Guidance for Standards III–VII – CFA Ethics Standards Level 1 MCQs
STANDARD III: DUTIES TO CLIENTS
Standard III(A) Loyalty, Prudence, and Care
- Which of the following is correct?
- 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.
- Both A&B
- None
- What are the Recommendations for Members as described in Standard III(A) Loyalty, Prudence, and Care?
- Submit to clients, at least quarterly, itemized statements showing all securities in custody and all debits, credits, and transactions.
- Deal fairly with all clients in regard to investment actions.
- Vote proxies in the best interest of clients and ultimate beneficiaries.
- All of the above
Standard III(B) Fair Dealing
- 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.
- The above statement is correct
- The above statement is incorrect
- What are the Recommendations for Members as described in Standard III(B) Fair Dealing?
- Encourage firms to establish compliance procedures requiring proper dissemination of investment recommendations and fair treatment of all customers and clients.
- Maintain a list of clients and holdings—use to ensure that all holders are treated fairly.
- Both A&B
- None
- What are the Recommendations for Firms as described in Standard III(B) Fair Dealing?
- Limit the number of people who are aware that a change in recommendation will be made.
- Disclose trade allocation procedures.
- Shorten the time frame between decision and dissemination.
- All of the above
Standard III(C) Suitability
- When CFA Members and Candidates are in an advisory relationship with a client, they must:
- Judge the suitability of investments in the context of the client’s total portfolio.
- 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.
- Both A&B
- None
- When CFA 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.
- The above statement is correct
- The above statement is incorrect
- What if an investment manager may receive a client request to purchase a security that the manager knows is unsuitable, given the client’s investment policy statement?
- the manager should not make the trade until he has discussed with the client the reasons (based on the IPS) that the trade is unsuitable for the client’s account.
- the manager should make the trade without discussed with the client the reasons (based on the IPS) that the trade is unsuitable for the client’s account.
- may follow his firm’s policy with regard to unsuitable trades.
- None
- What If the trade would have a material impact on the risk/return profile of the client’s total portfolio?
- update the IPS so the client accepts a changed risk profile that would permit the trade.
- the manager may follow firm policy, which may allow the trade to be made in a separate client-directed account.
- the manager may need to reconsider whether to maintain the relationship with the client.
- All of the above
- What are the Recommendations for Members as described in Standard III(C) Suitability?
- Review the investor’s objectives and constraints periodically to reflect any changes in client circumstances.
- For each client, put the needs, circumstances, and investment objectives into a written IPS.
- Both A&B
- None
Standard III(D) Performance Presentation
- When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.
- True
- False
- Which of the following is correct?
- Members must not misstate performance or mislead clients or prospects about their investment performance or their firm’s investment performance.
- Members must not misrepresent past performance or reasonably expected performance, and must not state or imply the ability to achieve a rate of return similar to that achieved in the past.
- Members must make detailed information available on request and indicate that the presentation has offered only limited information.
- All of the above
- What are the Recommendations for Members as described in Standard III(D) Performance Presentation?
- Maintain data and records used to calculate the performance being presented.
- Present the performance of a weighted composite of similar portfolios rather than the performance of a single account.
- Encourage firms to adhere to Global Investment Performance Standards.
- All of the above
Standard III(E) Preservation of Confidentiality
- Members and Candidates must keep information about current, former, and prospective clients confidential unless:
- The information concerns illegal activities on the part of the client
- Disclosure is required by law
- The client or prospective client permits disclosure of the information.
- All of the above
- What are the Recommendations for Members as described in Standard III(E) Preservation of Confidentiality?
- Members should avoid disclosing information received from a client except to authorized coworkers who are also working for the client.
- Members should follow firm procedures for storage of electronic data and recommend adoption of such procedures if they are not in place.
- Both A&B
- None
STANDARD IV: DUTIES TO EMPLOYERS
Standard IV(A) Loyalty
- 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.
- The above statement is correct
- The above statement is incorrect
- Which of the following is correct?
- Members must not engage in any activities that would injure the firm, deprive it of profit, or deprive it of the advantage of employees’ skills and abilities.
- Members should always place client interests above interests of their employer, but consider the effects of their actions on firm integrity and sustainability.
- Both A&B
- None
- When leaving an employer, members must continue to act in their employer’s best interests until their resignation is effective. Activities that may constitute a violation include:
- Misappropriation of trade secrets.
- Misuse of confidential information.
- Soliciting employer’s clients prior to leaving.
- Self-dealing and Misappropriation of client lists.
- All of the above
- Employer records on any medium (e.g., home computer, tablet, cell phone) are the property of the firm.
- True
- False
- What are the Recommendations for Members as described in Standard IV(A) Loyalty?
- Members are encouraged to give their employer a copy of the Code and Standards.
- Best practice is to use separate social media accounts for personal and professional communications.
- Both A&B
- None
Standard IV(B) Additional Compensation Arrangements
- 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.
- The above statement is correct
- The above statement is incorrect
- What are the Recommendations for Members as described in Standard IV(B) Additional Compensation Arrangements?
- Make an immediate written report to the employer detailing any proposed compensation and services, if additional to that provided by the employer.
- Members and candidates who are hired to work part time should discuss any arrangements that may compete with their employer’s interest at the time they are hired and abide by any limitations their employer identifies.
- Both A&B
- None
Standard IV(C) Responsibilities of Supervisors
- 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.
- The above statement is correct
- The above statement is incorrect
- Members with supervisory responsibilities have an obligation to:
- bring an inadequate compliance system to the attention of firm’s management
- recommend corrective action
- Both A&B
- None
- A member or candidate faced with no compliance procedures or with procedures he believes are inadequate must decline supervisory responsibility in writing until adequate procedures are adopted by the firm.
- True
- False
- If there is a violation, ____________ while increasing supervision or placing limitations on the wrongdoer’s activities.
- respond promptly
- conduct a thorough investigation
- Both A&B
- None
- What are the Recommendations for Members as described in Standard IV(C) Responsibilities of Supervisors?
- Require professional conduct evaluations.
- Review employee actions to monitor compliance and identify violations.
- Continually educate staff regarding procedures.
- All of the above
STANDARD V: INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS
Standard V(A) Diligence and Reasonable Basis
- Members and Candidates must:
- Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.
- Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.
- Both A&B
- None
- A list of things that should be considered prior to making a recommendation or taking investment action includes:
- Global and national economic conditions
- A firm’s financial results and operating history, and the business cycle stage.
- A determination of whether peer group comparisons for valuation are appropriate.
- All of the above
- Members should encourage their firms to adopt a policy for periodic review of the quality of third-party research, if they have not. Examples of criteria to use in judging quality are:
- Review assumptions used.
- Determine how rigorous the analysis was.
- Identify how timely the research is.
- All of the above
Standard V(B) Communication with Clients and Prospective Clients
- Members and Candidates must:
- Disclose to clients and prospective clients significant limitations and risks associated with the investment process.
- Distinguish between fact and opinion in the presentation of investment analyses and recommendations.
- Both A&B
- None
- Which of the following is correct?
- In preparing recommendations for structured securities, allocation strategies, or any other nontraditional investment, members must communicate those risk factors specific to such investments.
- Members must communicate significant changes in the risk characteristics of an investment or investment strategy.
- Members must update clients regularly about any changes in the investment process, including any risks and limitations that have been newly identified.
- All of the above
- 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.
- True
- False
STANDARD VI: CONFLICTS OF INTEREST
Standard VI(A) Disclosure of Conflicts
- 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.
- The above statement is correct
- The above statement is incorrect
- The most common conflict that requires disclosure is actual ownership of stock in companies that the member recommends or that clients hold.
- True
- False
- Members must give their employers enough information to judge the impact of a conflict, take reasonable steps to avoid conflicts, and report them promptly if they occur.
- True
- False
Standard VI(B) Priority of Transactions
- Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.
- True
- False
- Which of the following is correct?
- Personal transactions may be undertaken only after clients and the member’s employer have had an adequate opportunity to act on a recommendation.
- Members must not act on information about pending trades for personal gain.
- Both A&B
- None
- All firms should have basic procedures in place that address conflicts created by personal investing. Which of the following areas should be included?
- Establish limitations on employee participation in equity IPOs.
- Establish restrictions on participation in private placements.
- Establish reporting procedures, including duplicate trade confirmations, disclosure of personal holdings and beneficial ownership positions, and preclearance procedures.
- All of the above
- 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.
- The above statement is correct
- The above statement is incorrect
STANDARD VII: RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE
Standard VII(A) Conduct as Participants in CFA Institute Programs
- Members must not engage in any activity that undermines the integrity of the CFA charter. The Standard VII(A) Conduct as Participants in CFA Institute Programs applies to conduct that includes:
- Cheating on the CFA exam or any exam.
- Not following rules and policies of the CFA Program.
- Misrepresenting information on the Professional Conduct Statement (PCS) or the CFA Institute Professional Development Program.
- All of the above
- Candidates who violate any of the CFA exam policies (e.g., calculator, personal belongings, Candidate Pledge) have violated:
- Standard V(B)
- Standard VI(C)
- Standard VII(A)
- Standard VII(B)
- Which of the following requirements CFA Members must satisfy to maintain membership:
- Sign the PCS annually.
- Pay CFA Institute membership dues annually
- Both A&B
- None
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