C2 - Ethics & Investment Professionalism (5-15 Qs) Flashcards
Members of the CFA Institute shall:
A) act with due diligence, professionalism and in the responsible manner
B) use reasonable care and exercise independent professional judgement
C) strive to maintain and improve their client wealth
D) always seek to maintain the profitability and integrity of the firm
B - use reasonable care and exercise independent professional judgement
B is explicitly part of the Code and Standards, A and C are not explicitly mentioned and D is incorrect.
Under the CFA Code of Ethics and Professional Standards, which of the following is the most correct course of action if an order for multiple clients is not filled?
A) Fill the order of the biggest clients first
B) Filler the order of the smallest clients first
C) Filler the order of the clients whoe have suffered a loss recently
D) Fill the order on a pro-rata basis
D - Fill the order on a pro-rata basis
The Code requires that all clients are treated fairly, filling all the clients on a pro-rata basis would achieve this.
John Bone CFA, while working out in his club, overhears the CEO of Douglas & Co discussing plans to purchase one of their competitors.
According to the CFA Institute Professional Standards, Bone most likely cannot use the information because:
A) It relates to a takeover and is likely to be material, non-public information
B) It was overheard in the club and might be considered unreliable
C) He does not have reasonable and adequate basis for taking investment action
D) He would have to know more pertinent information about Douglas & Co
A - It relates to a takeover and is likely to be material, non-public information
Trading on this information is restricted per Standard II (Option one) as it relates to a takeover and therefore is likely to be material, non-public information.
Tony Jones CFA, is an independent investment advisor. One of Tony’s clients, Andy Stokes, asks Tony to review a tax planning scheme involving offshore investments to determine if the investments are worthwhile. Tony is suspicious so he has the scheme checked by an attorney who explains that the scheme is only just the right side of the law. Within two weeks of starting his firm, Tony receives a visit from Detective Dennis Waterman, another old friend, who informs Tony that Andy Stokes is under investigation for operating an illegal investment scheme. Six months later, Andy Stokes is convicted of the offence and imprisoned.
Based solely on the information above, has Tony breached any CFA Ethics or Professional Standards with regards to that illegal investment scheme?
A) Yes
B) No, because the illicit nature of the investment scheme would not be evident to a reasonably informed professional
C) Yes, because ignorance of the law and Code of Standards does not excuse illegal or unethical acts.
D) No, because of the difficulty in proving connection between parties.
B - No, because the illicit nature of the investment scheme would not be evident to a reasonably informed professional
Ignorance of the law and Code of Standards does not excuse illegal or unethical acts. HOWEVER, Members who are ignorant of the law or Code are only liable for violating the law or Code if the nature of he illicit acts would have been evident to someone familiar with the rules deemed to be common knowledge by a reasonably informed professional (Standard Ib). Having the scheme checked by an attorney provides further protection. Is it of no consquence that the scheme is ‘only just’ on the right side of the law, the right side is the right side.
Which of the following are CFA Institute Standards of Professional Conduct?
A) Professionalism; Integrity of Capital Markets; Duty of Independence
B) Professionalism; Regulatory and Legal Obligations; Duty to Employer
C) Professionalism; Duties to Clients; Responsibilities as a CFA Institute Member or CFA Candidate
D) Conflicts of Interest; Duty of Care; Responsibilities as a CFA Institute Member or CFA Candidate
C - Professionalism; Duties to Clients; Responsibilities as a CFA Institute Member or CFA Candidate
Which of the following is most likely to be considered market manipulation under the CFA code of Ethics and Professional Standards?
A) Buying shares in a company after making a ‘buy’ recommendation on the same shares to clients
B) Selling shares in a company after making a ‘sell’ recommendation on the same shares to clients
C) Buying on behalf of clients in order to push up the price before selling a personal holding
D) Buying shares in a company before buying shares on behalf of your clients.
C - Buying on behalf of clients in order to push up the price before selling a personal holding
D (buying personal shares before buying on behalf of your clients) is insider trading.
Under the CFA Institute Code of Ethics and Professional Standards, which of the following is the most accurate with regards to an employee leaving their current firm and joining a rival?
A) The employee may take information regarding current cients of the firm
B) The employee may take a valuation model developed by the employers whilst at the current firm
C) The employee may take partly complete research reports which they were working on at the current firm
D) The employee may take knowledge gained from attending a training course whilst at their current firm.
D - The employee may take knowledge gained from attending a training course whilst at their current firm.
The other answers represen the property of the current firm.
Alistair Allbell CFA, is one of the several analysts that cover the pharma sector for an independent provider of research services. Alistair feels the euphoria of completing an initial report recommending the purchase of Sempre Viva Inc stock given the company’s ability to development highly effective anti-aging creams. A few days after he released the report, Alistairs wife received news of a signifant inheritance following the death of a family member, whom she had not seen for number of years. Contained within the inheritance was a dissapointing rusty trophy nd $1.5m worth of Sempre Viva Inc stock. Alistair is asked to write a follow-up report on Sempre Viva Inc, however this was requested before he had the chance to inform his employer about the inheritance.
Which of the following best describes the course of action that Alistair should take?
A) Suggest to his employer that another analyst should be assigned to carry out the follow-up report
B) Advise his employer to place Sempre Viva Inc stock on the restricted list
C) Dispose of the Sempre Viva Inc stock
D) No action required as the stock was not purchased but inherited
**A - Suggest to his employer that another analyst should be assigned to carry out the follow-up report”
B (putting the company on the restricted list) is a potential course of action, but given the number of anaylsts that cover this sector, this choice seems unnecessary.
The CFA Code of Ethics requires members to do all of the following except?
A) Use reasonable care and exercise independent professional judgement
B) Promote the integrity of the capital markets
C) Avoid excessive remuneration
D) Act with integrity, competence, diligence and respect
C - Avoid excessive remuneration
Whilst there has been a lot of criticism of banker’s remuneration recently, but the CFA Code of Ethics does not address this issue.
An FCA authorised firm has received money from a retail client that it holds before it is to be invested on behalf of the client. It holds these funds in a bank account. Which of the following conditions must apply to this account?
1. It is separate from the account(s) used to hold the firm’s funds
2. The firm should take reasonable care in selecting the bank where the account is held
3. Other clients’ money should not be held in the same account
A) 1 only
B) 2 only
C) 1 and 2 only
D) 1 and 3 only
C 1 (separate to firm) and 2 (select bank)
Under the CFA Code of Ethics and Professional Standards, if an advisor is about to recommend securities which they hold personally, what action should they take.
A) Sell their own shares prior to making their recommendation
B) The advisor should not make the recommendation
C) The advisor should disclose to their clients that they have a personal holding in the securities
D) The advisor is not required to do anything with the regards to making the recommendation.
C - The advisor should disclose to their clients that they have a personal holding in the securities
Potential conflicts of interest must be disclosed.
A CFA Institute member lives in country S (a country with strict securities laws) and has an office in country L (a country with lax securities laws)
If the laws of country S say that professional conduct is governed by the country in which the investment business is conducted
Which rules apply to the member?
A) the laws of country S (strict laws)
B) The Codes of Standards of the CFA Institute
C) The member must choose which laws to follow
D) The laws of country L (Lax Laws)
B - The Code of Standards of the CFA Institute
Putting a clients’ interests ahead of your own is also know as:
A) Client Duty
B) Fiduciary Duty
C) Company Duty
D) Agent Duty
B - Fiduciary Duty
Which of the 7 CFA Standards of Professional Conduct does misconduct come under?
A) Duty to clients
B) Integrity of capital markets
C) Professionalism
D) Duty to employers
C - Professionalism
Which also covers knowledge of the law, independence and objectivity, and misrepresentation
How many hours of CPD is a CFA member expected to carry out each year?
A) 15 hours
B) 20 hours
C) 30 hours
D) 35 hours
D - 35 hours
