Ethics: Part 2: Code of Ethics & Standards of Professional Conduct

Question 1

What is “the handbook” referring to?

Answer 1

Standards of Practice Handbook (Handbook)

Question 2

What is the purpose of the handbook?

Answer 2

The Handbook provides guidance in understanding the interconnectedness of the aspirational and practical principles and provisions of the Code of Ethics and
Standards of Professional Conduct (Code and Standards).

Question 3

What is the purpose of the “code” (i.e., the code of ethics)?

Answer 3

The Code contains high-level aspirational ethical principles that drive members and candidates to create a positive and reputable investment profession.

Question 4

What is the purpose of the “standard” (i.e., the standard of conduct)?

Answer 4

The Standards contain practical ethical principles of conduct that members and candidates must follow to achieve the broader industry expectations.

Question 5

True or False:

The Code and Standards must be regularly reviewed and updated if they are to remain effective and continue to represent the highest ethical standards in the global investment industry

Answer 5

True

Question 6

What is the CFA’s mission?

Answer 6

To lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate
benefit of society

Question 7

What are the six tenants of the Code of Ethics?

Answer 7

(1) Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients, prospective clients, employers, employees,
colleagues in the investment profession, and other participants in the global capital markets.

(2) Place the integrity of the investment profession and the interests of clients above their own personal interests.

(3) Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.

(4) Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.

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

(6) Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Question 8

Within the “Standard of Conduct” section on Professionalism, what is required of a CFA member regarding the law?

Answer 8

Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities.

In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations.

Question 9

Within the “Standard of Conduct” section on Professionalism, what is required of a CFA member regarding “independence and objectivity”?

Answer 9

Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities.

Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.

Question 10

Within the “Standard of Conduct” section on Professionalism, what is required of a CFA member regarding “misrepresentation”?

Answer 10

Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other
professional activities.

Question 11

Within the “Standard of Conduct” section on Professionalism, what is required of a CFA member regarding “misconduct”?

Answer 11

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

Question 12

Within the “Standard of Conduct” section on “Integrity of Capital Markets”, what is required of a CFA member regarding “Material Nonpublic Information”?

Answer 12

Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.

Question 13

Within the “Standard of Conduct” section on “Integrity of Capital Markets”, what is required of a CFA member regarding “Market Manipulation”?

Answer 13

Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants

Question 14

Within the “Standard of Conduct” section on “Duty to Clients” , what is required of a CFA member regarding “Loyalty, Prudence, Care”?

Answer 14

Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment.

Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.

Question 15

Within the “Standard of Conduct” section on “Duty to Clients” , what is required of a CFA member regarding “Fair Dealing”?

Answer 15

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

Question 16

Within the “Standard of Conduct” section on “Duty to Clients” , what is required of a CFA member when:

Members and Candidates are in an advisory relationship with a client….

Answer 16

(1) Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly.

(2) Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action.

(3) Judge the suitability of investments in the context of the client’s total portfolio.

Question 17

Within the “Standard of Conduct” section on “Duty to Clients” , what is required of a CFA member when:

When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style….

Answer 17

When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio.

Question 18

Within the “Standard of Conduct” section on “Duty to Clients” , what is required of a CFA member regarding “Performance Presentation”?

Answer 18

When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.

Question 19

Within the “Standard of Conduct” section on “Duty to Clients” , what is required of a CFA member regarding “Preservation of Confidentiality”?

Answer 19

Members and Candidates must keep information about current, former, and prospective clients confidential unless:

1. The information concerns illegal activities on the part of the client or prospective client,
2. Disclosure is required by law, or
3. The client or prospective client permits disclosure of the information.

Question 20

Within the “Standard of Conduct” section on “Duty to Employers” , what is required of a CFA member regarding “Loyalty”?

Answer 20

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

Question 21

Within the “Standard of Conduct” section on “Duty to Employers” , what is required of a CFA member regarding “Additional Compensation Arrangements”?

Answer 21

Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.

Question 22

Within the “Standard of Conduct” section on “Duty to Employers” , what is required of a CFA member regarding “Responsibilities of Supervisors”?

Answer 22

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.

Question 23

Within the “Standard of Conduct” section on “Investment Analysis, Recommendations, & Actions” , what is required of a CFA member regarding “Diligence”?

Answer 23

Diligence and Reasonable Basis

Members and Candidates must:
1. Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.

2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.

Question 24

Within the “Standard of Conduct” section on “Investment Analysis, Recommendations, & Actions” , what is required of a CFA member regarding “Communication”?

Answer 24

1. Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly
   disclose any changes that might materially affect those processes.
2. Disclose to clients and prospective clients significant limitations and risks associated with the investment process.
3. Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients.
4. Distinguish between fact and opinion in the presentation of investment analysis and recommendations.

Question 25

Within the “Standard of Conduct” section on “Investment Analysis, Recommendations, & Actions” , what is required of a CFA member regarding “Record Retention”?

Answer 25

Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.

Question 26

Within the “Standard of Conduct” section on “Conflict of Interest” , what is required of a CFA member regarding “Disclosure of Conflicts”?

Answer 26

Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer.

Members and Candidates must ensure that such
disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.

Question 27

Within the “Standard of Conduct” section on “Conflict of Interest” , what is required of a CFA member regarding “Priority of Transactions”?

Answer 27

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

Question 28

Within the “Standard of Conduct” section on “Conflict of Interest” , what is required of a CFA member regarding “Referral Fees”?

Answer 28

Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration,
or benefit received from or paid to others for the recommendation of products or services.

Question 29

Within the “Standard of Conduct” section on “RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE” ,

what is required of a CFA member regarding

“Conduct as Participants in CFA Institute Programs”

Answer 29

Members and Candidates 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.

Question 30

Within the “Standard of Conduct” section on “RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE” ,

what is required of a CFA member regarding

“Reference to CFA Institute, the CFA Designation, and the CFA Program”

Answer 30

When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, 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 CFA Program.

Question 31

The Standards of Practice Handbook provides guidance:

A. regarding the penalties incurred as a result of ethical violations.

B. to which all CFA Institute members and candidates must adhere.

C. through explanatory material and examples intended to be all inclusive.

Answer 31

B. to which all CFA Institute members and candidates must adhere.

Question 32

Which of the following statements best describes an aspect of the Professional Conduct Program process?

A. Inquiries are not initiated in response to information provided by the media.

B. Investigations result in Disciplinary Review Committee panels for each case.

C. Investigations may include requesting a written explanation from the member or candidate.

Answer 32

C is correct.

When an inquiry is initiated, the Professional Conduct staff conducts an investigation that may include requesting a written explanation from the member or candidate.

A is incorrect because Professional Conduct inquiries can be initiated in response to information provided by the media. CFA Institute staff may become aware of questionable conduct by a member or candidate through the media, regulatory notices, or another public source.

B is incorrect because although the Disciplinary Review Committee (DRC) is responsible for enforcement of the Code and Standards in conjunction with the Professional Conduct Program (PCP), only in the event that a member or candidate does not accept the charges and proposed sanction is the matter referred to a panel composed of DRC members.

Question 33

A current Code of Ethics principle reads in full, “Promote the integrity”:

A. and viability of the global capital markets.”

B. of and uphold the rules governing capital markets.”

C. and viability of the global capital markets for the ultimate benefit of society.”

Answer 33

C is correct. One of the principles in the Code of Ethics was updated to reflect the role that the capital markets have in society as a whole.

A is incorrect because it is incomplete, missing the additional language to reflect the role that the capital markets have in society as a whole.

B is incorrect because this is the old principle as written in the Code of Ethics, which was recently updated to reflect the role of the capital markets in society as
a whole.

Question 34

As stated in the revised 11th edition, the Standards of Professional Conduct:

A. require supervisors to focus on the detection and prevention of violations.

B. adopt separate ethical considerations for programs such as CIPM and Investment Foundations.

C. address the risks and limitations of recommendations being made to clients.

Answer 34

C is correct. Given the constant development of new and exotic financial instruments and strategies, the standard regarding communicating with clients now
includes an implicit requirement to discuss the risks and limitations of recommendations being made to clients.

A is incorrect because the updated standard for members and candidates with supervision or authority over others within their firms stresses broader compliance expectations, which include the detection and prevention aspects of the original version that was the prior focus.

B is incorrect because the updated standard not only maintains the integrity of the CFA Program but also expands the same (not separate) ethical considerations
when members or candidates participate in such programs as the CIPM Program and the Investment Foundations Certificate.

Question 35

According to the Code of Ethics, members of CFA Institute and candidates for the CFA designation must:

A. maintain their professional competence to exercise independent professional judgment.

B. place the integrity of the investment profession and the interests of clients above their own personal interests.

C. practice in a professional and ethical manner with the public, clients, and others in the global capital markets.

Answer 35

B is correct. Members of CFA Institute and candidates for the CFA designation must place the integrity of the investment profession and the interests of clients
above their own personal interests.

A is incorrect because members of CFA Institute and candidates for the CFA designation must maintain and improve their professional competence and strive
to maintain and improve the competence of other investment professionals. The exercise of independent professional judgment is associated with using reasonable care.

C is incorrect because members of CFA Institute and candidates for the CFA designation must practice and encourage others to practice in a professional and
ethical manner that will reflect credibly on themselves and the profession. Members are supposed to act with integrity, competence, diligence, and respect and in
an ethical manner with the public, clients, and other market participants.

Question 36

Which of the following statements best describes an aspect of the Standards of Professional Conduct?

Members and candidates are required to:

A. ensure any portfolio mandate followed is fair, accurate, and complete.

B. promptly disclose changes that might materially affect investment processes.

C. have a reasonable and adequate basis for decisions about client confidentiality.

Answer 36

B is correct.

The current Standards of Professional Conduct requires members and candidates to promptly disclose any changes that might materially affect investment processes.

A is incorrect because under Standard III.C.2 Suitability, when members and candidates are responsible for managing a portfolio according to a specific mandate, they must take only investment actions that are consistent with the stated objectives of the portfolio.

The “fair, accurate, and complete” criterion relates to
the Standard III D Performance Presentation.
C is incorrect because under Standard III.E.1, 2, 3 Preservation of Confidentiality, members and candidates must keep information about current clients confidential unless the information concerns illegal activities on the part of the client, disclosure is required by law, or the client permits disclosure.

No decisions on confidentiality are required, with the “reasonable and adequate basis” criterion related to Standard V.A.2 Diligence and Reasonable Basis.

Question 37

Which of the following responses most completely represents an ethical principle of CFA Institute as outlined in the Standards of Practice Handbook?

A. Individual professionalism

B. Responsibilities to clients and employers

C. Ethics involved in investment analysis and recommendations

Answer 37

A is correct.

Within the Standards of Practice Handbook, CFA Institute addresses ethical principles for the profession in the following Standards: individual professionalism; integrity in capital markets; responsibilities to clients, responsibilities to employers; ethics involved in investment analysis, recommendations, and actions; and possible conflicts of interest.

B is incorrect because it represents, and combines, two ethical principles, those relating to the Standards “Duties to Clients” and “Duties to Employers.”

C is incorrect because the ethical principle (and Standard) relating to ethics in investment analysis and recommendations also includes actions.

Question 38

A CFA Institute member would violate the standard for material nonpublic information by:

A. conducting price distortion practices.

B. inappropriately causing others to act.

C. inadequately maintaining investment records.

Answer 38

B is correct. Under Standard II.A Material Nonpublic Information, members having material nonpublic information that could affect the value of an investment
must not cause others to act on the information.

A is incorrect because price distortion is mentioned in the Standard II.B Market Manipulation, not Standard II.A Material Nonpublic Information.

C is incorrect because the maintenance of appropriate records to support investment analyses is noted in Standard V.C Record Retention, not Standard II.A
Material Nonpublic Information.

Question 39

10. As part of the Duties to Clients standard, members and candidates must:

A. document client financial constraints after an initial investment action.

B. maintain an equal balance of interests owed to their clients and employers.

C. deal fairly and objectively with all clients when engaging in professional activities.

Answer 39

C is correct. Under the III.B Fair Dealing section of the Duty to Clients standard, members and candidates must deal fairly and objectively with all clients when
providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.

A is incorrect because under Standard III.C.1a Suitability, a section of Duties to Clients, members and candidates in an advisory relationship must make a
reasonable inquiry into a client’s financial constraints prior to (not after) taking investment action and must reassess and update this regularly

B is incorrect because under Standard III.A Loyalty, Prudence, and Care, members and candidates must act for the benefit of their clients and place their
clients’ interests before (not maintain an equal balance with) their employer’s or
their own interests.

Question 40

11. The Duties to Employers standard states that members and candidates must not:

A. accept any gifts that might compromise their independence and objectivity.

B. deprive their employer of their skills and abilities as related to their employment.

C. accept compensation competing with their employer’s interest and with the written consent of all parties involved.

Answer 40

B is correct. The IV.A Loyalty section of the Duties to Employers standard states that members and candidates cannot deprive their employer of the advantage of their skills and abilities in matters related to their employment.

A is incorrect because accepting gifts that might compromise a member or candidate’s independence and objectivity is addressed by Standard I.B Independence and Objectivity, a section of Professionalism, not under Standard IV Duties to
Employers.

C is incorrect because IV.B Additional Compensation Arrangements, part of the Duties to Employers standard, permits members and candidates to accept
compensation that competes with their employer’s interest if they obtain written consent from all parties involved.

Question 41

12. The Investment Analysis, Recommendations, and Actions standard states that members and candidates must:

A. find an investment suitable for their client before making a recommendation.

B. make reasonable efforts to ensure that performance presentation is fair, accurate, and complete.

C. distinguish between fact and opinion in the presentation of investment analysis and recommendations.

Answer 41

C is correct. The V.B.4 Communications with Clients and Prospective Clients section of the Investment Analysis, Recommendations, and Actions standard states that members and candidates must distinguish between fact and opinion in the presentation of investment analysis and recommendations.

A is incorrect because this standard is discussed in the III.C.1b Suitability section of the Duties to Clients standard.

B is incorrect because performance presentation is discussed in the III.D Performance Presentation section of the Duties to Clients standard.

Question 42

13. Based on the Conflicts of Interest standard, members and candidates must:

A. disclose, as required by law, those conflicts interfering with their professional duties.

B. disclose, as appropriate, any benefit paid to others for the recommendation of products.

C. seek employer approval before prioritizing their investment transactions over those clients.

Answer 42

B is correct. The VI.C Referral Fees section of the Conflicts of Interest standard requires members and candidates to disclose to their employer, clients, and
prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.

A is incorrect because the VI.A Disclosure of Conflicts section of the Conflicts of Interest standard requires members and candidates to make full and fair disclosure of all matters (not limited to legal requirements) that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer.

C is incorrect because the VI.B Priority of Transactions section of the Conflicts of Interest standard requires members and candidates to give priority to investment transactions for clients and employers versus those in which a member or candidate is the beneficial owner. This requirement is not waived by an employer’s approval.

Question 43

14. The Responsibilities as a CFA Institute Member or CFA Candidate Standard explicitly states a requirement regarding:

A. loyalty.
B. responsibility of supervisors.
C. reference to the CFA Program.

Answer 43

C is correct. The VII.B Reference to CFA Institute, the CFA Designation, and the CFA Program section of the Responsibilities as a CFA Institute Member or CFA
Candidate standard explicitly states the appropriate manner to make reference to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program.

A is incorrect because Standard VII Responsibilities as a CFA Institute Member or CFA Candidate standard does not refer to loyalty. Loyalty is addressed in two
other standards, Standard III.A Loyalty, Prudence, and Care and Standard IV.A Loyalty.

B is incorrect because Standard VII Responsibilities as a CFA Institute Member or CFA Candidate standard does not refer to the responsibility of supervisors. The responsibility of supervisors is addressed in Standard IV.C Responsibility of Supervisors.