Standard 1: Professionalism

1. In cases where the laws of a member or candidate’s country of residence, the local laws of regions where the member or candidate does business, and the Code and Standards specify different requirements, the member or candidate must abide by

1. Local law or the Code and Standards, whichever is stricter.
2. The Code and Standards or his country’s laws, whichever are stricter. C. the strictest of local law, his country’s laws, or the Code and Standards.
3. the strictest of local law, his country’s laws, or the Code and Standards.

Answer:

C] To comply with StandardI(A) Knowledge of the Law, a member rmust always abide by the strictest applicable law, regulation, or standard.

2. According to the Standard on independence and objectivity, members and candidates:

1. may accept gifts or bonuses from clients.
2. may not accept compensation from an issuer of securities in return for producing research on those securities.
3. should consider credit ratings issued by recognized agencies to be objective measures of credit quality

Answer:

A] Gifts from clients are acceptable under Standard I(B) Independence and Objectivity, but the Standard requires members and candidates to disclose such gifts to their employers. Standard I(B) allows issuer-paid research as long as the analysis is thorough, independent, unbiased, and has a reasonable and adequate basis for its conclusions, and the compensation from the issuer is disclosed. Members and candidates should consider the potential for conflicts of interest inherent in credit ratings and may need to do independent research to evaluate the soundness of these ratings.

Standard 2: Integrity Of Capital Markets

3. The mosaic theory is the idea that an analyst can:

1. base his recommendations on nonpublic material information only for the clients of the company, but not for the general public.
2. make recommendations or trade based on several pieces of public or nonpublic information, each piece by itself being nonmaterial, but when compiled the information becomes material.
3. make investment recommendations on the basis of several pieces of nonpublic information as long as the aggregate information remains nonmaterial.

Answer:

B]The mosaic theory permits an analyst to make recommendations based upon several pieces of public or nonmaterial information, even though the complied result is both material and nonpublic.

4. Which of the following is a violation of Standard II(B), Market Manipulation?

1. Engaging in a block trade to limit the effect on the price of a thinly traded security.
2. Implementing a trading strategy to exploit differences in market power and information.
3. Overstating an earnings projection in order to increase the price of a stock.

Answer:

C] Standard II(B), Market Manipulation, is not intended to prohibit transactions that are done in order to minimize income taxes or trading strategies that are not intended to distort prices or artificially inflate trading volume. Overstating earnings projections in order to increase the price of a stock is a direct violation.

Standard 3: Duties To Clients

5. Which of the following most accurately states a limitation that the Fair Dealing standard imposes?

1. Clients should not be discriminated against when disseminating investment recommendations.
2. Referral fees may be disclosed after proceeding with an agreement for service.
3. Before trading on her own portfolio, a CFA charter holder must wait for employer and client deals to be executed.

Answer:

A]Standard III(B) Fair Dealing states that the dissemination of information and recommendations to clients must be handled fairly. The other choices are related to Standard VI(B) Priority of Transactions and Standard VI(C) Referral Fees.

6. According to Standard III(C) Suitability, which of the following is least likely to be considered a relevant factor in determining the appropriateness and suitability of investment recommendations or actions for each portfolio or client?

1. Basic characteristics of the total portfolio.
2. Needs and circumstances of the portfolio or client.
3. Best interests of the investment professional.

Answer:

C] Determining appropriateness and suitability focuses on the portfolio or client, not on the investment professional. Investment professionals should take particular care to ensure that their goals in selling products or executing security transactions do not conflict with the best interests of the client.

7]While analyzing his clients' statements, a portfolio analyst who is a CFA charter holder, determines that one client is probably involved in illegal activities. According to Standard III(E), Preservation of Confidentiality, the analyst may NOT do which of the following?

1. Contact the appropriate governmental authorities about the determination.
2. Contact the CFA Institute about the determination.
3. There are no exceptions in this list.

Answer:

C] Standard III(E) allows an analyst to reveal information about a client to CFA Institute since CFA Institute will keep the information confidential. If the analyst is reasonably certain a law has been violated, an analyst may have an obligation to report the activities to the appropriate authorities. Therefore, neither of the listed actions are exception from the analyst's options.

Standard 4: Duties To Employers

8] If a member or candidate wishes to engage in an independent practice that may conflict with her employer's interests, she is least likely required to notify her employer of:

1. the types of services she will provide.
2. the compensation she will receive.
3. the number of clients her practice will serve.

Answer:

C] She must provide information to her employer about the type of services, the compensation arrangement, and the expected duration of the services.

9] An analyst belongs to a nationally recognized charitable organization, which requires dues for membership. The analyst has worked out a deal where he provides money management advice instead of paying dues. Which of the following must the analyst do?

1. Resign from the position because the relationship is a conflict with the Standards.
2. Must treat the charitable organization as his employer.
3. Nothing since he is not an employee of the charitable organization.

Answer:

B]An employee/employer relationship does not necessarily mean monetary compensation for services. If the analyst is performing services for the organization, then the analyst must treat the position as if he were an employee.

10]Natalie John, CFA, a supervisor at a boutique investment advisory firm, has tried unsuccessfully to convince top management of the firm's need for a formal, comprehensive compliance program. What is John’s most appropriate course of action?

1. Decline in writing to accept supervisory responsibility.
2. Rely on the Code and Standards to perform her duties as a supervisor.
3. Resign from the firm if no compliance program is institute

Answer:

A]According to Standard IV(C) Responsibilities of Supervisors, John should decline in writing to accept supervisory responsibility until the firm adopts adequate compliance procedures.

Standard 5:Investment Analysis, Recommendations, and Actions

11. An investment analyst receives a research report from his colleague. The colleague's report has an elaborate table with performance data on publicly traded stocks. The colleague says the data in the table consists of measures provided by Bloomberg. The analyst finds the table a useful reference for a report she is writing. She uses several pieces of data from the table. The analyst is potentially in violation of:

1. no particular standard because this is an appropriate activity.
2. Standard V(A), Diligence and Reasonable Basis, if she does not first verify the data in the table is accurate.
3. Standard I(C), Misrepresentation, concerning the use of the work of others.

Answer:

B]Since the data in the table supposedly comes from Bloomberg, a recognized data source, the analyst does not have to cite the source of the data. However, the analyst needs to use reasonable care and verify that the data is accurate by going back to the source. Had the analyst printed the table prepared by her colleague without acknowledgment, the analyst would have violated Standard I(C), Misrepresentation.

12] In preparing research reports, which of the following is least likely required or recommended by the Code and Standards?

1. Attribute paraphrases and summaries of material prepared by others.
2. Maintain copies of materials that were relied on in preparing the research report.
3. Send all reports to the firm's legal counsel to ensure compliance with securities laws.

Answer:

C]Members do not need to send all reports to the firm's legal counsel to ensure compliance with securities laws.

13] Jane Davey, CFA, is a research analyst following XYZ Co. All the information she has gathered suggests the stock should be rated a weak "hold." During a recent lunch, Davey overheard another analyst say that the stock should be rated a "buy." Davey returns to her office and issues a "buy" recommendation. Davey has most likely violated the Code and Standards by:

1. failing to distinguish between fact and opinion.
2. recommending an investment action without a reasonable basis.
3. acting or causing others to act on material nonpublic information.

Answer:

B]Standard V(A) Diligence and Reasonable Basis requires members and candidates to have a reasonable and adequate basis, supported by appropriate research and investigation, for their recommendations.

Standard 6:Conflicts of Interest

14]Which of the following statements is most accurate about Standard VI concerning referral fees?

1. Referral fees may be disclosed before or after proceeding with an agreement for service.
2. Referral fees must be disclosed after proceeding with an agreement for service.
3. Referral fees must be disclosed before proceeding with an agreement for service.

Answer:

C] According to Standard VI(C) Referral Fees, such fees must be disclosed before proceeding with an agreement for service. This gives the client or employer the opportunity to compute the full cost of the service and to evaluate any potential partiality in the recommendation.

15]Bill Good, CFA, refers many of his clients to Clark Towers, CPA, for accounting services. In return, Towers performs routine services for Good, such as his tax returns, for no charge. Towers has just become a member of the CFA Institute. With this development, Towers must:

1. discontinue his services for Good.
2. only reveal to the prospects referred by Good that he performs services for Good.
3. reveal to the prospects referred by Good that he performs services for Good, along with the estimated value of those services.

Answer:

C] According to VI(C), Referral Fees, as a member of CFA Institute, Towers must tell his clients about the payment in kind to Smith along with an estimate of the value of those services.

16] Mike Smith, CFA, is preparing a purchase recommendation on Unity Construction for his research firm. Which of the following least likely represents a conflict of interest that Smith should disclose in his report?

1. Smith's research firm has a large stake of ownership in Unity
2. Smith's cousin repairs machines for Unity.
3. Unity hires Smith as a consultant to analyze Unity's financial statement

Answer:

B]Standard VI(A) Disclosure of Conflicts defines what constitutes a conflict of interest with regard to clients, prospective clients, and employers. All of these represent potential conflicts of interest with the exception of the cousin working for Unity Construction in a job that is unrelated to Unity's financing.

Standard 7:Responsibilities as a CFA Institute Member or CFA Candidate

17]Which of the following is least likely an appropriate use of the CFA designation?

1. Chris Stark, as a CFA charter holder, will outperform the market.
2. Chris Stark, CFA.
3. Chris Stark has earned the CFA designation by passing three exams, all on his first attempt

Answer:

A] Members may not over-promise their performance as CFA charterholders. They may follow their name with the designation and describe, factually, the requirements for becoming a charter holder. It is acceptable for a member to state that he passed the exams on his first attempts if that is true.

18]Aditya Singh is registered to sit for the Level II CFA exam. Unfortunately, Singh has failed the exam for the past two years. In his frustration, Singh posted the following comment on a popular internet bulletin board: "I believe that CFA Institute is intentionally limiting the number of charterholders in order to increase its cash flow by continuing to fail candidates. Just look at the pass rates."

With regard to the Standards concerning misconduct and conduct as participants in CFA Institute programs, Singh is:

1. in violation of only one of these Standards.
2. in violation of both of these Standards.
3. not in violation of either Standard.

Answer:

C] Standard VII(A) Conduct as Participants in CFA Institute Programs does not prohibit expressing opinions about the CFA program or CFA Institute. Nothing in the facts indicates a violation of Standard I(D) Misconduct, which deals with professional conduct involving dishonesty, fraud, or deceit.

19]You are a research analyst offering portfolio management services. All of the following statements in promotion of your services are in violation of the CFA Institute Standards of Practice handbook EXCEPT:

1. based upon my research, you will achieve a 20% compound annual rate of return on small-cap stocks over the next 5 years.
2. I guarantee that you will receive returns in excess of the market index average under my management.
3. I passed Level II of the CFA Program in 2003.

Answer:

C] Candidates may refer to the CFA level(s) passed and the associated dates as long as a partial designation is not implied. They may not guarantee or promise a given level of return.

20]Chris Vans, a stockbroker who has completed Level I of the CFA program and is registered for the next Level II CFA exam, may:

1. not to mention that he is involved in the CFA Program until he has passed all three levels.
2. state that he is a Level II candidate in the CFA Program.
3. use the Level I CFA designation since he has passed the Level I exam.

Answer:

B]According to Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program, Chris may refer to his participation in the program but must state that he is a candidate and specify the level of the exam for which he is registered. There is no partial designation.

Global Investment Performance Standards

21] Which of the following parties may adopt and claim compliance with Global Investment Performance Standards (GIPS)?

1. A software firm that developed a software package that assists investment firms in achieving GIPS compliance.
2. The chief compliance officer for a regional money manager.
3. An investment management firm located in New York.

Answer:

C]Only an investment firm that actually manages assets can claim compliance with GIPS.

22]Which of the following statements most accurately describes the requirements for GIPS verification?

1. A firm must select a representative set of composites for third-party GIPS verification.
2. Third-party verification is required for a firm to claim compliance with GIPS.
3. Verification of GIPS compliance is recommended, but not required.

Answer:

C]Verification of GIPS compliance is recommended but not required. If a firm chooses verification, GIPS requires the verification to be performed by a third party and apply to the entire firm's methods and practices, rather than that of selected composites.

23]The purpose of composites in a GIPS-compliant performance presentation is to:

1. clearly distinguish the entity that is presented to the public as a GIPS-compliant firm.
2. provide information about a firm’s performance in various asset classes or investment strategies.
3. present overall firm performance in a single statistic that is comparable across firms.

Answer:

B]The purpose of composites is to give clients and prospects information about a firm's past performance managing investments in various asset classes or investment strategies.

24]With regard to Global Investment Performance Standards (GIPS), if the Chief Investment Officer of an asset management firm also is a CFA charter holder:

1. the firm is required to comply with GIPS.
2. the charter holder is required to comply with GIPS.
3. neither the firm nor the charter holder are required to comply with GIPS.

Answer:

C]Adoption of GIPS is voluntary for firms. GIPS applies to firms, not individuals.

25]Ashwin James, CFA, is reading an online forum discussion about the construction and purpose of composites in performance reporting. He finds these statements from participants:

Statement 1: The purpose of composites is to let investors know how well a firm has performed managing different types of securities or investment strategies.

Statement 2: A managed portfolio should have a performance history of at least one year before the firm assigns it to a composite.

With respect to both statements:

1. both are correct.
2. both are incorrect.
3. only one is correct.

Answer:

C] James should agree with Statement 1 but disagree with Statement 2. Reporting on the performance of composites gives clients and prospects information about the firm's success in managing various types of securities or investment styles. The firm should identify which composite each managed portfolio will be included in before the portfolio's performance is known, to prevent the firm from including portfolios selectively and artificially creating composites with superior returns.

Reviewing these top 25 ethics questions will help you understand how the CFA Institute frames ethics-related problems and improve your exam preparedness.

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