CFA Program — Ethics

Question 1

A portfolio manager personally purchases shares of a small-cap stock the day before recommending it to clients, intending to sell his shares once the price rises from client buying. This is most likely a violation of which Standard?

• A) Standard I(A) - Knowledge of the Law
• B) Standard VI(B) - Priority of Transactions
• C) Standard IV(A) - Loyalty to Employer
• D) Standard V(C) - Record Retention

Question 2

Under the Asset Manager Code of Professional Conduct, firms are expected to do all of the following EXCEPT:

• A) Establish a fair and equitable trade allocation process
• B) Disclose conflicts of interest to clients
• C) Guarantee a minimum rate of return to attract new clients
• D) Maintain adequate compliance procedures

Question 3

Which of the following best describes the requirement under Standard I(C) - Misrepresentation?

• A) Members may exaggerate investment performance if the exaggeration is minor
• B) Members must not make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities
• C) Misrepresentation only applies to written communications, not verbal ones
• D) Misrepresentation rules apply only to communications with existing clients, not prospects

Question 4

A member serves on the board of a public company and also covers that company as a sell-side analyst. To comply with the Standards, the member should primarily:

• A) Resign from either the board position or the analyst coverage, or ensure the conflict is disclosed and the objectivity of research is preserved
• B) Continue both roles without disclosure since board service is a personal matter
• C) Only disclose the conflict if a client specifically asks about it
• D) Transfer coverage of the company to a colleague only if requested by the employer

Question 5

A CFA charterholder discovers that her firm's marketing materials overstate the historical performance of a fund by including back-tested results without disclosure. She raises the issue internally but her supervisor tells her to ignore it. What should she do next?

• A) Comply with her supervisor's instruction since he has authority over her
• B) Say nothing further, since she already raised the issue once
• C) Dissociate from the activity, which may include reporting the practice through firm channels or refusing to be associated with the materials
• D) Immediately report the firm to the CFA Institute Professional Conduct Program

Question 6

An analyst is asked by his employer to sign a non-compete agreement that would also require him to violate client confidentiality if enforced literally. Under Standard III(E) - Preservation of Confidentiality, which of the following is true?

• A) The analyst must always follow employer agreements over client confidentiality
• B) Client confidentiality obligations continue to apply and generally take precedence over conflicting employer contract terms
• C) Confidentiality only applies while the analyst is actively employed
• D) Confidentiality obligations do not apply to non-compete agreements

Question 7

A member is offered a bonus by a mutual fund company for directing client assets into that fund, above and beyond his standard employer compensation, and he does not disclose this to his employer or clients. Which Standard is most directly violated?

• A) Standard I(A) – Knowledge of the Law
• B) Standard IV(B) – Additional Compensation Arrangements
• C) Standard II(B) – Market Manipulation
• D) Standard VII(A) – Conduct as Members and Candidates

Question 8

A member recommends a security to clients without having a reasonable and adequate basis for the recommendation, relying solely on a stock tip from an acquaintance at a cocktail party. Which Standard is most likely violated?

• A) Standard V(A) – Diligence and Reasonable Basis
• B) Standard III(B) – Fair Dealing
• C) Standard IV(B) – Additional Compensation Arrangements
• D) Standard I(D) – Misconduct

Question 9

A member who manages a family trust as a side activity, unrelated to her employer's business, fails to inform her employer of this outside activity, which does not compete with or create a conflict for her employer. Is this most likely a violation of Standard IV(A), Loyalty?

• A) Yes, always a violation regardless of any conflict.
• B) Yes, because all outside activities must be pre-approved by CFA Institute.
• C) No, because family matters are never covered by the Standards.
• D) Not necessarily a violation, since the outside activity does not conflict with or compete against the employer, though many firms independently require such disclosure by policy.

Question 10

An analyst discovers a material error in a previously published research report. What does Standard V(A) most directly require the analyst to do?

• A) Ignore the error unless a client specifically asks about it.
• B) Delete the original report from all records permanently.
• C) Promptly correct or withdraw the erroneous report and communicate the correction to those who relied on it.
• D) Wait until the next scheduled report to quietly fix the error.

Question 11

A member changes the recommendation on a stock from "buy" to "sell" based on new, credible negative information. Before the report is published, she executes a personal trade to sell her own shares, then publishes the report the next day. Which Standard is most likely violated?

• A) Standard VI(B) – Priority of Transactions
• B) Standard III(A) – Loyalty, Prudence, and Care
• C) Standard V(C) – Record Retention
• D) Standard I(C) – Misrepresentation

Question 12

A candidate registered for the Level I CFA exam has failed the exam twice. May the candidate accurately state on a resume that they are "pursuing the CFA credential"?

• A) No, candidates may never mention the CFA Program on a resume under any circumstances.
• B) Yes, and they may also claim to be a "CFA Level II holder" for marketing purposes.
• C) No, only charterholders may mention the CFA Program at all.
• D) Yes, as long as the statement does not imply that passage of the exam(s) is assured or that any particular status has been achieved beyond current registration/candidacy.

Question 13

A member learns, through a legitimate industry conference presentation open to the public, information about a company's upcoming product launch that has not yet been covered by mainstream financial media, though it was announced without restriction to all conference attendees. She incorporates this into her research. Is this most likely a violation of Standard II(A)?

• A) Yes, since any information not yet covered by major media outlets is automatically nonpublic.
• B) Yes, because conference presentations are always confidential by default.
• C) No, but only if she personally knows every attendee at the conference.
• D) No, because the information was disclosed to a wide public audience at an open conference and is not considered nonpublic, even though mainstream media has not yet reported on it.

Question 14

A member is a portfolio manager who also serves as a part-time paid consultant for a company whose stock she sometimes recommends to clients. She discloses this consulting relationship in writing to her employer and to clients before making any recommendation. Is this arrangement most likely consistent with the Standards?

• A) Yes, provided the disclosure is made and the member's recommendations remain independent and objective despite the relationship.
• B) No, members may never hold any outside consulting role under any circumstances.
• C) No, disclosure to the employer alone is sufficient and disclosure to clients is unnecessary.
• D) Yes, but only if the member stops making any recommendations about that company entirely.

Question 15

A CFA charterholder is quoted in a news article discussing general market trends. The reporter, without the charterholder's review, adds a headline implying the charterholder specifically recommends buying a particular stock, which the charterholder never actually said. What is the charterholder's most appropriate response under the Standards?

• A) Do nothing, since the charterholder did not personally write the headline.
• B) Immediately resign from the CFA Program.
• C) Sue the reporter regardless of the firm's or CFA Institute's guidance.
• D) Take reasonable steps to correct the misrepresentation, such as contacting the publication to request a correction, since allowing an inaccurate impression to stand unaddressed could raise concerns under Standard I(C).

Question 16

A member accepts a new job offer while still employed at her current firm. Before formally resigning, she begins contacting several of her current firm's clients to inform them she will soon be moving and to solicit their business for her new employer. Which Standard does this most likely violate?

• A) Standard IV(A) – Loyalty
• B) Standard I(B) – Independence and Objectivity
• C) Standard V(C) – Record Retention
• D) Standard II(B) – Market Manipulation

Question 17

A member's firm prepares GIPS-compliant performance reports. Which of the following best reflects a core principle behind the GIPS standards?

• A) Eliminating the need for any independent verification of performance claims.
• B) Full disclosure and fair representation of investment performance, enabling meaningful comparison across firms.
• C) Guaranteeing a specific minimum return to all composite members.
• D) Allowing firms to selectively exclude any underperforming accounts from composites at will.

Question 18

A supervisor at an investment firm receives a report suggesting a subordinate may be violating securities laws, but delays action for several weeks while conducting a thorough internal investigation before taking corrective steps. Is this delay itself necessarily inconsistent with Standard IV(C)?

• A) No, supervisors have no obligation to ever investigate reported concerns.
• B) Yes, because Standard IV(C) requires investigation to be completed within 24 hours in all cases.
• C) Not necessarily -- a reasonable, good-faith investigation before acting can be consistent with the supervisor's duty, as long as the delay is not used to conceal misconduct or allow it to continue unchecked in the meantime.
• D) Yes, any delay of any length is always a violation regardless of the reason.

Question 19

A portfolio manager receives a gift worth $500 from a client after achieving exceptional returns. According to the Standards of Professional Conduct, the manager should:

• A) Accept the gift without disclosure since it is from a client, not a third party
• B) Decline the gift to avoid any appearance of conflict
• C) Accept the gift only after disclosing it to her employer
• D) Accept the gift and disclose it in the next quarterly report to all clients

Question 20

An analyst issues a research report recommending a stock. She fails to disclose that her husband owns 10,000 shares of that company. Which CFA Institute Standard is most likely violated?

• A) Standard I(B) – Independence and Objectivity
• B) Standard VI(A) – Disclosure of Conflicts
• C) Standard V(A) – Diligence and Reasonable Basis
• D) Standard II(A) – Material Nonpublic Information

Question 21

An investment banker overhears colleagues discussing an upcoming merger between two public companies. If he trades on this information, he most likely violates:

• A) Standard II(A) – Material Nonpublic Information
• B) Standard VI(B) – Priority of Transactions
• C) Standard III(B) – Fair Dealing
• D) Standard I(A) – Knowledge of the Law

Question 22

Which of the following best describes the 'mosaic theory' under CFA Institute Standards?

• A) Combining material nonpublic information with public data to form an investment conclusion
• B) Combining multiple pieces of nonmaterial nonpublic information to create a material conclusion is always prohibited
• C) An analyst may use public information and nonmaterial nonpublic information to form conclusions not independently available
• D) Mosaic theory applies only to fixed-income analysts

Question 23

A research analyst changes a buy recommendation to a hold one day before the firm's investment banking division closes a deal with that company. The most likely violated standard is:

• A) Standard I(B) – Independence and Objectivity
• B) Standard V(B) – Communication with Clients
• C) Standard II(B) – Market Manipulation
• D) Standard III(E) – Preservation of Confidentiality

Question 24

Under the Asset Manager Code, firms must keep client assets:

• A) Commingled to reduce administrative costs
• B) Separate from the firm's own assets
• C) In government bonds unless the client specifies otherwise
• D) Subject to a minimum 90-day lock-up period

Question 25

A portfolio manager allocates newly issued shares of a hot IPO to her personal account before allocating shares to client accounts that had also requested the issue. Which Standard is most likely violated?

• A) Standard III(B) – Fair Dealing
• B) Standard I(A) – Knowledge of the Law
• C) Standard IV(A) – Loyalty to Employer
• D) Standard V(B) – Communication with Clients

Question 26

An analyst learns from a friend at a public company, in a casual conversation outside of work, that the company will miss its earnings target due to a factory shutdown. This information has not been disclosed publicly. The analyst updates his research model and lowers his rating on the stock. Which Standard is most likely violated?

• A) Standard V(A) – Diligence and Reasonable Basis
• B) Standard III(C) – Preservation of Confidentiality
• C) Standard I(B) – Independence and Objectivity
• D) Standard II(A) – Material Nonpublic Information

Question 27

A CFA charterholder includes in her marketing materials a claim that clients who followed her recommendations over the past five years averaged a 22% annual return, based on the performance of her three best client accounts, without mentioning her other accounts underperformed significantly. Which Standard is most likely violated?

• A) Standard IV(C) – Responsibilities of Supervisors
• B) Standard II(B) – Market Manipulation
• C) Standard III(D) – Performance Presentation
• D) Standard VI(B) – Priority of Transactions

Question 28

A member changes jobs and, without his former employer's permission, brings a spreadsheet of proprietary client contact information and trading strategies he developed while employed there to help him build his book of business at his new firm. Which Standard is most likely violated?

• A) Standard V(C) – Record Retention
• B) Standard IV(A) – Loyalty
• C) Standard I(C) – Misrepresentation
• D) Standard VII(A) – Conduct as Members and Candidates

Question 29

A member recommends a complex structured product to a retired client living on a fixed income, without first assessing whether the product is appropriate given the client's risk tolerance, income needs, and investment objectives. Which Standard is most likely violated?

• A) Standard III(C) – Suitability
• B) Standard VI(C) – Referral Fees
• C) Standard I(D) – Misconduct
• D) Standard II(A) – Material Nonpublic Information

Question 30

An analyst publishes a research report recommending a "buy" rating on a stock, disclosing in a footnote that his firm has a market-making relationship with the company, but does not disclose that he personally owns a significant position in the stock. Which Standard is most likely violated?

• A) Standard III(A) – Loyalty, Prudence, and Care
• B) Standard V(A) – Diligence and Reasonable Basis
• C) Standard I(A) – Knowledge of the Law
• D) Standard VI(A) – Disclosure of Conflicts

Question 31

A CFA charterholder works in a country where local law permits investment managers to accept client referral fees from third parties without disclosure, but the CFA Institute Code and Standards require such disclosure. Which of the following best describes the charterholder's obligation?

• A) The charterholder must comply with whichever of the local law or the Code and Standards is stricter, meaning disclosure of the referral fee is required despite local law being silent on the point.
• B) The charterholder may always follow the more permissive local law when it conflicts with the Code and Standards.
• C) The charterholder is exempt from the Code and Standards entirely while working outside the charterholder's home country.
• D) The charterholder must resign from CFA Institute membership if local law and the Standards differ in any way.

Question 32

A trader posts anonymous messages on an online investment forum falsely claiming a small-cap company is about to receive a buyout offer, intending to drive up the stock price before selling shares he already holds at a profit. Which Standard is most directly violated?

• A) Standard IV(A) – Loyalty
• B) Standard II(B) – Market Manipulation
• C) Standard V(A) – Diligence and Reasonable Basis
• D) Standard I(A) – Knowledge of the Law, exclusively

Question 33

A member overhears two investment bankers discussing confidential details of an unannounced acquisition while riding in a public elevator, information that is clearly material and has not been disclosed to the market. May the member trade on or share this information?

• A) No, the information is material nonpublic information regardless of how it was obtained, and Standard II(A) prohibits the member from trading on it or passing it to others who might trade on it.
• B) Yes, since information overheard by chance rather than solicited directly is exempt from Standard II(A).
• C) Yes, but only if the member did not recognize either speaker.
• D) No, but only until the member's firm's legal department is notified, after which trading becomes permissible.

Question 34

A member is convicted of driving under the influence during a personal vacation, an incident unrelated to her professional duties and not involving any client or employer matter. Does this conviction raise concerns under Standard I(D), Misconduct?

• A) No, Standard I(D) applies exclusively to conduct occurring during work hours.
• B) No, personal conduct unrelated to investment work can never implicate the Standards.
• C) Yes, but only if the member's employer is a bank.
• D) Potentially yes -- Standard I(D) covers conduct involving dishonesty, fraud, or deceit, or that otherwise reflects adversely on the member's professional reputation, integrity, or competence, even if it occurs outside the workplace and is unrelated to professional activities.

Question 35

A member tells a prospective client that a proposed investment strategy is "guaranteed to generate positive returns every year, with no risk of loss," despite the strategy's actual historical performance including several losing years. Which Standard is most directly violated?

• A) Standard III(C) – Suitability
• B) Standard VI(A) – Disclosure of Conflicts
• C) Standard I(C) – Misrepresentation
• D) Standard II(A) – Material Nonpublic Information

Question 36

An equity analyst covering a publicly traded company is invited by that company's investor relations department on an all-expenses-paid, multi-day trip to visit an overseas manufacturing facility, including business-class airfare and luxury hotel accommodations, with no equivalent benefit offered to analysts who decline. Which Standard is most directly implicated?

• A) Standard IV(C) – Responsibilities of Supervisors
• B) Standard I(B) – Independence and Objectivity
• C) Standard III(E) – Preservation of Confidentiality
• D) Standard V(C) – Record Retention