R02 Code of Ethics and Standards of Professional Conduct - Answers

Question 1
L1ET-PQ0101-1410
LOS: LOS-0010
Lesson Reference: Lesson 1: Code of Ethics and Standards of Professional Conduct
Difficulty: medium
Oversight and responsibility for the CFA Institute Professional Conduct Program is maintained by the:
Board of Governors
CEO
Disciplinary Review Committee
Rationale
 This Answer is Correct
The CFA Institute Board of Governors maintains oversight and responsibility for the Professional
Conduct Program (PCP), which, in conjunction with the Disciplinary Review Committee (DRC), is
responsible for enforcement of the Code and Standards.
Question 2
L1R01TB-AC009-1512
LOS: LOS-0025
Difficulty: medium
According to the Integrity of Capital Markets Standard, members must not knowingly:
Exploit information not available to all market participants.
Cause others to act on material nonpublic information.
Possess material nonpublic information.
Rationale
 Exploit information not available to all market participants.
Standard II Integrity of Capital Markets prohibits trading on inside information and market
manipulation. Material nonpublic information includes information that is relevant to the price of the
security and unknown to the public at large. Causing another to act on inside information is equivalent
to acting on it yourself. The mere possession of inside information is not itself a violation.
Rationale
 Cause others to act on material nonpublic information.
Rationale
 Possess material nonpublic information.
Question 3
L1ET-PQ0102-1410
LOS: LOS-0010
Difficulty: medium
If a member or candidate does not accept the charges and proposed sanction levied by the CFA Institute
under the Professional Conduct Program, the matter is referred to a panel composed of
the Board of Governors
Senior CFA Institute executives
Disciplinary Review Committee members
Rationale
If the member or candidate does not accept the charges and proposed sanction levied by the CFA
Institute under the Professional Conduct Program, the matter is referred to a panel composed of DRC
members. The panel reviews materials and presentations from Professional Conduct staff and from the
member or candidate. The panel's task is to determine whether a violation of the Code and Standards
or testing policies occurred and, if so, what sanction should be imposed.
Question 4
L1ETR01-LIC001-1510
LOS: LOS-0020
Difficulty: medium
Which of the following is not a concept covered by the CFA Institute Code of Ethics?
Competence.
Integrity and diligence.
Remuneration levels of investment professionals.
Rationale
Remuneration of investment professionals is not explicitly covered in the Code of Ethics. Disclosure of
compensation is stipulated in Standard IV(B): Additional Compensation Arrangements and in Standard
VI(C): Referral Fees.
Question 5
L1R01TB-AC017-1512
LOS: LOS-0025
Difficulty: medium
When communicating recommendations to clients, the Investment Analysis, Recommendations, and Actions
Standard requires members to:
disclose the detailed specifications of any financial models used in the analysis.
retain and make all research documentation available to clients upon request.
disclose any material changes to the member's investment selection methodology.
Rationale
 disclose the detailed specifications of any financial models used in the analysis.
Investors choose managers based on a variety of characteristics. One common factor is the investment
style or methodology employed by the manager. If the manager changes that methodology, the client
should be informed so that he can make a reasonable decision as to whether the manager still meets
his needs.
Conflicts of interest are a common dilemma for investment professionals. The Standards of
Professional Conduct provide guidance on handling them. First, members should anticipate the
sources of conflicts and avoid them. Second, if it is unavoidable, you should disclose the conflict to the
affected clients in enough detail that they might make an informed decision as to whether it might
prove to disadvantage them. The Standards do not categorically prohibit gifting, bonuses, or referral
fees. They do, however, require formal disclosures to employers and clients.
Rationale
 retain and make all research documentation available to clients upon request.
his needs.
Rationale
 disclose any material changes to the member's investment selection methodology.
his needs.
Question 6
L1R01TB-AC010-1512
LOS: LOS-0025
Difficulty: medium
In the event that local law is in conflict with GIPS, firms must:
present two versions of their performance.
comply with local law without further disclosure.
comply with local law and disclose the nature of the conflict.
Rationale
 present two versions of their performance.
When in conflict, GIPS requires that firms conform to applicable laws and to disclose the nature of the
conflict.
Rationale
 comply with local law without further disclosure.
conflict.
Rationale
 comply with local law and disclose the nature of the conflict.
conflict.
Question 7
L1R01TB-AC013-1512
LOS: LOS-0010
Difficulty: medium
An investigation into the professional conduct of a member may be initiated by:
A Media Report An Anonymous Phone Call
A. Yes No
B. No Yes
C. Yes Yes
Row A
Row B
Row C
Rationale
 Row A
A PCP investigation may be initiated by one of four occurrences. 1) Selfreporting of an incident on the
member's annual disclosure statement; 2) A written complaint filed with the PCP; 3) A media report
implicating a violation; 4) An exam proctor report filed from an official examination center.
Rationale
 Row B
Rationale
 Row C
Question 8
L1ET-TBB205-1412
LOS: LOS-0010
Difficulty: medium
The CFA Standards of Professional Conduct III (Duties to Client) does not include which of the following
items?
Fair dealing.
Suitability.
Priority of transactions.
Rationale
Priority of transactions is covered under the Conflicts of Interest section of the CFA Standards of
Professional Conduct.
Question 9
L1R01TB-AC014-1512
LOS: LOS-0025
Difficulty: medium
The Code of Ethics requires members to:
Maximize Their Clients' Wealth Strive to Improve the Competence of Their Peers
A. Yes No
B. No Yes
C. Yes Yes
Row A
Row B
Row C
Rationale
 Row A
The Code of Ethics require covered persons to: act with integrity and competence, place the integrity of
the profession and clients' interests ahead of their own, use reasonable care and independent
judgment, be a credit to the profession, promote the integrity of the capital markets, maintain their
own competence and improve others within the profession. It does not require the maximization of
clients' wealth.
Rationale
 Row B
clients' wealth.
Rationale
 Row C
clients' wealth.
Question 10
L1ET-TBB201-1412
LOS: LOS-0010
Difficulty: medium
The Asset Manager Code of Conduct does not provide guidelines in which of the following areas?
Loyalty to client.
Investment process.
Client fees.
Rationale
The Asset Manager Code of Conduct does not address how managers should charge their clientele.
Question 11
L1R02TB-BW004-1612
LOS: LOS-0020
Difficulty: easy
According to Standard III (C) Suitability, when members and candidates are in an advisory relationship with
a client, they must:
Make a reasonable inquiry into a client's marital status.
Judge the suitability of investments in the context of the client's total portfolio.
Determine that an investment is suitable to a client without adherence to the client's written
objectives.
Rationale
 Make a reasonable inquiry into a client's marital status.
The first choice is incorrect. They should inquire about his investment experience, risk and return
objectives, and financial constraints.
Rationale
 Judge the suitability of investments in the context of the client's total portfolio.
The second choice is correct. This statement is true.
Rationale
 Determine that an investment is suitable to a client without adherence to the client's written
objectives.
The third choice is incorrect. They should determine that an investment is suitable to a client. It should
be consistent with his written objectives.
Question 12
L1R01TB-AC016-1512
LOS: LOS-0025
Difficulty: medium
According to the Duties to Clients Standard, members are obligated to:
place their employer's interests ahead of their own.
judge the suitability of assets based on their stand-alone risk.
provide the names of former clients to prospective customers.
Rationale
 place their employer's interests ahead of their own.
Standard III Duties to Clients requires that covered persons place both their clients' and employer's
interests ahead of their own. Assets' risk should be judged in a portfolio context. Confidentiality would
prohibit a covered person from sharing the names of clients with prospects.
Rationale
 judge the suitability of assets based on their stand-alone risk.
Rationale
 provide the names of former clients to prospective customers.
Question 13
L1R02TB-BW003-1612
LOS: LOS-0020
LOS: LOS-0025
Difficulty: easy
Which of the following is NOT part of the CFA Institute Code of Ethics?
Competence
Contractual provisions
Independent judgment
Rationale
 Competence
The first choice is incorrect. This is part of the Code of Ethics.
Rationale
 Contractual provisions
The second choice is correct. Contractual provisions are not part of the Code of Ethics.
Rationale
 Independent judgment
The third choice is incorrect. This is part of the Code of Ethics.
Question 14
L1ET-TBB203-1412
LOS: LOS-0010
Difficulty: medium
The CFA Standards of Professional Conduct—Professionalism does not include which of the following items?
Knowledge of the law.
Representation.
Misconduct.
Rationale
CFA Standards of Professional Conduct—Professionalism includes misrepresentation, not
representation as a major category.
Question 15
L1R01TB-AC006-1512
LOS: LOS-0025
Difficulty: medium
Under the Code of Ethics, members must:
Use reasonable care in performing their professional duties.
Disclose the format and methods used in their analysis.
Apply the Code and Standards if they are stricter than governing laws.
Rationale
 Use reasonable care in performing their professional duties.
The Code is distinct from the Standards of Professional Conduct. The Code represents six guiding
principles that inform and underlie the Standards. Of the choices, only the principle of reasonable care
is explicitly stated in the Code.
Rationale
 Disclose the format and methods used in their analysis.
Rationale
 Apply the Code and Standards if they are stricter than governing laws.
Question 16
L1R01TB-AC011-1512
LOS: LOS-0025
Difficulty: medium
Patricia Chan is a finance professor at a local university and a CFA charterholder. She had a conversation
with two of her colleagues, Dr. Yi and Dr. Smith, about the placement of the CFA designation after their
names. Each made the following statements:
Chan: “Members are required to list the CFA designation before their PhD.”
Yi: “Members are required to list the CFA designation after their PhD.”
Smith: “Members may choose to list the CFA designation before or after their PhD.”
Which of the professors' statements is correct?
Chan is correct.
Yi is correct.
Smith is correct.
Rationale
 Chan is correct.
Standard VII(B) does not specify the order in which the CFA designation must appear among other
credentials following a member's name. The professors may place “CFA” either before or after “PhD” as
they choose.
Rationale
 Yi is correct.
they choose.
Rationale
 Smith is correct.
they choose.
Question 17
L1R01TB-AC005-1512
LOS: LOS-0025
Difficulty: medium
Mika Shane, CFA, is an analyst with Zeta Consulting. In preparing an analysis for a prospective merger
between Mega Trucking and Big Haul Trucking, Shane purchases several reports prepared by other analysts.
The reports contain a variety of statistics summarized in line and bar charts. Using the same data, Shane
converts them to pie and point charts, renames the charts for her purposes, and modifies the labels used for
the data. According to the Standards of Professional Conduct, is Shane required to cite the source of each
chart?
Yes.
No, because she purchased the reports and now owns the data.
No, because she modified the charts from their original layouts.
Rationale
 Yes.
Shane must cite the source so that the reader can make an informed judgment as to their credibility.
Furthermore, simply making cosmetic changes to the charts would not imply that the underlying data
was collected and summarized by Shane.
Rationale
 No, because she purchased the reports and now owns the data.
Rationale
 No, because she modified the charts from their original layouts.
Question 18
L1R02TB-BW001-1612
LOS: LOS-0020
Difficulty: easy
Which of the following is not a component of the Code of Ethics?
Place their own personal interests above the integrity of the investment profession and the
interests of clients.
Must not engage in any professional conduct involving dishonesty, fraud, or deceit.
Practice and encourage others to practice in a professional and ethical manner that will
reflect credit on themselves and the profession.
Rationale
 Place their own personal interests above the integrity of the investment profession and the
interests of clients.
The first choice is correct. This is not a component.
Rationale
 Must not engage in any professional conduct involving dishonesty, fraud, or deceit.
The second choice is incorrect. This is a component of the Code of Ethics.
Rationale
 Practice and encourage others to practice in a professional and ethical manner that will
reflect credit on themselves and the profession.
The third choice is incorrect. This is a component of the Code of Ethics.
Code of Ethics:
1. Act with integrity, competence, diligence, 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 of, and uphold the rules governing, capital markets.
6. Maintain and improve their professional competence and strive to maintain and improve the
competence of other investment professionals.
Question 19
L1R01TB-AC004-1512
LOS: LOS-0025
Difficulty: medium
Before entering an arrangement involving additional compensation from a party other than your employer,
the Duties to Employers Standard requires written consent be received from:
Your Employer The Other Party
A. Yes No
B. No Yes
C. Yes Yes
Row A
Row B
Row C
Rationale
 Row A
Standard IV Duties to Employers requires that additional compensation arrangements be disclosed to
your employer and that written consent is received from both parties.
Rationale
 Row B
Rationale
 Row C
Question 20
L1ET-TBB214-1412
LOS: LOS-0020
Difficulty: medium
John works at an investment consulting firm that provides manager search and selection services. His boss
asks John to place a manager in a client presentation that would otherwise not fit the search criteria. His
boss believes the manager will recommend his consulting firm to other clientele if selected. John's boss is
most likely violating Standard:
1(A).
1(B).
1(C).
Rationale
Standard 1(B) covers issues pertaining to influencing analysts during the manager search and selection
process.
Question 21
L1R02TB-BW009-1612
LOS: LOS-0025
Difficulty: medium
Which of the following is least likely required of fiduciaries that are responsible for pension plans?
Judging investments in the context of the total portfolio.
Supporting the sponsor's management during proxy fights.
Acting solely in the interest of plan participants.
Rationale
 Judging investments in the context of the total portfolio.
The first choice is incorrect.
Rationale
 Supporting the sponsor's management during proxy fights.
The second choice is correct. Under Standard III (A) Loyalty, Prudence, and Care, fiduciaries must
evaluate management's proposals during proxy fights to see if they are in the best interest of the plan
participants. If management's ideas are justifiable and reasonably ensure plan participants'
betterment, then fiduciaries can support them. If management is only trying to further its own
objectives, especially at the cost of plan participants, then fiduciaries must vote against management
in proxy fights.
Rationale
 Acting solely in the interest of plan participants.
The third choice is incorrect.
Question 22
L1ETR01-LIC002-1510
LOS: LOS-0020
Difficulty: medium
The Code of Ethics requires members and candidates to act with integrity, competence, diligence, respect
and in an ethical manner when dealing with:
Clients and prospective clients only.
The public and clients and prospective clients only.
The public, clients and prospective clients, employers, employees, colleagues in the
investment profession, and participants in global markets.
Rationale
The first component of the Code of Ethics is: “Act with integrity, competence, diligence, respect and in
an ethical manner with the public, clients, prospects, employers, employees, colleagues in the
investment profession and other participants in the global capital markets.”
Question 23
L1R02TB-BW014-1612
LOS: LOS-0025
Difficulty: medium
Which of the following is the most accurate statement of a limitation imposed by the Fair Dealing standard?
Member and candidates are allowed to disclose referral fees within three months after the
service agreement is executed.
CFA charter holders should offer clients a different level of service selectively.
Clients should not be discriminated against when disseminating investment
recommendations and taking investment action.
Rationale
 Member and candidates are allowed to disclose referral fees within three months after the
service agreement is executed.
The first choice is incorrect.
Rationale
 CFA charter holders should offer clients a different level of service selectively.
The second choice is incorrect.
Rationale
 Clients should not be discriminated against when disseminating investment
recommendations and taking investment action.
The third choice is correct. Standard III (B) Fair Dealing states that the dissemination of information
and recommendations to clients must be handled fairly. The other choices are related to Standard VI
(B) Priority of Transactions and Standard VI (C) Referral Fees.
Question 24
L1R01TB-AC008-1512
LOS: LOS-0010
Difficulty: medium
Primary responsibility for oversight of the Professional Conduct Program rests with the CFA Institute's:
Enforcement Committee.
Board of Governors.
Ethics Committee.
Rationale
 Enforcement Committee.
The Board of Governors maintains responsibility for and oversight of the PCP. It and the Disciplinary
Review Committee have the responsibility of enforcing the Code and Standards.
Rationale
 Board of Governors.
Rationale
 Ethics Committee.
Question 25
L1R02TB-BW006-1612
LOS: LOS-0020
Difficulty: easy
Which of the following falls under Standard III Duties to Clients?
Misrepresentation
Fair dealing
Disclosure of conflicts
Rationale
 Misrepresentation
The first choice is incorrect. This falls under Standard I Professionalism.
Rationale
 Fair dealing
The second choice is correct. This falls under Duties to Clients.
Rationale
 Disclosure of conflicts
The third choice is incorrect. This falls under Standard VI Conflicts of Interest.
Question 26
L1R01TB-AC007-1512
LOS: LOS-0025
Difficulty: medium
According to the Conflicts of Interest Standard, members must:
Avoid any conduct that creates a real or potential conflict of interest.
Disclose any compensation received for recommending products or services.
Decline to accept referral fees from parties other than their employer.
Rationale
 Avoid any conduct that creates a real or potential conflict of interest.
Rationale
 Disclose any compensation received for recommending products or services.
Rationale
 Decline to accept referral fees from parties other than their employer.
Question 27
L1ET-TBB204-1412
LOS: LOS-0010
Difficulty: medium
Referral fees are an issue discussed under which portion of the Standards of Professional Conduct?
Integrity of Capital Markets.
Duties to Clients.
Conflicts of Interest.
Rationale
Referral fees are discussed under Conflicts of Interest in the Standards of Professional Conduct.
Question 28
L1R02TB-BW002-1612
LOS: LOS-0020
Difficulty: easy
According to Standard III (D), when communicating investment performance information, members and
candidates must make reasonable efforts to ensure that it is
Fair, accurate, and complete.
Fair, measurable, and complete.
Fair, understandable, and complete.
Rationale
 Fair, accurate, and complete.
The first choice is correct. Standard III (D) states, “When communicating investment performance
information, members and candidates must make reasonable efforts to ensure that it is fair, accurate,
and complete.”
Rationale
 Fair, measurable, and complete.
Rationale
 Fair, understandable, and complete.
Question 29
L1R02TB-BW012-1612
LOS: LOS-0025
Difficulty: medium
Under Standard III (B) Fair Dealing, the following are required actions for compliance except:
Disseminate investment recommendations to all clients regardless of whether the securities
are suitable for the clients.
Ensure the investment recommendation is available to all clients concurrently, where
possible.
Restrict the number of people who would know that an investment recommendation is going
to be communicated.
Rationale
 Disseminate investment recommendations to all clients regardless of whether the securities
are suitable for the clients.
The first choice is correct. To ensure compliance with the Standard, members should seek to
communicate investment recommendations to all clients who have indicated an interest and those for
whom the securities are suitable. There is no need to communicate recommendations to clients for
whom the securities are deemed unsuitable.
Rationale
 Ensure the investment recommendation is available to all clients concurrently, where
possible.
Rationale
 Restrict the number of people who would know that an investment recommendation is going
to be communicated.
Question 30
L1ETR01-LIC003-1510
LOS: LOS-0010
Difficulty: medium
The Professional Conduct staff under the direction of CFA Institute are least likely to make an inquiry into a
member's conduct when:
They perform random checks on members' professional conduct.
The media reports on a member whose professional conduct appears to have been unethical.
Members self-disclose on their Professional Conduct Statement that they are involved in
litigation regarding their investment advice.
Rationale
There is no mention of CFA Institute performing random checks on members' (or candidates') behavior.
The circumstances that might prompt an enquiry are self-disclosure by a member, written complaints,
media, or other public sources providing information, or whenever a candidate is suspected of
comprising their professional conduct during an examination.
Question 31
L1ET-TBB202-1412
LOS: LOS-0010
Difficulty: medium
Under the Code and Standards, Standard III: Duties to Clients does not include which of the following items?
Suitability.
Record retention.
Performance measurement.
Rationale
Record retention falls under Standard V.
Question 32
L1R02TB-BW010-1612
LOS: LOS-0020
Difficulty: medium
According to the Code of Ethics, when practicing in a professional and ethical manner the goal is to:
Resolve conflicts between clients and employers.
Ensure that clients and employers work in harmony.
Reflect credit on the investment profession.
Rationale
 Resolve conflicts between clients and employers.
The first choice is incorrect. Not required.
Rationale
 Ensure that clients and employers work in harmony.
The second choice is incorrect. Not required.
Rationale
 Reflect credit on the investment profession.
The third choice is correct. The Code states that a member shall “practice and encourage others to
practice in a professional and ethical manner that will reflect credit on members and their profession.”
Question 33
L1ET-TBB215-1412
LOS: LOS-0020
Difficulty: medium
Commonwealth Investments reports performance for the past 10 years that shows consistent alpha for their
multiasset class product that has remained consistent in its investment process. However, in some years
they used the S&P 500 as their benchmark, and in other years they used a mix of S&P 500 and Barclays
Aggregate Bond Index, depending on the fund's performance. This use of different benchmarks most likely
violates Standard:
1(A)
1(B)
1(C)
Rationale
Standard 1(C) Misrepresentation covers performance reporting. In this instance Commonwealth
Investments is deceiving its investors about the true alpha generated by changing benchmarks to meet
their own best interests.
Question 34
L1ET-TBB212-1412
LOS: LOS-0020
Difficulty: medium
Jack is an equity research analyst who covers biotech firms. One of the firms he follows offers free travel,
lodging, and attendance at a corporate conference. Which of the following activities would Jack need to
perform to justify accepting this trip?
View the laboratories.
Meet with some of their scientists.
Visit with the CEO.
Rationale
Accepting travel and lodging from a firm must produce benefits to Jack's clients that exceed the
savings he experienced from the free trip. Meeting with the firm's CEO is a rare opportunity and can
provide Jack with valuable insights that can benefit his clientele.
Question 35
L1R02TB-BW005-1612
LOS: LOS-0020
Difficulty: easy
Which of the following is NOT explicitly listed in the Code of Ethics with regard to interactions with covered
persons?
The public
The SEC
Colleagues in the investment profession
Rationale
 The public
The SEC is not explicitly listed in the Code of Ethics. The Code of Ethics explicitly lists how covered
persons should interact with to the public, clients, prospective clients, employers, employees,
colleagues in the investment profession, and other participants in the global capital markets.
Rationale
 The SEC
Rationale
 Colleagues in the investment profession
Question 36
L1R02TB-BW013-1612
LOS: LOS-0020
Difficulty: medium
Which of the following is part of the Code of Ethics?
Use reliable data and exercise independent professional judgment when conducting
Use reasonable care and exercise independent professional judgment when conducting
Use extreme care and exercise independent professional judgment when conducting
Rationale
 Use reliable data and exercise independent professional judgment when conducting
The first choice is incorrect. This is a misstatement of the Code's provision.
Rationale
 Use reasonable care and exercise independent professional judgment when conducting
The second choice is correct. The Code of Ethics states that Members must “use reasonable care and
exercise independent professional judgment when conducting investment analysis, making investment
recommendations, taking investment actions, and engaging in other professional activities.”
Rationale
 Use extreme care and exercise independent professional judgment when conducting
The third choice is incorrect. This is a misstatement of the Code's provision.
Question 37
L1R01TB-AC015-1512
LOS: LOS-0025
Difficulty: medium
According to the Professionalism Standard, members must not, under any circumstances:
accept, solicit, or offer any gifts in the course of their professional duties.
apply the Standards in place of governing civil rules, regulations, or laws.
engage in any act of deceit, dishonesty, or that damages their professional reputation.
Rationale
 accept, solicit, or offer any gifts in the course of their professional duties.
The Professionalism Standard covers: A. Knowledge of the law, B. Independence and objectivity, C.
Misrepresentation, and D. Misconduct. By engaging in any act of deceit, fraud, or illicit activity, a
covered person is in violation of Standard I Professionalism—D. Misconduct.
Rationale
 apply the Standards in place of governing civil rules, regulations, or laws.
Rationale
 engage in any act of deceit, dishonesty, or that damages their professional reputation.
Question 38
L1R02TB-BW008-1612
LOS: LOS-0020
Difficulty: easy
Preservation of confidentiality
Communication with clients and prospective clients
Material nonpublic information
Rationale
 Preservation of confidentiality
The first choice is correct. This falls under Duties to Clients.
Rationale
 Communication with clients and prospective clients
The second choice is incorrect. This falls under Standard V Investment Analysis, Recommendations,
and Actions.
Rationale
 Material nonpublic information
The third choice is incorrect. This falls under Standard II Integrity of Capital Markets.
Question 39
L1ET-PQ0103-1410
LOS: LOS-0010
Difficulty: medium
Sanctions that can be imposed by the CFA Institute under the Professional Conduct Program include all of
the following except:
Public censure
Fines
Suspension of membership
Rationale
Sanctions imposed by CFA Institute may have significant consequences; they include public censure,
suspension of membership and use of the CFA designation, and revocation of the CFA charter.
Candidates enrolled in the CFA Program who have violated the Code and Standards or testing policies
may be suspended or prohibited from further participation in the CFA Program.
Question 40
L1ET-PQ0104-1410
LOS: LOS-0020
Difficulty: medium
Bob Hadrell, CFA, has recently joined a new firm that is currently reviewing its internal code of ethics. As part
of this review, the firm has asked Hadrell for a summary of the CFA Institute Code of Ethics and Standards of
Professional Conduct. Hadrell makes the following two statements:
Statement 1:”Members of CFA Institute and candidates for the CFA designation must promote the integrity
of and uphold the rules governing capital markets.”
Statement 2:” Integrity of Capital Markets: Market Manipulation.”
Hadrell should describe:
Both Statement 1 and Statement 2 as Standards of Professional Conduct

Statement 1 as a component of the Code of Ethics and Statement 2 as a Standard of
Professional Conduct
Statement 1 as a Standard of Professional Conduct and Statement 2 as a component of the
Code of Ethics
Rationale
The Code of Ethics contains six components that address general areas of ethical behavior. The
Standards of Professional Conduct are seven areas of Professional Conduct that deal with specific
types of behavior in certain situations, e.g., Market Manipulation.
Question 41
L1R02TB-BW011-1612
LOS: LOS-0020
Difficulty: medium
Which of the following is under Standard III Duties to Clients?
Priority of transactions
Fair dealing
Misrepresentation
Rationale
 Priority of transactions
The first choice is incorrect. This falls under Standard VI Conflicts of Interest.
Rationale
 Fair dealing
The second choice is correct. This falls under Duties to Clients.
Rationale
 Misrepresentation
The third choice is incorrect. This falls under Standard I Professionalism.
Question 42
L1ET-TBB213-1412
LOS: LOS-0020
Difficulty: medium
Shelly recently started at a Texas based institutional consulting firm that provides manager search and
selection services. During the Christmas holiday she received gifts of chocolates, popcorn, and other holiday
food items from numerous investment managers. With respect to Standard 1(B) of the Professional Code of
Conduct, what must Shelly do?
Report the gifts.
Return the gifts.
Do nothing.
Rationale
Gifts of this nature cannot reasonably be expected to influence Shelly during the manager search and
selection process, especially given the gifts were from numerous, not a select few managers. She is not
required to report the gifts.
Question 43
L1ET-TBB216-1412
LOS: LOS-0020
Difficulty: medium
Sally works for an investment management firm as a client consultant. Her firm's CIO produces a quarterly
research report that is presented at every client meeting. Because Sally is making the presentation, she
believes it is appropriate to put her name on the CIO's research report as well. Sally has most likely violated
Standard:
1(A)
1(B)
1(C)
Rationale
Sally has violated 1(C) Misrepresentation (plagiarism) by putting her name on a report she did not
write.
Question 44
L1R02TB-BW007-1612
LOS: LOS-0020
Difficulty: easy
Performance presentation
Diligence and reasonable basis
Priority of Transactions
Rationale
 Performance presentation
The first choice is correct. This falls under Duties to Clients.
Rationale
 Diligence and reasonable basis
The second choice is incorrect. This falls under Standard V Investment Analysis, Recommendations,
and Actions.
Rationale
 Priority of Transactions
The third choice is incorrect. This falls under Standard VI Conflicts of Interest.

R02 Code of Ethics and Standards of Professional Conduct - Answers

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R02 Code of Ethics and Standards of Professional Conduct - Answers

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Question 1

The third choice is incorrect. This is a component of the Code of Ethics.

Statement 2:” Integrity of Capital Markets: Market Manipulation.”

Hadrell should describe:

Both Statement 1 and Statement 2 as Standards of Professional Conduct

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