CFA Program — Ethics

Question 1

Under the Global Investment Performance Standards (GIPS), firms claiming compliance are generally required to:

• A) Include all actual, fee-paying, discretionary portfolios in at least one composite
• B) Exclude any underperforming portfolios from composites to present the most favorable results
• C) Report performance only for the single best-performing account in each strategy
• D) Update composite performance figures only once every five years

Question 2

A portfolio manager changes the benchmark used to report a fund's performance mid-year to one that makes the fund's relative performance look more favorable, without disclosing the change to clients. This is most likely a violation of:

• A) Standard III(D) – Performance Presentation
• B) Standard II(B) – Market Manipulation
• C) Standard I(A) – Knowledge of the Law only
• D) Standard VI(B) – Priority of Transactions

Question 3

A firm's compliance department discovers that a senior portfolio manager has been allocating profitable trades disproportionately to his personal account before allocating to client accounts, but decides not to escalate the issue given the manager's seniority. This inaction by compliance is most inconsistent with:

• A) Standard IV(C) – Responsibilities of Supervisors, which requires reasonable steps to detect and address violations regardless of seniority
• B) Standard V(A) – Diligence and Reasonable Basis
• C) Standard I(D) – Misconduct, applied only to the compliance staff
• D) Standard VII(A) – Conduct as Candidates in the CFA Program

Question 4

An analyst incorporates a competitor's proprietary industry model into her own research report, citing the competitor firm generally as a data source but not disclosing that entire sections of analysis were closely paraphrased from the competitor's report. This is most likely a violation of:

• A) Standard I(C) – Misrepresentation, for failing to distinguish fact from the work of others (plagiarism)
• B) Standard III(B) – Fair Dealing
• C) Standard VI(C) – Referral Fees
• D) Standard I(A) – Knowledge of the Law only

Question 5

A member is asked by a client to structure a transaction in a way that the member believes is designed primarily to mislead the client's auditors about the true nature of the client's finances. The member should most appropriately:

• A) Comply, since client instructions take precedence over the member's own judgment
• B) Decline to participate in the transaction, since assisting would be inconsistent with professional integrity, even at a client's request
• C) Comply, but only document the client's instructions in writing
• D) Proceed as instructed, so long as the member is paid in advance

Question 6

A firm's proxy voting policy states that all votes will be cast in the best interest of clients, but in practice, votes on shares held for a large corporate client are routinely cast to support that client's management on unrelated matters, regardless of merit. This practice is most inconsistent with:

• A) Standard III(A) – Loyalty, Prudence, and Care, which requires acting in the best interest of clients rather than in the interest of a firm relationship
• B) Standard V(C) – Record Retention
• C) Standard VI(B) – Priority of Transactions
• D) Standard IV(B) – Additional Compensation Arrangements

Question 7

An equity analyst uses the "mosaic theory" to combine several immaterial nonpublic observations from a factory tour with extensive public financial data to arrive at a non-consensus earnings estimate. A competitor later reaches the same conclusion using only public data. Is the analyst's approach most likely consistent with Standard II(A)?

• A) Yes, provided none of the individual nonpublic observations were themselves material, since the mosaic theory permits combining immaterial nonpublic information with public information and professional judgment.
• B) No, any use of nonpublic information whatsoever, regardless of materiality, is prohibited.
• C) No, because reaching a non-consensus conclusion is itself evidence of a violation.
• D) Yes, but only because a competitor later reached the same conclusion independently.

Question 8

A portfolio manager at a firm serving both retail and institutional clients allocates a favorable, oversubscribed IPO allocation on a strict pro-rata basis across all client accounts that requested participation, regardless of account size or fee level. Is this approach most likely consistent with Standard III(B)?

• A) No, all favorable allocations must always go exclusively to the largest institutional accounts.
• B) No, Standard III(B) prohibits IPO allocations to any client under any circumstances.
• C) Yes, but only if retail clients are entirely excluded from participation.
• D) Yes, pro-rata allocation based on order size (or a similarly systematic, disclosed methodology) applied consistently across all requesting clients is generally consistent with the fair dealing obligation.

Question 9

A fixed-income analyst's compensation is directly and substantially tied to the trading volume she generates for the firm's bond desk, independent of the quality or accuracy of her research recommendations. Which Standard is most likely placed at risk by this compensation structure?

• A) Standard VII(B) – Reference to the CFA Designation
• B) Standard IV(C) – Responsibilities of Supervisors, exclusively
• C) Standard I(B) – Independence and Objectivity
• D) Standard V(C) – Record Retention

Question 10

A member discloses to a prospective client, in writing, that her firm receives soft dollar credits from a broker in exchange for directing client trades to that broker, and explains this arrangement's general nature. Does this disclosure alone fully satisfy the member's obligations regarding soft dollar arrangements?

• A) Yes, but only if the broker is based in the same country as the client.
• B) Disclosure is necessary but the arrangement must also actually benefit the client (such as through investment research used for the client's benefit) and comply with applicable best execution obligations -- disclosure alone does not cure an arrangement that fails these substantive requirements.
• C) Yes, disclosure alone is always fully sufficient regardless of how the soft dollars are used.
• D) No, soft dollar arrangements are categorically prohibited under all circumstances.

Question 11

A member's firm experiences a data breach exposing client account information. The firm's compliance department directs all employees not to discuss the breach with clients until a public relations plan is finalized, a process expected to take several weeks. A member has direct client relationships and is concerned about this delay. What does Standard III(E), Preservation of Confidentiality, most directly suggest?

• A) Standard III(E) governs confidentiality of client information from disclosure, and is not primarily designed to address this scenario -- the member should instead consider other obligations, such as Standard III(A) (client interests) and applicable breach notification laws, in evaluating whether the delay is appropriate.
• B) Standard III(E) requires the member to publicly announce the breach immediately, overriding all firm policy.
• C) Standard III(E) requires the member to say nothing about the breach forever, even after the PR plan is finalized.
• D) Standard III(E) has no relevance to data breaches under any circumstances.

Question 12

A member manages a fund benchmarked against a specific index. To reduce tracking error, she occasionally deviates from her genuine independent research views to align more closely with the index's sector weights, without disclosing this practice to clients who believe they are receiving an actively managed, high-conviction strategy. Which Standard is most likely violated?

• A) Standard II(B) – Market Manipulation
• B) Standard IV(B) – Additional Compensation Arrangements
• C) Standard VI(C) – Referral Fees
• D) Standard V(B) – Communication with Clients and Prospective Clients

Question 13

A member's firm uses artificial intelligence tools to help generate portions of client-facing investment research. A junior analyst uses the AI tool's output largely unedited, without independently verifying the underlying data or reasoning, and the report contains a material factual error. Which Standard is most directly implicated?

• A) Standard VII(A) – Conduct as Members and Candidates, exclusively, since AI tools are inherently prohibited.
• B) Standard II(A) – Material Nonpublic Information, since AI tools are trained on nonpublic data by definition.
• C) Standard I(A) – Knowledge of the Law, exclusively.
• D) Standard V(A) – Diligence and Reasonable Basis, since members remain responsible for ensuring a reasonable and adequate basis for any research or recommendation they publish, regardless of the tools used to help produce it.

Question 14

A member's firm implements an automated trade surveillance system to detect potential front-running or other Standard VI(B) violations. The system flags a series of trades for review, but the compliance team, due to short staffing, has a multi-month backlog of unreviewed flagged alerts. What does this backlog most likely suggest about the firm's compliance program?

• A) The backlog has no bearing on compliance obligations under any Standard.
• B) Automated systems eliminate any need for human review once alerts are generated.
• C) A months-long backlog is always considered fully acceptable regardless of the circumstances.
• D) The firm's stated supervisory procedures may not be adequately implemented in practice, which could itself raise concerns under Standard IV(C) if it results in undetected, ongoing violations.

Question 15

A member employed by an investment bank's equity research division learns, through her role reviewing a pending merger prospectus before its public filing, material nonpublic information about the target company's financial condition. She takes no trading action but mentions the general topic (without specifics) to a friend at a social gathering, who then does additional independent research and happens to arrive at a similar conclusion using only public information. Has the member most likely violated Standard II(A)?

• A) This scenario requires careful analysis -- if the member disclosed enough for the friend's subsequent trading to be meaningfully informed or triggered by the tip (even without specifics), this could raise concerns under II(A)'s prohibition on "causing others to trade" on MNPI, though if the friend's conclusion was genuinely independently derived from public data alone, the causal link is weaker.
• B) No violation is possible under any circumstances, since the friend used only public data in the end.
• C) This is always and unambiguously a clear violation regardless of any other facts.
• D) Standard II(A) does not apply to conversations at social gatherings under any circumstances.

Question 16

A member manages a hedge fund and, in marketing materials sent to prospective investors, presents only the fund's three best-performing individual positions from the past year as illustrative examples, without disclosing that these were selected specifically because they were the top performers out of over 100 positions held. Which Standard is most likely violated?

• A) Standard I(C) – Misrepresentation, and/or Standard III(D) – Performance Presentation, since selectively presenting only cherry-picked winning positions without disclosing the selection methodology creates a misleading impression of the fund's overall skill.
• B) Standard II(B) – Market Manipulation, since presenting winning trades manipulates the market.
• C) Standard IV(B) – Additional Compensation Arrangements.
• D) Standard VII(B) – Reference to the CFA Designation.

Question 17

A member serves as a portfolio manager and also sits on the investment committee that selects sub-advisors for a fund-of-funds product the firm offers. She fails to disclose that her spouse is a principal at one of the sub-advisor firms under consideration. Which Standard is most directly violated?

• A) Standard II(B) – Market Manipulation
• B) Standard VI(A) – Disclosure of Conflicts
• C) Standard III(C) – Suitability
• D) Standard V(C) – Record Retention

Question 18

A member who previously worked as a sell-side analyst covering a specific industry moves to a buy-side role at an asset management firm covering the same industry. She continues to apply the general industry knowledge and analytical frameworks she developed in her prior role. Is this most likely a violation of Standard IV(A)?

• A) Yes, unless the prior employer provides written permission for every specific insight used.
• B) No, but only if she covers a completely unrelated industry at her new role.
• C) No, general industry knowledge, analytical skill, and expertise developed over a career are generally considered the member's own, distinguishable from an employer's specific confidential trade secrets or proprietary records.
• D) Yes, all knowledge gained at any prior employer must never be used again.

Question 19

A research analyst at an investment bank covers Company X. The bank's investment banking division is competing for an advisory mandate from Company X. The analyst publishes a favorable report on Company X without disclosing the potential banking relationship. Which Standard is most likely violated?

• A) Standard V(B) – Communication with Clients and Prospective Clients
• B) Standard I(B) – Independence and Objectivity, and Standard VI(A) – Disclosure of Conflicts
• C) Standard III(B) – Fair Dealing only
• D) Standard II(A) – Material Nonpublic Information

Question 20

A CFA charterholder manages a global equity fund. She receives a luxury trip from a broker-dealer whose execution services she uses. She accepts without disclosing to her employer. Which of the following best identifies the violation?

• A) Standard IV(A) – Loyalty: accepting gifts from third parties without employer consent
• B) Standard I(B) – Independence and Objectivity: gifts can impair objectivity; undisclosed gift violates both I(B) and IV(B)
• C) Standard VI(B) – Priority of Transactions: gifted services distort order routing
• D) Standard III(A) – Loyalty, Prudence, and Care: breach of fiduciary duty to clients

Question 21

Under the Research Objectivity Standards, a firm should most likely:

• A) Prohibit analysts from publishing ratings on companies for which the firm has underwriting relationships
• B) Ensure supervisory analysts approve all research reports before publication
• C) Allow investment banking to review but not change research reports before publication
• D) Require all analyst compensation to be tied to investment banking revenue

Question 22

An analyst is writing a research report and uses a discounted cash flow model. Her inputs are based on management guidance, consensus forecasts, and her own adjustments. She does not disclose the specific inputs used. Under Standard V(B), the report most likely:

• A) Complies because DCF is a standard methodology
• B) Violates because key assumptions and inputs must be disclosed
• C) Violates only if the report contains a buy recommendation
• D) Complies if the conclusion is supported by the final valuation output

Question 23

Under the Standards, which of the following activities constitutes market manipulation?

• A) Publishing a well-researched bearish report that causes a stock to decline
• B) Executing a series of trades to create the appearance of active trading volume
• C) Short selling a stock based on fundamental analysis
• D) Issuing a research report contradicting consensus without a new catalyst

Question 24

A portfolio manager is asked by a client to invest in a specific security. The manager believes the investment is unsuitable for the client's IPS objectives. The manager should:

• A) Execute the trade as instructed since the client has the right to direct their portfolio
• B) Refuse the trade under all circumstances
• C) Execute the trade but document that it was client-directed and may be inconsistent with the IPS
• D) Only execute the trade after obtaining written approval from the compliance department

Question 25

An analyst's firm has an investment banking relationship with a company the analyst covers. To comply with Standard I(B), which of the following firm practices would be most effective?

• A) Prohibiting the firm from ever doing business with companies the research department covers.
• B) Compensating research analysts based directly on investment banking deal revenue.
• C) Maintaining information barriers ("firewalls") between research and investment banking, along with clear disclosure of the relationship in published research.
• D) Allowing the investment banking division to review and approve research reports before publication.

Question 26

A portfolio manager at a firm learns during a private company site visit, arranged as part of legitimate research, that the company's new factory is running at higher-than-expected efficiency, a conclusion he pieces together by combining this observation with previously published industry data and his own analysis. He is the first analyst to reach this conclusion. Under the "mosaic theory," is trading on this conclusion a violation of Standard II(A)?

• A) No, since the conclusion was derived by piecing together public and non-material observations through the analyst's own skill, rather than through receipt of material nonpublic information directly.
• B) Yes, because any information not yet known by other analysts is automatically material nonpublic information.
• C) Yes, because site visits are always prohibited under the Standards.
• D) No, but only because the analyst discussed his conclusion with company management first.

Question 27

A firm's written compliance procedures require pre-clearance of all personal trades by investment staff, but a portfolio manager routinely bypasses this requirement, believing his trades are too small to matter. His direct supervisor is aware of this pattern but has not enforced the policy. Which of the following best describes the supervisor's responsibility under Standard IV(C)?

• A) The supervisor has no responsibility, since the manager's trades are personally his own choice.
• B) The supervisor's only obligation is to inform the manager's trades are too small to matter.
• C) The supervisor must resign immediately upon learning of any violation.
• D) The supervisor must take reasonable steps, such as enforcing the pre-clearance policy and escalating persistent noncompliance, to detect and prevent the violation.

Question 28

A CFA charterholder serves as a portfolio manager for a pooled investment vehicle. She personally invests in the same securities held by the fund, in the same direction, but she executes her personal trades after client trades have been fully filled. Is this practice most likely consistent with Standard VI(B), Priority of Transactions?

• A) Yes, but only if the manager discloses the trade to regulators, not to the firm or clients.
• B) Yes, since client transactions are given priority (executed first), which is the central requirement of Standard VI(B).
• C) No, since members may never personally invest in the same securities as their clients under any circumstances.
• D) No, since Standard VI(B) requires personal trades to occur before client trades.

Question 29

A manager presents a composite's historical performance to a prospective institutional client, complying with the Global Investment Performance Standards (GIPS). Which of the following is a core purpose of GIPS compliance?

• A) To provide a standardized, comparable, and fair basis for presenting investment performance across firms.
• B) To guarantee a minimum rate of return to all prospective clients.
• C) To eliminate the need for firms to disclose any fees.
• D) To require firms to use only backtested (simulated) performance in all presentations.

Question 30

A member is asked by her employer to sign a non-compete agreement restricting her ability to solicit clients for one year after leaving the firm. Complying with the terms of this agreement after departure is most directly consistent with which Standard?

• A) Standard II(A) – Material Nonpublic Information, since client lists are always considered material nonpublic information.
• B) Standard I(D) – Misconduct, since non-compete agreements are inherently unethical.
• C) Standard VII(B) – Reference to the CFA Designation, since the agreement references her CFA charter.
• D) Standard IV(A) – Loyalty, since honoring lawful contractual obligations to a former employer, including reasonable post-employment restrictions, aligns with the duty of loyalty during and reasonably tied to the employment relationship.

Question 31

A member's home country has no laws restricting the use of client brokerage commissions to pay for research (soft dollars), but the CFA Institute Code and Standards impose specific requirements that client commissions be used only to benefit the client whose trades generated them. Which of the following best describes the member's obligation?

• A) The member must follow the more strict of the two -- here, the Code and Standards -- since Standard I(A) requires members to comply with applicable law, and where the Code imposes a higher standard than the applicable law, the member must adhere to the Code's stricter requirements.
• B) The member may always follow whichever standard is more convenient or less costly to implement.
• C) The member must follow only local law and may disregard the Code and Standards whenever local law is silent on an issue.
• D) The member should follow neither, since soft dollar practices are entirely a matter of firm discretion.

Question 32

A member posts anonymously on a widely followed financial social media platform, falsely claiming that a small-cap company is about to be acquired at a large premium, intending to drive up the share price before selling a pre-existing personal position at a profit. Which Standard is most directly violated?

• A) Standard III(E) – Preservation of Confidentiality, since the post concerns a specific company.
• B) Standard II(B) – Market Manipulation, since spreading false information intended to distort the market price of a security for personal gain is a form of information-based market manipulation.
• C) Standard V(C) – Record Retention, since the post was not properly archived.
• D) Standard VI(C) – Referral Fees, since the member benefited financially from the post.

Question 33

During a paid expert-network call arranged through a licensed platform, an analyst covering the pharmaceutical sector is connected with a consultant who, without prompting, begins describing unpublished, detailed interim results from a competitor's ongoing Phase III clinical trial that the consultant learned about through a confidential advisory role at that competitor. The analyst continues listening and takes detailed notes. What is the analyst's most appropriate course of action under Standard II(A)?

• A) Immediately attempt to stop the consultant from continuing to disclose the material nonpublic information, refrain from acting or causing others to act on any such information already received, and consider reporting the incident to compliance, since receiving MNPI through an ostensibly legitimate channel does not eliminate the trading and disclosure prohibitions of Standard II(A).
• B) Continue taking detailed notes and incorporate the trial data directly into the firm's published research report, since the information came through a paid, licensed expert-network platform.
• C) Trade immediately on the information before it becomes public, since expert network calls are considered a public information source by definition.
• D) The analyst has no further obligation once the call has ended, regardless of what was disclosed or how the information is subsequently used.

Question 34

A member is found to have significantly falsified a personal loan application unrelated to any client account or professional duties. Her employer subsequently learns of this and is considering disciplinary action. Is this personal conduct most likely relevant under the Code and Standards?

• A) No, Standard I(D) applies exclusively to conduct that occurs during working hours in a professional capacity.
• B) No, personal financial matters are entirely outside the scope of the Code and Standards under all circumstances.
• C) Yes, but only if the loan application was for an amount exceeding a specific regulatory dollar threshold.
• D) Yes, Standard I(D), Misconduct, applies to conduct involving dishonesty, fraud, or deceit that reflects adversely on the member's professional reputation, integrity, or competence, even when the conduct occurs in a purely personal context unrelated to client accounts.

Question 35

A member leaves Firm A to join Firm B and, in marketing materials for a new fund at Firm B, claims sole credit for a strong three-year track record that was actually generated by a five-person team at Firm A, of which she was one member with no lead decision-making role. Is this most likely consistent with Standard I(C)?

• A) Yes, since any team member may claim full individual credit for a team track record regardless of their actual role.
• B) Yes, but only if the member discloses the fund's fee structure elsewhere in the same document.
• C) No, claiming sole credit for a track record actually produced by a team misrepresents the member's individual role and could mislead prospective investors about the member's demonstrated individual skill, violating the prohibition on misrepresentation.
• D) No, but only because performance track records may never be referenced when a member changes firms under any circumstances.

Question 36

An equity research analyst's firm is simultaneously pitching for a lucrative advisory mandate on a client company's planned divestiture. The head of investment banking asks the analyst informally, before any report is published, to 'keep the tone constructive' on the company given the pending relationship. The analyst had independently planned to issue a Sell rating. What is the analyst's most appropriate response under Standard I(B)?

• A) Change the rating to at least a Hold to preserve the advisory relationship, since firm revenue considerations override the analyst's independent view.
• B) Maintain the independently derived Sell rating based on the analyst's own objective analysis, and if internal pressure continues, escalate the matter through appropriate compliance channels, since Standard I(B) requires the analyst to resist efforts by others within the firm to influence the independence and objectivity of published opinions.
• C) Publish the Sell rating but privately warn the investment bank in advance so it can prepare a rebuttal, which fully satisfies Standard I(B).
• D) Decline to publish any report at all until the advisory mandate is decided, which is a complete and sufficient resolution under the Standards.