Ethics (MCQ) Flashcards
According to the CFA Institute Code of Ethics, what must members and candidates always prioritize when making decisions?
A. Personal financial gain
B. The interests of clients and integrity of the profession
C. The profitability of their firm
D. Avoiding risk at all costs
Answer:** B**. The interests of clients and integrity of the profession.
**Relevant Section: **Chapter 4 section 1.3.1 The Chartered Financial Analyst (CFA) Institute – Code of Ethics and Standards of Professional Conduct
**Explanation: **The CFA Code emphasizes acting with integrity and putting the interests of clients and the integrity of the profession above personal gain. This principle is a cornerstone of ethical decision-making in the financial services industry, as members must demonstrate loyalty and diligence to uphold the profession’s reputation
Which of the following is a core principle under the CFA Institute’s Code of Ethics and Standards of Professional Conduct?
A. Encouraging clients to maximize leverage
B. Upholding the rules governing capital markets
C. Prioritizing profit over ethical considerations
D. Disclosing all private client data to market analysts
Chapter 4, Section: 1.3.1
**B. **Upholding the rules governing capital markets
Explanation: The CFA Code stresses the importance of maintaining integrity in capital markets. Members are required to uphold rules and regulations, as well as protect the market from unethical practices. Ethical behavior in the capital markets ensures fair competition and boosts public trust.
The Chartered Institute for Securities & Investment (CISI) Code of Conduct emphasizes which of the following as a key principle?
A. Maximizing the return on investments
B. Declining to act on matters outside one’s competence
C. Conducting transactions in a foreign currency
D. Ensuring that clients assume all responsibility for their losses
Chapter 4, Section: 1.3.2
B. Declining to act on matters outside one’s competence
Explanation: One of the key principles of the CISI Code is ensuring professionals act only in areas where they are competent. This prevents inappropriate advice or actions, protecting clients from harm and maintaining the trust in the professional’s abilities
What is a key obligation for members under the CISI’s Lord George Principles?
A. Acting with honesty and integrity at all times
B. Ensuring all transactions are risk-free
C. Prioritizing the interests of their firm over clients
D. Providing no more than basic advice to clients
Chapter 4, Section: 1.3.2
** A. **Acting with honesty and integrity at all times
**Explanation: **The Lord George Principles, which guide the CISI Code, emphasize acting with integrity and honesty in all dealings. This is vital for maintaining public confidence in the profession, ensuring that financial services professionals are trustworthy and reliable
What is a key benefit of maintaining fair and orderly markets?
A. It ensures higher profits for all investors
B. It promotes economic development and wealth creation
C. It guarantees no fluctuations in stock prices
D. It reduces the need for regulatory oversight
Chapter 4, Section 2.1
** B. **It promotes economic development and wealth creation
Explanation: Fair and orderly markets encourage confidence in investors, provide liquidity, and facilitate economic growth by ensuring smooth capital transfers between enterprises. This environment is crucial for fostering long-term economic development
What type of information qualifies as price-sensitive non-public information?
A. Information that is publicly available
B. Information that is general to the entire industry
C. Information likely to have a significant effect on the price of securities
D. Information shared through informal social channels
Chapter 4, Section 2.2
**C. **Information likely to have a significant effect on the price of securities
Explanation: Price-sensitive information refers to specific, non-public information about a company or its securities that, if made public, could influence the price of the company’s stock. This is typically confidential data about a company’s performance or future plans
How can a market maker legally possess price-sensitive non-public information?
A. By using insider information to make trades
B. By acting in good faith during the normal course of their business
C. By intentionally seeking confidential company information
D. By trading based on industry rumours
Chapter 4, Section: 2.3.1 Market Makers
**B. **By acting in good faith during the normal course of their business
**Explanation: **Market makers can hold price-sensitive information as long as they are acting in good faith and in the regular course of business. Their role in providing liquidity and facilitating transactions does not constitute insider dealing if conducted appropriately
Under what condition can an individual legally possess price-sensitive non-public information?
A. By obtaining it through unauthorized access
B. By acquiring it from public sources before it is widely known
C. By receiving it through normal professional duties without acting on it
D. By trading on the information before it becomes public
Chapter 4, Section 2.3
**C. **By receiving it through normal professional duties without acting on it
**Explanation: **Individuals can legally possess price-sensitive information if it is acquired through the proper conduct of their professional duties and they do not use it for personal gain, such as trading before the information is public
Why are market makers allowed to possess price-sensitive information without committing insider trading?
A. They are exempt from all trading regulations
B. They are required to share the information with competitors
C. They act in good faith and within their normal course of business
D. They are permitted to trade on any information they acquire
Chapter 4, 2.3.1 Market Makers
**C. **They act in good faith and within their normal course of business
**Explanation: **Market makers are allowed to hold price-sensitive information as part of their role in providing liquidity to the markets, as long as they act in good faith and do not exploit the information for personal gain
How can market participants legally share market information without violating insider trading rules?
A. By sharing any non-public information they come across
B. By ensuring the information is general and does not specifically relate to a single company
C. By only sharing information with their closest colleagues
D. By passing on sensitive details anonymously
Chapter 4, Section 2.3.2 Market Information
B. By ensuring the information is general and does not specifically relate to a single company
**Explanation: **Market participants can share general market information that does not pertain specifically to one company or security, as this is not considered insider trading. Specific, non-public company information is what constitutes price-sensitive information
What is the purpose of price stabilization in financial markets?
A. To artificially inflate the value of stocks
B. To ensure orderly trading by minimizing price volatility after new share issues
C. To manipulate prices for the benefit of major shareholders
D. To drive up demand for underperforming stocks
Chapter 4, Section 2.3.3 Price Stabilisation
**B. **To ensure orderly trading by minimizing price volatility after new share issues
Explanation: Price stabilization is a legitimate mechanism used to support the price of newly issued shares and prevent excessive volatility during the initial trading period. It helps maintain orderly markets and protect investors from sudden price swings
