Ethics: Part 1: Ethics & Trust in the Investments' Profession

Question 1

What are “stakeholders” ?

Answer 1

individuals or groups of individuals who could be affected either directly or indirectly by a decision and
thus have an interest, or stake, in the decision.

Question 2

What are ethical principles?

Answer 2

beliefs regarding what is good, acceptable, or obligatory behavior and what is bad, unacceptable, or forbidden behavior.

Question 3

What is “ethical conduct” ?

Answer 3

Ethical conduct is behavior that follows moral principles and balances self-interest with both the direct and the indirect consequences of the behavior on others.

Question 4

What is “ethical actions” ?

Answer 4

Ethical actions are those actions that are perceived as beneficial and conforming to the ethical expectations of society.

Question 5

What are “Laws and Regulations” ?

Answer 5

Rules of conduct specified by a governing body, such as a legislature or a regulator, identifying how individuals and entities under its jurisdiction should behave in certain situations

Question 6

What is a “Code of Ethics” ?

Answer 6

Codified beliefs about obligatory and forbidden conduct in a written set of principles

Question 7

What are “Standards of Conduct” ?

Answer 7

Standards of conduct serve as benchmarks for the minimally acceptable behavior of community members and can help clarify the code of ethics.

Question 8

Which of the following statements is most accurate? Ethics can be described as:

A. a commitment to upholding the law.

B. an individual’s personal opinion about right and wrong.

C. a set of moral principles that provide guidance for our behavior

Answer 8

C. a set of moral principles that provide guidance for our behavior

Question 9

Which of the following statements is most accurate? Standards of Conduct:

A. are a necessary component of any code of ethics.

B. serve as a general guide regarding proper conduct by members of a group.

C. serve as benchmarks for the minimally acceptable behavior required of members of a group

Answer 9

C. serve as benchmarks for the minimally acceptable behavior required of members of a group

Question 10

What is a “profession”?

Answer 10

A profession is an occupational community that has specific education, expert knowledge, and a framework of practice and behavior that underpins community
trust, respect, and recognition.

Question 11

True or False:
Professions normalize practitioner behavior.

Answer 11

True

Question 12

What is a “fiduciary duty”?

Answer 12

A fiduciary duty is the legal responsibility to act solely in the best interest of another party.

“Fiduciary” means trust, and a person with a fiduciary duty has a legal obligation to maintain that trust.

Question 13

What is the investment manager’s professional duty when a client’s interests and market interests conflict?

Answer 13

Where client interests and market interests conflict, the
Code and Standards set an investment management professional’s duty to market integrity as the overriding obligation.

Question 14

What is “practice analysis” ?

Answer 14

The CFA Institute Global Body of Investment Knowledge (GBIK) and Candidate Body of Knowledge (CBOK) are updated on an ongoing basis through a process known as practice analysis.

Through interactions with practicing investment management professionals, practice analysis helps ensure that the body of knowledge for the investment management profession remains current and globally relevant.

Question 15

How frequently must a CFA charterholder attest to the continued adherence of CFA’s principles?

Answer 15

Yearly.

CFA charterholders and CFA Program candidates are required to adhere to the Code and Standards and to sign annually a statement attesting to that continued
adherence.

Question 16

Which of the following statements is most accurate? Investment professionals have a special responsibility to act ethically because:

A. the industry is heavily regulated

B. they are entrusted to protect clients’ assets

C. the profession requires compliance with its code of ethics

Answer 16

B is correct. Investment professionals have a special responsibility because clients entrust them to protect the clients’ assets.

Question 17

Which of the following statements best completes the following sentence?

Professionals use their specialized knowledge and skills:

A. in service to others.

B. to advance their career.

C. for the exclusive benefit of their employers.

Answer 17

A is correct. Professionals use specialized knowledge and skills in service to others. Their career and employer may benefit, but those results are not the
primary focus of a professional’s use of his or her specialized knowledge and skills.

Question 18

Which of the following statements is most accurate? A profession’s code of ethics:

A. includes standards of conduct or specific benchmarks for behavior.

B. ensures that all members of a profession will act ethically at all times.

C. publicly communicates the shared principles and expected behaviors of a profession’s members.

Answer 18

C is correct.

A profession’s code of ethics publicly communicates the shared principles and expected behaviors of a profession’s members.

The existence of a code of ethics does not ensure that all members will behave in a manner consistent with the code and act ethically at all times.

A profession will often establish a disciplinary process to address alleged violations of the code of ethics.

A profession may adopt standards of conduct to enhance and clarify the code of ethics.

Question 19

What is “overconfidence bias” ?

Answer 19

Overconfidence bias is a type of bias that suggests that we are more likely to overestimate the morality of our own behavior, particularly in situations that we have not faced before.

Question 20

What are “Situational Influences” ?

Answer 20

Situational influences are external factors, such as environmental or cultural elements, that shape our thinking, decision making, and behavior.

Question 21

What is the “Bystander Effect” ?

Answer 21

An phenomena in which people are less likely to intervene in an emergency when others are present

Question 22

True or False:

People tend to behave more ethically when they think someone else is watching or when there is a mirror placed close to them.

Answer 22

True

Question 23

True or False:

Large financial rewards and/or prestige can motivate individuals to act in their own short-term self-interests, ignoring possible short-term risks or consequences to
themselves and others as well as long-term risks or consequences for both themselves and others.

Answer 23

True

Question 24

Which of the following will most likely determine whether an individual will behave unethically?

A. The person’s character

B. The person’s internal traits and intrinsic motivation

C. External factors, such as environmental or cultural elements

Answer 24

C is correct.

Social psychologists have shown that even good people may behave unethically in difficult situations. Situational influences, which are external factors (e.g., environmental or cultural elements), can shape our
thinking, decision making, and behavior and are more likely to lead to unethical behavior than internal traits or character.

Question 25

Which of the following statements is most accurate?

A. Large financial rewards, such as bonuses, are the most powerful situational influences.

B. When decision making focuses on short-term factors, the likelihood of ethical conduct increases.

C. Situational influences can motivate individuals to act in their short-term self-interests without recognizing the long-term risks or consequences for themselves and others

Answer 25

C is correct.

Situational influences can motivate individuals to act in their short-term self-interests without recognizing the long-term risks or consequences for themselves and others.

Large financial rewards are powerful situational influences, but in some situations, other situational influences, such as loyalty to colleagues, may be even more powerful.

Question 26

True or False:

Legal and ethical conduct are always the same.

Answer 26

False.

Legal and ethical conduct are not always the same

Question 27

What is “whistelblowing” ?

Answer 27

Whistleblowing refers to the disclosure by an individual of dishonest, corrupt, or illegal activity by an organization or government.

Question 28

What is whistelblowing an example of?

Answer 28

A disconnect between legal and ethical conduct.

Depending on the circumstances, a whistleblower may violate organizational policies and even local laws with the disclosure; thus, a whistleblower’s actions may be deemed illegal and yet considered by some to be ethical.

Question 29

Will increased regulation always improve ethical behavior of persons in financial markets?

Answer 29

No.

A new law may reduce or even eliminate the existing activity while simultaneously creating an opportunity for a different, but similarly problematic, activity.

Question 30

True or False:

Ethical conduct goes beyond what is legally required and encompasses what different societal groups or communities, including professional associations, consider to be ethically correct behavior.

Answer 30

True

Question 31

What must individuals do in order to act ethically?

Answer 31

To act ethically, individuals need to be able to think
through the facts of the situation and make good choices even in the absence of clear laws or rules.

Question 32

What is “judgement” ?

Answer 32

the ability to make considered decisions and reach sensible conclusions.

Question 33

Which of the following statements is most accurate?
A. All legal behavior is ethical behavior.
B. Some ethical behavior may be illegal.
C. Legal standards represent the highest standard.

Answer 33

B is correct.

Some ethical behavior may be illegal. Civil disobedience is an example of what may be illegal behavior that some consider to be ethical.

Legal and ethical behavior often coincide but not always. Standards of conduct based on ethical principles may

Question 34

Which of the following statements is most accurate?

A. Increased regulations are the most useful means to reduce unethical behavior by market participants.

B. Regulators quickly design and implement laws and regulations to address practices that adversely affect the fairness and efficiency of markets.

C. New laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different, but similarly problematic, conduct.

Answer 34

C is correct.

New laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different, but similarly problematic, conduct.

Question 35

What is the purpose of an ethical decision-making framework?

Answer 35

An ethical decision-making framework will help a decision maker see the situation from multiple perspectives and pay attention to aspects of the situation that may be less evident with a short-term, self-focused perspective.

The goal of getting a broader picture of a situation is to be able to create a plan of action that is less likely to harm stakeholders and more likely to benefit them.

Question 36

What are the five steps to the ethical decision-making framework?

Answer 36

1. Identify
2. Consider
3. Decide
4. Act
5. Reflect

Question 37

What should someone “identify” during an ethical decision-making process?

Answer 37

Identify: Relevant facts, stakeholders and duties owed, ethical principles, conflicts of interest

Question 38

What should someone “consider” during the ethical decision-making process?

Answer 38

Consider: Situational influences, additional guidance, alternative actions

Question 39

What should someone “reflect” on during the ethical decision-making process?

Answer 39

Reflect: Was the outcome as anticipated? Why or why not?

Question 40

List some CFA ethical principles

Answer 40

(1) Duty of loyalty to employer
(2) Client interests come first
(3) Maintain confidences and confidentiality of information
(4) Objectivity of analysis
(5) Fairness to market participants

Question 41

Which of the following statements is most accurate? An ethical decision-making framework:

A. is only beneficial when a firm lacks a code of ethics.

B. is used to improve compliance with laws and regulations.

C. is a tool for analyzing the potential alternative actions and consequences of a decision.

Answer 41

C is correct.

An ethical decision-making framework is a tool for analyzing the potential alternative actions and consequences of a decision.

Question 42

Which of the following is most accurate?
Ethical decision-making frameworks:

A. raise awareness of different perspectives.

B. focus attention on short-term consequences.

C. allocate more weight to those who will directly benefit from the decision.

Answer 42

A is correct.

Ethical decision-making frameworks raise awareness of different perspectives.

The framework should consider short-term consequences, but they are not the focus of the framework.

Similarly, the framework may allocate more weight to those who directly benefit from decisions, but this is
not the primary goal of an ethical decision-making framework.

Question 43

Which of the following is most accurate?
Ethical decision-making frameworks:

A. are not needed if behavior is legal.

B. identify who gains the most from a decision.

C. can help reduce unanticipated ethical lapses and unexpected consequences.

Answer 43

C is correct.

Ethical decision-making frameworks can help avoid unanticipated ethical consequences.

As it relates to A, ethics standards are often
higher than legal standards so an ethical decision-making framework would be needed.

Although B is accurate, identifying who gains most from the decision is a small component of the framework.

Question 44

Regarding ethics, what is one clear difference between “professions” and “craft guilds” ?

Answer 44

The requirement to uphold high ethical standards is one clear difference between professions and craft guilds or trade bodies.

Question 45

Regarding ethics, what is a primary goal of professions?

Answer 45

A primary goal of professions is to establish trust among clients and among society in general.

Question 46

How do legal standards and ethical standards differ?

Answer 46

Legal standards are often rule based.

Ethical conduct goes beyond legal standards, balancing self-interest with the direct and indirect consequences
of behavior on others.

Question 47

Benchmarks for minimally acceptable behaviors of community members are:

A. a code of ethics.
B. laws and regulations.
C. standards of conduct.

Answer 47

C. standards of conduct.

Standards of conduct serve as benchmarks for the minimally acceptable behavior of community members and can help clarify the code of ethics.

Question 48

Specialized knowledge and skills, a commitment to serve others, and a shared code of ethics best characterize a(n):

A. vocation.
B. profession.
C. occupation.

Answer 48

B. profession.

Question 49

When unethical behavior erodes trust in an investment firm, that firm is more likely to experience:

A. lower revenues only.
B. higher expenses only.
C. lower revenues and higher expenses.

Answer 49

C. lower revenues and higher expenses.

Question 50

High ethical standards are distinguishing features of which of the following bodies?

A. Craft guilds
B. Trade bodies
C. Professional bodies

Answer 50

C. Professional bodies

Question 51

Fiduciary duty is a standard most likely to be upheld by members of a(n):

A. employer.
B. profession.
C. not-for-profit body

Answer 51

B. profession.

Question 52

Which of the following best identifies an internal trait that may lead to poor ethical decision making?

A. Overconfidence
B. Loyalty to employer
C. Promise of money or prestige

Answer 52

A. Overconfidence

Question 53

Situational influences in decision making will most likely be minimized if:

A. strong compliance programs are in place.
B. longer-term consequences are considered.
C. individuals believe they are truthful and honest.

Answer 53

B. longer-term consequences are considered.

Question 54

Decision makers who use a compliance approach are most likely to:

A. avoid situational influences.
B. oversimplify decision making.
C. consider more factors than when using an ethical decision-making approach.

Answer 54

B. oversimplify decision making.

Question 55

To maintain trust, the investment management profession must be interdependent with:

A. regulators.
B. employers.
C. investment firms.

Answer 55

C. investment firms.

Question 56

Which is an example of an activity that may be legal but that CFA Institute considers unethical?

A. Making legally required disclosures in marketing materials

B. Trading while in possession of material nonpublic information

C. Disclosure by an employee of his or her own company’s dishonest activity

Answer 56

B. Trading while in possession of material nonpublic information

Question 57

An ethical decision-making framework will most likely:

A. include a pre-determined, uniform sequence.

B. focus exclusively on confirmable facts and relationships.

C. help avoid a decision that has unanticipated ethical consequences.

Answer 57

C. help avoid a decision that has unanticipated ethical consequences.

Question 58

When an ethical dilemma occurs, an investment professional should most likely first raise the issue with a:

A. mentor outside the firm.
B. professional body’s hotline.
C. senior individual in the firm.

Answer 58

C. senior individual in the firm.