Ethics

Question 1

Describe the Code of Ethics members of the CFA Institute must subscribe to.

Answer 1

Act with integrity, competence, diligence, and respect.

Place the integrity of the investment profession and the interests of clients above their own.

Use reasonable care and exercise independent professional judgment.

Practice and encourage others to practice in a professional and ethical manner.

Promote the integrity and viability of the global capital markets for the ultimate benefit of society.

Maintain and improve their professional competence.

Question 2

Name the 7 areas of the Standards of Professional Conduct.

Answer 2

I. Professionalism

II. Integrity of Capital Markets

III. Duties to Clients

IV. Duties to Employers

V. Investment Analysis, Recommendations, and Actions

VI. Conflicts of Interest

VII. Responsibilities as a CFA Institute Member or CFA Candidate

Question 3

List the areas of Professionalism (I) that are part of the CFA Institute Standards of Professional Conduct.

Answer 3

A. Knowledge of the Law

B. Independence and Objectivity

C. Misrepresentation

D. Misconduct

Question 4

List the areas of Integrity of Capital Markets (II) that are part of the CFA Institute Standards of Professional Conduct.

Answer 4

A. Material Nonpublic Information

B. Market Manipulation

Question 5

List the areas of Duties to Clients (III) that are part of the CFA Institute Standards of Professional Conduct.

Answer 5

A. Loyalty, Prudence, and Care

B. Fair Dealing

C. Suitability

D. Performance Presentation

E. Preservation of Confidentiality

Question 6

List the areas of Duties to Employers (IV) that are part of the CFA Institute Standards of Professional Conduct.

Answer 6

A. Loyalty

B. Additional Compensation Arrangements

C. Responsibilities of Supervisors

Question 7

List the areas of Investment Analysis, Recommendations, and Actions (V) that are part of the CFA Institute Standards of Professional Conduct.

Answer 7

A. Diligence and Reasonable Basis

B. Communication with Clients and Prospective Clients

C. Record Retention

Question 8

List the areas of Conflicts of Interest (VI) that are part of the CFA Institute Standards of Professional Conduct.

Answer 8

A. Disclosure of Conflicts

B. Priority of Transactions

C. Referral Fees

Question 9

List the areas of Responsibilities as a CFA Institute Member or CFA Candidate (VII) that are part of the CFA Institute Standards of Professional Conduct.

Answer 9

A. Conduct as members and candidates in the CFA program

B. Reference to CFA Institute, the CFA Designation, and the CFA Program

Question 10

I(A): Knowledge of the Law

Answer 10

Members must understand and comply with laws, rules, regulations, and Code and Standards of any authority governing their activities.

In the event of a conflict, follow the more strict law, rule, or regulation.

Do not knowingly participate or assist in violations, and disassociate from any known violation.

Question 11

I(B): Independence and Objectivity

Answer 11

Members and Candidates must use reasonable care and judgment to exercise independence and objectivity in professional activities.

Members and Candidates are not to offer, solicit, or accept any gift, benefit, compensation, or consideration that would compromise either their own or someone else’s independence and objectivity.

Question 12

I(C): Misrepresentation

Answer 12

Members and Candidates must not knowingly misrepresent facts regarding investment analysis, recommendations, actions, or other professional activities.

Do not make any misrepresentations or give false impressions.

Question 13

I(D): Misconduct

Answer 13

Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their integrity, good reputation, trustworthiness, or professional competence.

Question 14

II(A): Material Nonpublic Information

Answer 14

Members and Candidates in possession of nonpublic information that could affect an investment’s value must not act or induce someone else to act on the information.

Information is “material” if its disclosure would impact the price of a security or if reasonable investors would want the information before making an investment decision.

Question 15

II(B): Market Manipulation

Answer 15

Members and Candidates must not engage in any practices intended to mislead market participants through distorted prices or artificially inflated trading volume. Spreading false rumors is also prohibited.

Question 16

III(A): Loyalty, Prudence, and Care

Answer 16

Members must always act for the benefit of clients and place clients’ interests before their employer’s or their own interests. Members must be loyal to clients, use reasonable care, and exercise prudent judgment.

Client interests always come first.

Question 17

III(B): Fair Dealing

Answer 17

Members must deal fairly and objectively with all clients and prospects when providing investment analysis, making investment recommendations, taking investment action, or in other professional activities.

Do not discriminate against any clients when disseminating recommendations or taking investment action.

Fairly does not mean equally.

Question 18

III(C): Suitability

Answer 18

1. When in an advisory relationship with client or prospect, Members and Candidates must:

• Make reasonable inquiry into clients’ investment experience, risk and return objectives, and constraints prior to making any recommendations or taking investment action, update regularly.
• Be sure investments are suitable to a client’s financial situation and consistent with client objectives before making recommendation or taking investment action.
• Make sure investments are suitable in the context of a client’s total portfolio.

2. When managing a portfolio, investment recommendations and actions must be consistent with the stated portfolio objectives and constraints.

Question 19

III(D): Performance Presentation

Answer 19

Presentations of investment performance information must be fair, accurate, and complete.

Members must avoid misstating performance or misleading clients/prospects about investment performance of themselves or their firms, should not misrepresent past performance or reasonably expected performance, and should not state or imply the ability to achieve a rate of return similar to that achieved in the past.

Question 20

III(E): Preservation of Confidentiality

Answer 20

All information about current and former clients and prospects must be kept confidential unless it pertains to:

• illegal activities
• disclosure is required by law
• the client or prospect gives permission for the information to be disclosed
• when cooperating with a CFA Institute Professional Conduct Program (PCP) investigation

If illegal activities by a client are involved, members may have an obligation to report the activities to authorities. The confidentiality Standard extends to former clients as well.

Question 21

IV(A): Loyalty

Answer 21

In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.

Members must not engage in any activities which would injure the firm, deprive it of profit, or deprive it of the advantage of employees’ skills and abilities. Always place client interests above interests of employer.

Question 22

IV(B): Additional Compensation Arrangements

Answer 22

No gifts, benefits, compensation, or consideration are to be accepted which may create a conflict of interest with the employer’s interest unless written consent is received from all parties.

Note: Written consent from a member’s employer includes email communication.

Question 23

IV(C): Responsibilities of Supervisors

Answer 23

All Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

Members must take steps to prevent employees from violating laws, rules, regulations, or the Code and Standards and make reasonable efforts to detect violations.

Question 24

V(A): Diligence and Reasonable Basis

Answer 24

When analyzing investments, making recommendations, and taking investment actions use diligence, independence, and thoroughness.

Investment analysis, recommendations, and actions should have a reasonable and adequate basis, supported by research and investigation.

Using secondary or third-party research: See that the research is sound.

Group research and decision making: Even if a Member does not agree with the independent and objective view of the group, he does not necessarily have to decline to be identified with the report, as long as there is a reasonable and adequate basis.

Question 25

V(B): Communication with Clients and Prospective Clients

Answer 25

Disclose to clients and prospects the basic format and general principles of investment processes they use to analyze and select securities and construct portfolios. Promptly disclose any process changes.

Disclose to clients and prospective clients significant limitations and risks associated with the investment process.

Proper communication with clients is critical to provide quality financial services.

All means of communication are included here, not just research reports.

Question 26

V(C): Record Retention

Answer 26

Maintain all records supporting analysis, recommendations, actions, and all other investment-related communications with clients and prospects.

Members must maintain research records that support the reasons for the analyst’s conclusions and any investment actions taken. Such records are the property of the firm.

If no other regulatory standards are in place, CFA Institute recommends at least a 7-year holding period.

Question 27

VI(A): Disclosure of Conflicts

Answer 27

Members and Candidates must make full and fair disclosure of all matters which may impair their independence or objectivity or interfere with their duties to their employer, clients, and prospects. Disclosures must be prominent, in plain language, and effectively communicate the information.

Members must fully disclose to clients, prospects, and their employers all actual and potential conflicts of interest in order to protect investors and employers. These disclosures must be clearly stated.

Question 28

VI(B): Priority of Transactions

Answer 28

Investment transactions for clients and employers must have priority over those in which a Member or Candidate is the beneficial owner.

Client transactions take priority over personal transactions and transactions made on behalf of the member’s firm.

Note that family-member accounts which are client accounts should be treated just like any client account—they should not be disadvantaged.

Question 29

VI(C): Referral Fees

Answer 29

Members and Candidates must disclose to their employers, clients, and prospects any compensation, consideration, or benefit received by, or paid to, others for recommendations of products and services.

Members must inform employers, clients, and prospects of any benefit received for referrals of customers and clients, allowing them to evaluate the full cost of the service as well as any potential partiality. All types of consideration must be disclosed.

Question 30

VII(A): Conduct as Participants in CFA Institute Programs

Answer 30

Participants in CFA Institute Programs must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.

This Standard applies to conduct which includes:

• Cheating on the CFA exam or any exam.
• Not following rules and policies of the CFA program.
• Giving confidential information on the CFA exam to Candidates or the public.
• Improperly using the designation to further personal and professional goals.
• Misrepresenting information on the Professional Conduct Statement (PCS) or the CFA Institute Professional Development Program.
• Members and candidates are not precluded from expressing their opinions regarding the exam program or CFA Institute.

Question 31

VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program

Answer 31

Members and Candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the program.

Members must not make promotional promises or guarantees tied to the CFA designation.

Members must satisfy these requirements to maintain membership:

• sign PCS annually
• pay CFA Institute membership dues annually

If they fail to do this, they are no longer active members.

There is no partial designation.

The Chartered Financial Analyst and CFA marks must always be used either after a charterholder’s name or as adjectives, but not as nouns, in written and oral communications.