation to clients is causing others to act. Violation is complete.
C. Timing logic. Maybe if the recommendation came before the announcement, it is a violation, but after is fine. The violation occurs at the point of trading on MNI, not at the point of announcement. The recommendation based on MNI is the violation regardless of what happens later.

Unit: guidance-for-standards-i-vii

Question 38Exam level

Thomas Keane, CFA, overhears two executives from MegaCorp discussing a pending merger in a restaurant. Keane did not seek this information and was not party to the conversation. He purchases MegaCorp shares the next morning. Which statement is most accurate?

How sure are you?

Correct: B. Standard II(A) does not require the analyst to have actively solicited or sought out the information. The test is: was the information material? Was it nonpublic? Did the member act on it? All three are yes here. 'Overheard in a restaurant' does not make information public. Information is public when it has been broadly disseminated to investors generally. The fact that two executives were discussing it in a restaurant where one person happened to hear it does not satisfy broad dissemination.
A. Passively receiving information without seeking it feels innocent. You might believe intent to seek is required. The Standard applies to acting on MNI regardless of how obtained. No solicitation requirement exists.
C. The restaurant is a public place. A public place might suggest public information. 'Public information' means broadly disseminated to investors generally. Not 'spoken in a place accessible to the public.' A conversation heard by one person in a restaurant is not broadly disseminated.

Unit: guidance-for-standards-i-vii

Question 39Exam level

Maria Lopez, CFA, is analyzing RetailCo. She reviews RetailCo's annual reports, press releases, and SEC filings. She also visits 50 RetailCo stores, counting customer traffic and noting inventory levels. Based on this combined analysis, she concludes RetailCo will report below-consensus earnings. She upgrades her model and issues a sell recommendation before earnings are announced. The earnings report, when released, confirms her analysis. Has Lopez violated Standard II(A), most likely?

How sure are you?

Correct: C. This is the textbook mosaic theory example. Lopez used: (1) annual reports and press releases, public information; (2) SEC filings, public information; (3) store traffic counts and inventory observations. Nonpublic, but NONMATERIAL on their own. No single store's inventory level is material. The combination of nonmaterial nonpublic observations with public data to form a material conclusion is exactly what mosaic theory protects. The fact that her conclusion turned out to be correct. And was 'material'. Does not mean she violated the Standard. The output of analysis can be material even when each input tile is not.
A. Her conclusion was about future earnings. Which sounds like material nonpublic information. The conclusion of analysis is not MNI. MNI is information received from a source with a duty of confidentiality. An analyst's independent conclusion, even if correct, is not MNI.
B. The store visit produced nonpublic information she personally collected. Mosaic theory explicitly protects the use of nonmaterial nonpublic information. Each store's traffic count is nonmaterial in isolation. Collecting public-access information through diligent fieldwork is encouraged.

Unit: guidance-for-standards-i-vii

Question 40Exam level

James Reed, CFA, is a sell-side analyst. During an earnings call, the CFO of TechCorp responds to Reed's question by providing guidance that is not included in the public script of the call but is audible to all call participants. Reed acts on this information. Which of the following is most accurate?

How sure are you?

Correct: B. An open conference call or earnings call available to all investors simultaneously satisfies the broad dissemination requirement. If all market participants have simultaneous access to the same information, it is public information. Even if not yet in a written press release. The fact that the guidance was not in the pre-written script does not make it nonpublic. Public = broadly disseminated. The call was open, therefore the CFO's comments during the call are public from the moment they are spoken.
A. Information not in the official press release sounds unofficial and therefore nonpublic. Press release ≠ only way to make information public. An open conference call accessible to all is broad dissemination.
C. Analyst calls historically were a method of selective disclosure (hence Reg FD was passed to stop this). Post-Reg FD, earnings calls are required to be open to all investors simultaneously. Open call = public dissemination.

Unit: guidance-for-standards-i-vii

Question 41Exam level

Rachel Kim, CFA, receives a call from her brother-in-law who works in the M&A department of InvestBank. He tells her that InvestBank is advising on a pending takeover of NanoCorp and the deal will close at $45/share. A 40% premium. Kim does not trade but immediately passes the information to two of her clients who purchase NanoCorp shares. Kim most likely has:

How sure are you?

Correct: A. Tipping is a violation of Standard II(A) regardless of whether the tipper personally trades. The Standard prohibits acting OR causing others to act on MNI. Kim caused her clients to act by passing them the information. The merger price ($45/share, 40% premium) is unambiguously material. The fact that the information came from a personal relationship rather than a professional channel is irrelevant. The source's duty of confidentiality and the materiality/nonpublic status determine the violation, not the relationship type.
B. Receiving information from a personal contact might seem like an independence/objectivity issue. Standard I(B) covers pressures on independence from third parties. This is a straightforward MNI tipping case under II(A).
C. Personal source might seem like it falls outside professional obligations. Standard II(A) applies to all members regardless of source. Whether the contact was a brother-in-law or a CEO does not change the analysis.

Unit: guidance-for-standards-i-vii

Question 42Exam level

A hedge fund manager purchases 2 million shares of SmallCapCo, representing 25% of its outstanding shares, over a two-week period using 15 different brokerage accounts to conceal the buying program. The purpose is to drive the price up before selling to unsuspecting investors at the inflated price. This activity most clearly violates:

How sure are you?

Correct: B. This is a textbook pump-and-dump scheme. A transaction-based market manipulation strategy. The manager is buying in large quantities through multiple accounts to artificially inflate price (manipulation), then intends to sell at the manipulated price. This is Standard II(B), not II(A). Standard II(A) involves trading on information; Standard II(B) involves distorting prices or artificially inflating volume. The intent to mislead market participants is explicitly present here.
A. Insider trading and market manipulation both involve wrongdoing. You might conflate them. Standard II(A) is about information advantage. There is no MNI here. The manager is creating a manipulated price through trades, not acting on secret information.
C. The manager is trading ahead of selling to clients, which sounds like priority of transactions. Standard VI(B) covers personal account trading ahead of client orders. Here the harm is to market participants generally through price manipulation, not priority sequencing.

Unit: guidance-for-standards-i-vii

Question 43Harder

An analyst at BrokerDealer simultaneously buys and sells the same security through two affiliated accounts to generate reported trading volume of 500,000 shares in a stock that normally trades 10,000 shares/day. The stated purpose is to attract retail investor attention. This is most likely described as:

How sure are you?

Correct: A. Wash trading (simultaneously buying and selling to generate artificial volume with no net change in position) is an explicit form of transaction-based market manipulation under Standard II(B). The intent is to mislead market participants about genuine trading interest. Volume inflation to attract retail investors is exactly the kind of practice that 'distorts prices or artificially inflates trading volume with intent to mislead.' Disclosure does not cure the violation. The practice itself is prohibited.
B. Front-running involves using internal trade information. The analyst knows about the trades. Front-running involves trading ahead of client orders for personal benefit. This is wash trading. A completely different violation type under II(B).
C. Disclosure resolves many CFA ethics violations. If you tell clients, the conflict is cured. Disclosure cures conflicts of interest and compensation arrangements, not market manipulation. The manipulation of public market data cannot be 'consented to' by disclosure.

Unit: guidance-for-standards-i-vii

Question 44Harder

David Park, CFA, receives a research report from a company IR department indicating that management expects to 'significantly beat' consensus Q3 earnings estimates. The report is marked 'For Analysts Only. Confidential' and has not been released to the public. Park purchases shares for his managed accounts. Park most likely has:

How sure are you?

Correct: B. The 'For Analysts Only. Confidential' label itself establishes that the information has not been broadly disseminated. It is explicitly nonpublic. 'Significantly beat' consensus earnings is unambiguously material. Whether the information arrived through official IR channels, an illegal leak, or a friend's whisper does not change the analysis. The test is: is it material? Is it nonpublic? Trading on it is prohibited regardless of delivery mechanism. This is precisely the selective disclosure scenario that Reg FD was designed to prevent.
A. Official channels sound legitimate. If IR sent it through proper channels, it seems authorized. Official channel does not mean public. The confidential designation and restricted distribution confirm nonpublic status.
C. Management guidance is common and often discussed openly on earnings calls. Management guidance is only public when broadly disseminated. Confidential guidance sent only to select analysts is selective disclosure. A violation of Reg FD for the company and II(A) for the analyst.

Unit: guidance-for-standards-i-vii

Question 45Harder

Which of the following pieces of information collected by a CFA analyst would most likely be considered nonpublic but NONMATERIAL, making its use appropriate under mosaic theory?

How sure are you?

Correct: B. Employee counts observed in a public place are nonpublic (they are not disseminated) but nonmaterial in isolation. Counting employees does not give the analyst specific knowledge of financial outcomes. It is a nonmaterial observation that contributes to a broader picture. This is exactly the kind of 'channel check' activity that mosaic theory protects. Options A, C, and D all involve material nonpublic information. FDA trial outcomes, board-approved dividends, and financial restatements are all unambiguously price-moving.
A. The analyst gathered it independently through a channel check. It feels like legitimate research. Regardless of how the analyst gathered it, FDA approval outcomes are material. The source's duty of confidentiality and the information's price impact make it MNI.
C. Leaked information might feel like a 'different category' from intentionally provided MNI. A leaked board resolution is material nonpublic information. The leak origin does not reduce materiality or nonpublic status.

Unit: guidance-for-standards-i-vii

Question 46Harder

A market rumor circulates widely on financial Twitter that AcquirerCo is planning to buy TargetCo. The rumor has not been confirmed by either company and no official announcement has been made. Elena Vasquez, CFA, researches the rumor, finds it credible based on public strategic logic and valuation analysis, and purchases TargetCo shares. Which statement best describes Vasquez's situation?

How sure are you?

Correct: A. A widely circulated rumor on a public platform is public information. It has been broadly disseminated. Once information is in the public domain, trading based on analysis of that information is permitted. Vasquez is not acting on a secret tip; she is reacting to public market information and adding her own public analysis (strategic logic, valuation). The fact that the rumor is unconfirmed does not make it nonpublic. Unconfirmed market rumors that are widely available to all investors are public for Standard II(A) purposes. This is a critical distinction many candidates miss.
B. Rumors are by definition unverified and feel like insider information. This is a major misconception. Unconfirmed ≠ nonpublic. The rumor's wide circulation makes it public. The violation occurs only if the analyst traded based on a private tip that sparked the rumor.
C. Spreading false information is separately prohibited under Standard II(B). Standard II(B) market manipulation could apply if she spread a false rumor, but that is separate. Her trading on the widely available rumor is not a Standard II(A) violation.

Unit: guidance-for-standards-i-vii

Question 47Exam level

Which of the following is the most likely example of information that is material but public, and therefore does NOT implicate Standard II(A)?

How sure are you?

Correct: B. An SEC 10-K filing is material public information. From the moment it is filed with the SEC and available on EDGAR, it is publicly available to all investors. Material public information may be freely traded upon. Options A, C, and D are all material nonpublic: the CFO's private comment about a 'challenging' quarter, a tip about a pending merger, and leaked board minutes are all nonpublic by definition. The 10-K is the only option where the information is simultaneously material AND public.
A. 'Challenging' sounds vague and potentially not material. Analyst meetings are routine. Private CFO guidance is nonpublic regardless of vagueness. Even directional guidance from a CFO in a private setting is nonpublic and potentially material.
C. Investment bankers have legitimate knowledge of deals. Their communications might seem like normal deal flow. Investment banker tips about pending mergers are quintessential MNI. Material, nonpublic, from a source with fiduciary duty.

Unit: guidance-for-standards-i-vii

Question 48Exam level

According to the CFA Standards, which of the following actions is most likely REQUIRED (not merely recommended) when a member receives what appears to be material nonpublic information?

How sure are you?

Correct: B. The CFA Standards require members who have received information they believe may be MNI to consult with their firm's compliance department and refrain from trading or recommending trades until legality is determined. This is a firm requirement, not merely best practice. Reporting to the SEC is not required by CFA Standards (though it may be required by applicable law). Disclosing to clients would itself be tipping. Documentation alone is insufficient. The member must not act while legality is unclear.
A. SEC reporting sounds like the responsible, compliant action. CFA Standards do not require SEC reporting. The member's obligation under the Standards is to refrain from trading and consult compliance. Regulatory reporting obligations are separate legal matters.
C. Fair dealing (Standard III) involves treating all clients fairly. Simultaneous disclosure sounds like a cure. Disclosing MNI to clients is itself a violation. It constitutes tipping. Standard II(A) prohibits causing others to act on MNI, which includes providing it to clients.

Unit: guidance-for-standards-i-vii

Question 49Exam level

Kara Chen, CFA, is a portfolio manager at a large investment firm. Her research department has just issued a Strong Buy recommendation on a technology stock. Chen updates the portfolios of her largest clients first because they pay higher fees. She notifies smaller retail clients two days later after the price has already moved. Which Standard has Chen MOST LIKELY violated?

How sure are you?

Correct: A. The correct answer is Standard III(B). Fair Dealing. Chen must disseminate investment recommendations to ALL clients simultaneously. Giving larger clients preferential advance notice based on fee level is explicitly prohibited. The timing delay disadvantaged smaller clients, violating the fair dealing requirement..
B. You might think favoritism toward large clients is a loyalty issue. III(A) concerns placing CLIENT interests before the manager's own interests or employer interests. The violation here is between client classes, which is specifically addressed by III(B).
C. The investment may not be suitable for all clients. Suitability concerns whether an investment matches a specific client's IPS. The violation here is the timing of dissemination. A III(B) issue, not a suitability issue.

Unit: guidance-for-standards-i-vii

Question 50Harder

David Park, CFA, manages a discretionary account for Margaret Wilson, a 68-year-old retiree. Her IPS specifies capital preservation and income generation with low risk tolerance. Wilson contacts Park and instructs him to invest 40% of her portfolio in a speculative biotech startup. Park believes this is completely inconsistent with her IPS. What is Park's MOST APPROPRIATE course of action?

How sure are you?

Correct: A. The correct answer is Park should inform Wilson that the investment is inconsistent with her IPS objectives and risk tolerance, document the discussion, and decline to make the investment unless Wilson explicitly acknowledges the inconsistency and consents after being informed. If she insists, Park should consider whether to continue the relationship. He should NOT simply comply without raising the suitability concern..
B. You might believe client autonomy overrides everything. For managed/discretionary accounts, the manager has a fiduciary obligation to flag unsuitable instructions. Blind compliance without suitability analysis violates III(C).
C. The trade does appear unsuitable, so refusing seems protective. The manager cannot unilaterally refuse a client instruction indefinitely. The correct action is to inform, document, and if necessary modify or terminate the relationship. Not to simply override the client's directive.

Unit: guidance-for-standards-i-vii

Question 51Harder

Thomas Rivera, CFA, is evaluating whether to include a high-yield junk bond in a client's diversified portfolio. The bond has a CCC rating and high default risk viewed in isolation. Rivera's supervisor argues this violates the Prudent Investor Rule because junk bonds are inherently imprudent. Which statement most likely reflects the Prudent Investor Rule?

How sure are you?

Correct: A. The correct answer is The Prudent Investor Rule is applied at the PORTFOLIO level, not the individual security level. A high-yield bond that appears risky in isolation can be a prudent holding if it contributes to the portfolio's overall risk-return profile consistent with the client's IPS. Rivera's supervisor is applying the wrong standard. The old 'prudent man rule' evaluated each security in isolation, but the modern Prudent Investor Rule does not..
B. Client autonomy seems to justify inclusions. Suitability and prudence are still required regardless of client instruction. Client request does not automatically make an investment prudent.
C. The word 'prudent' implies caution and conservatism. The rule explicitly allows higher-risk securities when appropriate in portfolio context. The manager must assess contribution to overall portfolio objectives, not label individual securities as imprudent.

Unit: guidance-for-standards-i-vii

Question 52Exam level

Sarah Mitchell, CFA, is a portfolio manager at an institutional firm. Her firm is underwriting a hot IPO that is oversubscribed. Mitchell allocates 500 shares to each of her 20 largest clients and 50 shares to each of her 80 smaller clients, based on account size and prior indication of interest. A compliance officer questions whether this violates Standard III(B). Which response BEST describes the compliance situation?

How sure are you?

Correct: A. The correct answer is Mitchell has NOT violated Standard III(B). Fair dealing does NOT require equal allocation. Allocating based on account size, suitability, and prior indication of interest is explicitly permitted. The Standard only prohibits discriminatory allocation based on favoritism, relationships, or other non-legitimate criteria. A systematic, objective allocation method based on relevant client factors is compliant..
B. This is the most common wrong answer. 'fair' sounds like 'equal'. III(B) explicitly states that fair dealing does not mean equal dealing. Proportional allocation based on account size and suitability factors is explicitly permitted.
C. Industry practice sometimes segregates IPO access. The Standards require fair access to ALL clients. Completely excluding retail clients would be a violation. The proportional allocation in this scenario is compliant.

Unit: guidance-for-standards-i-vii

Question 53Exam level

Portfolio manager Lisa Wang, CFA, is preparing a marketing brochure for her firm. She selects the 10 best-performing client accounts over the past 5 years to display as the firm's track record. The 15 other accounts managed over the same period had lower returns, and 3 accounts were terminated. Wang does not include the terminated accounts in the display. Which standard has Wang MOST LIKELY violated?

How sure are you?

Correct: A. The correct answer is Wang has violated Standard III(D). Performance Presentation. Cherry-picking only the best-performing accounts misrepresents the firm's actual track record. Excluding terminated accounts (survivorship bias) further distorts the performance record. Members must present performance fairly, accurately, and in full context. Including all accounts in a composite and terminated accounts. GIPS specifically addresses both of these presentation failures..
B. The deceptive presentation harms prospective clients. While prospective clients are harmed, the specific standard governing performance misrepresentation is III(D). III(A) governs loyalty to existing clients.
C. Logically, past terminated accounts seem irrelevant to current capability. Including only surviving accounts creates survivorship bias. A specific violation under III(D). Terminated accounts must be included for honest composite construction.

Unit: guidance-for-standards-i-vii

Question 54Exam level

John Adams, CFA, is meeting with his client Robert Chen. During the meeting, Chen mentions that he regularly uses insider information from his position as a corporate director to trade stocks in his personal account. Adams believes this constitutes illegal activity. What should most likely Adams do FIRST?

How sure are you?

Correct: A. The correct answer is Adams should consult with his firm's compliance department and/or legal counsel to determine the appropriate course of action. Confidentiality is not absolute when illegal activity is involved, but the member should not immediately report to regulators without first consulting internal compliance and legal advisors. The Standards do not require Adams to report but do allow him to do so. And the decision should be made in consultation with legal counsel..
B. Illegal activity seems to demand immediate regulatory reporting. The Standards do not require immediate external reporting. The first step is to consult compliance and legal counsel. Mandatory reporting depends on jurisdiction.
C. Termination seems like a clean, ethical response. While termination may eventually be appropriate, the required first step is internal consultation with compliance/legal. Unilateral immediate action without consultation is not the Standards-compliant response.

Unit: guidance-for-standards-i-vii

Question 55Harder

Andrea Thompson, CFA, directs her clients' brokerage commissions to a specific broker-dealer in exchange for receiving Bloomberg terminal access and proprietary research reports that she uses to enhance her investment analysis. Thompson believes this benefits her clients because better research leads to better investment decisions. Has Thompson violated Standard III(A), most likely?

How sure are you?

Correct: A. The correct answer is Potentially yes. If the soft-dollar arrangement generates research that directly benefits the clients whose commissions are being used, it may be permissible. But only if: (1) the client brokerage generates research that primarily benefits those clients, (2) the commissions paid are reasonable relative to the services received, and (3) the arrangement is disclosed to clients. If the research benefits Thompson's OTHER clients or primarily benefits Thompson herself, this is a violation of III(A). Client brokerage belongs to the client, not the manager..
B. The indirect benefit argument seems reasonable. The Standards require that soft-dollar research PRIMARILY benefit the specific clients whose commissions are being directed. General benefit to the manager or other clients is insufficient.
C. Widespread practice seems to imply acceptability. Standard industry practice does not override CFA Standards. The test is whether the specific arrangement meets disclosure, proportionality, and client-benefit requirements.

Unit: guidance-for-standards-i-vii

Question 56Harder

Michael Torres, CFA, has just taken on a new advisory client, Jennifer Kim. Kim is impatient and wants Torres to immediately recommend investments for her $500,000 portfolio. Kim refuses to provide details about her financial situation, risk tolerance, or investment objectives. Torres recommends a balanced index fund as a 'safe' starting point. Which statement BEST describes Torres's compliance with the Standards?

How sure are you?

Correct: A. The correct answer is Torres has violated Standard III(C). Members must make a reasonable effort to gather client information sufficient to assess suitability BEFORE making any recommendations. Torres cannot recommend any investment, even a seemingly conservative balanced fund, without first understanding the client's IPS elements. If Kim refuses to provide information, Torres should explain that he cannot make suitable recommendations without it, and document the refusal..
B. Balanced funds are conservative and broadly diversified. The Standards do not allow assumptions about suitability based on perceived conservatism. Without IPS information, any recommendation violates III(C), regardless of how conservative the investment appears.
C. Disclosure seems to cover liability. Disclosure does not substitute for actual suitability determination. The obligation is to GATHER the information needed for suitability analysis, not to disclose its absence and proceed anyway.

Unit: guidance-for-standards-i-vii

Question 57Exam level

Rachel Green, CFA, works at an investment firm with both institutional and retail client divisions. When her research team issues a new sell recommendation, Green personally calls her three largest institutional clients immediately to inform them. She then sends the recommendation to all remaining clients via the firm's standard distribution email 45 minutes later. Has Green violated Standard III(B), most likely?

How sure are you?

Correct: A. The correct answer is Yes. Green has violated Standard III(B). Investment recommendations must be disseminated to ALL clients simultaneously. This meaning at the same time, not in sequence. The 45-minute gap between calling institutional clients and emailing retail clients allowed the institutional clients to act on the sell recommendation before retail clients received it. The size of the client does not justify priority dissemination..
B. Administrative delays seem unavoidable in practice. The Standards require simultaneous dissemination. An intentional 45-minute delay that gives some clients a trading advantage violates III(B), regardless of the operational rationale.
C. Favoritism seems to implicate loyalty to one client group. The relevant standard is III(B), Fair Dealing, which specifically governs the timing and manner of disseminating investment recommendations and actions. III(A) covers loyalty to individual clients vs manager interests.

Unit: guidance-for-standards-i-vii

Question 58Harder

Investment manager Carlos Rivera, CFA, is marketing a new quantitative strategy his firm developed in 2024. The firm has no actual client performance history for the strategy. Rivera's brochure shows strong returns from 2019–2023 with a footnote stating 'returns are simulated based on back-tested model.' Has Rivera violated Standard III(D), most likely?

How sure are you?

Correct: A. The correct answer is Potentially no. IF the disclosure is prominent and accurate. The Standards allow presentation of simulated or back-tested results IF clearly and prominently disclosed as simulated. The footnote must be conspicuous enough that clients understand the returns are NOT actual. However, if the footnote is buried, in fine print, or not prominently placed, the presentation would mislead prospective clients about actual performance and violate III(D)..
B. Simulated results sound inherently deceptive. The Standards do not prohibit back-tested results. They require prominent, clear disclosure that the results are simulated, not actual. Compliance depends on how the disclosure is made.
C. Actual results since inception seem like the safest approach. While actual-only is the safest approach, back-tested results with proper disclosure are explicitly permitted under the Standards. The question is adequacy of disclosure, not a categorical prohibition.

Unit: guidance-for-standards-i-vii

Question 59Above the exam

An analyst, in the same week, (1) accepts a small gift from a client that is customary in the client's culture and immediately discloses it to her employer, and (2) fails to keep records supporting a buy recommendation she issued from memory. Which of her two actions is most likely a genuine Standards violation?

How sure are you?

Correct: B. A modest gift that is customary in the client's culture, promptly disclosed to the employer, does not by itself violate Standard I(B) (Independence and Objectivity); disclosure and reasonableness are exactly what the guidance for that Standard looks for. Issuing a recommendation without retaining the records that support it, however, is a direct violation of Standard V(C), Record Retention, regardless of whether the recommendation itself turned out to be sound.
A. The guidance for Standard I(B) does not treat every client gift as an automatic violation; a modest, culturally customary gift that is disclosed to the employer is specifically the kind of fact pattern the guidance treats as acceptable, not presumptively wrong.
C. Treating both as equal violations misses that the gift scenario, as described (modest, customary, disclosed), is compliant under the Standard I(B) guidance; only the recordkeeping lapse is an actual violation here.

Unit: guidance-for-standards-i-vii

Question 60Above the exam

A member discovers that her firm's written compliance procedures adequately address insider trading (Standard II(A)) but say nothing at all about how employees should handle material nonpublic information received accidentally from a corporate insider. Under the guidance for Standard IV(C), Responsibilities of Supervisors, and Standard II(A) together, the member's most likely best course of action is to:

How sure are you?

Correct: B. Standard IV(C) guidance calls for members with supervisory or compliance responsibility to recommend that adequate compliance procedures be adopted and to escalate known gaps rather than ignore them. A general prohibition on trading on material nonpublic information (Standard II(A)) is not the same as having a written PROCEDURE addressing a specific accidental-receipt scenario; combining the two LOS, the correct response is to flag and push for the procedural gap to be closed through the firm's own compliance channel.
A. A general prohibition on trading on inside information is not a substitute for a written PROCEDURE telling employees what to do in a specific accidental-receipt scenario; the gap identified here is a compliance-procedure gap, which Standard IV(C) guidance says should be raised, not ignored just because a related Standard exists.
C. An individual member is not authorized to unilaterally implement firm-wide policy without escalating through her firm's own compliance and supervisory structure; doing so bypasses the very process the guidance for Standard IV(C) describes.

Unit: guidance-for-standards-i-vii