READINGS: CFA INSTITUTE CODE OF

ETHICS AND STANDARDS OF

PROFESSIONAL CONDUCT
READINGS:
CODE OF ETHICS AND PROFESSIONAL
STANDARDS
LOS a: Describe the structure of the CFA Institute Professional Conduct Program and
the process for the enforcement of the Code and Standards.
❖ The CFA Institute Professional Conduct Program is covered by the CFA Institute Bylaws
and the Rules of Procedure for Proceedings Related to Professional Conduct.
❖ The Program is based on the principles of fairness of the process to members and
candidates and maintaining the confidentiality of the proceedings.
❖ 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.
The CFA Institute Professional Conduct staff conducts inquiries related to professional
conduct. Several circumstances can prompt such an inquiry:
❖ Self-disclosure by members or candidates on their annual Professional Conduct
Statements of involvement in civil litigation or a criminal investigation, or that the member
or candidate is the subject of a written complaint.
❖ Written complaints about a member or candidate’s professional conduct that are received
by the Professional Conduct staff.
❖ Evidence of misconduct by a member or candidate that the Professional Conduct staff
received through public sources, such as a media article or broadcast.
❖ A report by a CFA exam proctor of a possible violation during the examination.
❖ Analysis of exam materials and monitoring of social media by CFA Institute.
Once an inquiry has begun, the Professional Conduct staff may request (in writing) an
explanation from the subject member or candidate and may:
❖ interview the subject member or candidate,
❖ interview the complainant or other third parties, and/or
❖ collect documents and records relevant to the investigation.

The Professional Conduct staff may decide:

❖ that no disciplinary sanctions are appropriate,
❖ to issue a cautionary letter, or
❖ to discipline the member or candidate.
In a case where the Professional Conduct staff finds a violation has occurred and proposes a
disciplinary sanction, the member or candidate may accept or reject the sanction.

If the member or candidate chooses to reject the sanction, the matter will be referred to a disciplinary
review panel of CFA Institute members for a hearing.

Sanctions imposed may include:

❖ revocation of charter holder

❖ suspension of candidate’s continued participation in the CFA Program

❖ public censure (to tell somebody, in a strong and formal way, that he/she has done something
wrong)

❖ condemnation by the member’s peers

(Important point - no monetary fines are involved)

 LOS b: State the six components of the Code of Ethics and the seven Standards of
Professional Conduct.
The Standards of Professional Conduct
I. Professionalism
II. Integrity of Capital Markets
III. Duties to Clients
IV. Duties to Employers
V. Investment Analysis, Recommendations, and Actions
VI. Conflicts of Interest
VII. Responsibilities as a CFA Institute Member or CFA Candidate
Components of the Code of Ethics
❖ 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.
❖ Place the integrity of the investment profession and the interests of clients above their own personal
interests.
❖ Use reasonable care and exercise independent professional judgment when conducting investment
analysis, making investment recommendations, taking investment actions, and engaging in other
professional activities.
❖ Practice and encourage others to practice in a professional and ethical manner that will reflect credit on
themselves and the profession.
❖ Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
❖ Maintain and improve their professional competence and strive to maintain and improve the competence of
other investment professionals.
Punishing abuses in the financial sector is not included in any of the six components of the CFA Code of
Ethics.
 • Sanctions imposed by CFA Institute for violations of the CFA Institute Code of
Ethics or Standards of Professional Conduct least likely include:
A. monetary fines.
B. public censure.
C. revocation of a CFA Charter.

A is correct. Sanctions available to CFA Institute do not include monetary

fines. However, 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.
 • Disclosure of confidential CFA exam information will most likely be detected by
the Professional Conduct staff through:
A. monitoring online and social media.
B. analysis of Proctor Reports.
C. annual Professional Conduct Statements.

A is correct. Professional Conduct inquiries come from a number of

sources including the monitoring of online and social media to detect
disclosure of confidential exam information.
 • Which of the following groups is most likely responsible for maintaining oversight
and responsibility for the Professional Conduct Program (PCP)?
A. CFA Institute Board of Governors
B. Disciplinary Review Committee
C. Professional Conduct Division

A is correct. All CFA Institute members and candidates enrolled in the CFA
Program are required to comply with the Code and Standards. The CFA
Institute Board of Governors maintains oversight and responsibility for the
Professional Conduct Program (PCP).
 • Which of the following is not a component of the CFA Institute Code of Ethics?
A. Promote financial integrity and seek to prevent and punish abuses in the
financial markets.
B. Place the integrity of the investment profession and the interests of clients
above their own personal interests.
C. Practice and encourage others to practice in a professional and ethical manner
that will reflect credit on themselves and the profession.

A is correct. Punishing abuses in the financial sector is not included in any

of the six components of the CFA Code of Ethics.
 • Which of the following least likely reflects the two primary principles of the CFA
Institute Rules of Procedure for Proceedings Related to Professional Conduct?
A. Confidentiality of proceedings
B. Public disclosure of disciplinary sanctions
C. Fair process to the member and candidate

B is correct because the two principles of the Rules of Procedure for

Proceedings Related to Professional Conduct are confidentiality of
proceedings and fair process to the member and candidate.
Standard I: Professionalism
Standard I(A) Knowledge of the Law
❖ Members must understand and comply with all applicable laws, rules, and regulations.
❖ However, members and candidates are not required to have detailed knowledge of or be
experts on all the laws that could potentially govern their activities.

❖ In the event of conflict, Members and Candidates must comply with the stricter law.
❖ Simple, do not violate any law.
❖ Members must not knowingly participate in and must dissociate from any
violation of such laws.
❖ If you know that violations of applicable rules or laws are taking place, either by
co-workers or clients, CFA Institute strongly encourages members and candidates to
report potential violations.
❖ One way to do so is to approach your supervisor or compliance department to remedy the
situation.
❖ If they will not or cannot, then you must dissociate from the activity (When dissociating
from violations, keep records documenting the violations, encourage employer to bring an
end to the violations.)
❖ If this cannot be accomplished, you may, in an extreme case, have to resign from the firm
to be in compliance with this Standard.
❖ There is no requirement in the Standards to report wrongdoers, but local law may require
it; members are “strongly encouraged” to report violations to CFA Institute Professional
Conduct Program.
Standard I(B) Independence and Objectivity
❖ Members must use reasonable care and judgment to achieve and maintain independence and
objectivity in their professional activities.
❖ Members 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.
❖ Allocating shares in oversubscribed IPOs to personal accounts is a violation.
❖ Normal business entertainment is permitted.
❖ Client gifts must be disclosed to the member’s employer prior to acceptance, if possible, but
after acceptance, if not.
❖ Members may prepare reports paid for by the subject firm if compensation is a flat rate not tied
to the conclusions of the report (and if the fact that the research is issuer-paid is disclosed).
Accepting compensation that is dependent on the conclusions, recommendations, or market
impact of the report, and failure to disclose that research is issuer-paid, are violations of this
Standard.
❖ Members opinion must not be affected by internal pressure or compensation,
else he would be in violation of this standard. To avoid violation,
❖ they may refuse the supervisor’s request.
❖ The firm should discontinue issuing recommendations about the company.

❖ Travel funding
❖ Best practice dictates that analysts always use commercial transportation at their
expense or at the expense of their firm rather than accept paid travel arrangements
from an outside company.
❖ In case of unavailability of commercial travel, they may accept modestly arranged
travel to participate in appropriate information gathering events, such as property
tour.
Standard I(C) Misrepresentation
Misrepresentation includes:
❖ knowingly misleading investors,
❖ omitting relevant information,
❖ presenting selective data to mislead investors, and
❖ plagiarism.
Plagiarism is using reports, forecasts, models, ideas, charts, graphs, or spreadsheets
created by others without crediting the source. Crediting the source is not required when
using projections, statistics, and tables from recognized financial and statistical reporting
services.
When using models developed or research done by other members of the firm, it is
permitted to omit the names of those who are no longer with the firm as long as the
member does not represent work previously done by others as his alone.
Actions that would violate the Standard include:
❖ Guaranteeing a specific return on securities that do not have an explicit
guarantee from a government body or financial institution.
❖ Selecting a performance benchmark that is not comparable to the investment
strategy employed.
❖ Presenting performance data or attribution analysis that omits accounts or
relevant variables.
❖ Offering false or misleading information about the analyst’s or firm’s capabilities,
expertise, or experience.
❖ Using marketing materials from a third party (outside advisor) that are
misleading.
Standard I(D) Misconduct
Members must not engage in any professional conduct involving dishonesty, fraud,
or commit any act that reflects adversely on their professional reputation, integrity,
or competence.
❖ Personal bankruptcy: not a violation
❖ Investing client’s money without conducting necessary due diligence: violation
 • According to the Code and Standards regarding knowledge of laws and
regulations, CFA Institute members and candidates must:
A. understand the relevant regulations for all the countries where they trade
securities.
B. have detailed knowledge of all the laws that could potentially govern the
member’s activities.
C. spend a minimum of five hours per calendar year on continuing education
activities related to applicable laws and regulations.
A is correct because Standard I(A) requires members and candidates to
understand applicable laws and regulations in those countries where they
trade or conduct business. While an understanding of laws and
regulations is required, members and candidates can rely on legal
counsel and compliance to be subject matter experts in these areas. The
Standards do not require a minimum of five hours of continuing education
 • An investment management firm has been hired by ETV Corporation to work on
an additional public offering for the company. The firm's brokerage unit now has a
"sell" recommendation on ETV, but the head of the investment banking
department has asked the head of the brokerage unit to change the
recommendation from "sell" to "buy." According to the Standards, the head of the
brokerage unit would be permitted to:
The correct answer is B. This question relates to Standard I(B)–Independence and
A.Objectivity.
IncreaseWhen
the recommendation
asked to changeby a no more than oneonincrement
recommendation a company(in this
stockcase, to a
to gain
"hold"for
business recommendation).
the firm, the head of the brokerage unit must refuse in order to maintain his
independence and objectivity in making recommendations. He must not yield to pressure
B.by Place theinvestment
the firm’s company banking
on a restricted
department.list and give the
To avoid onlyappearance
factual information about
of a conflict of
interest, the firm should discontinue issuing recommendations about the company. Answer
the company.
A is incorrect; changing the recommendation in any manner that is contrary to the analyst’s
C.opinion
Assign a new
violates theanalyst
duty toto decideindependence
maintain if the stock deserves a higher
and objectivity. rating.
Answer C is incorrect
because merely assigning a new analyst to decide whether the stock deserves a higher
rating will not address the conflict of interest.
 • Ward is scheduled to visit the corporate headquarters of Evans Industries. Ward
expects to use the information he obtains there to complete his research report on
Evans stock. Ward learns that Evans plans to pay all of Ward's expenses for the
trip, including costs of meals, hotel room, and air transportation. Which of the
following actions would be the best course for Ward to take under the Code and
Standards?
A. Accept the expense-paid trip and write an objective report.
B.ThePay for answer
correct all travel
is expenses,
B. The best including costs under
course of action of meals and incidental
Standard items. and
I(B)–Independence
Objectivity is to avoid a conflict of interest whenever possible. Therefore, for Ward to pay
C.for all
Accept the expense-paid
his expenses is the correcttrip but disclose
answer. Answer Cthe valuea of
details the services
course accepted
of action in which thein
the would
conflict report.be disclosed, but the solution is not as appropriate as avoiding the conflict of
interest. Answer A would not be the best course because it would not remove the
appearance of a conflict of interest; even though the report would not be affected by the
reimbursement of expenses, it could appear to be.
 • Li Chen, is a CFA candidate and an equity research analyst at an independent
research firm. Chen is contacted by Granite Technologies, Inc., to write an
issuer-paid research report on the firm to increase awareness of Granite’s stock
amongst the investment community. Which statement best represents how Chen
should respond to this assignment request? Chen should:
A. negotiate a flat fee and disclose this relationship in her report.
B. decline to write the report as it will compromise her independence.
C. accept long-term warrants on Granite’s stock in lieu of any cash compensation.
A is correct because by negotiating a flat fee, her independence and objectivity would not
be questioned as her fee would not be based on the results of her research. In addition, by
fully disclosing the relationship in her report she allows the reader to determine if her
judgment is compromised. As a result, Chen is maintaining compliance with Standard
I(B)–Independence and Objectivity.
 • Grey recommends the purchase of a mutual fund that invests solely in long-term
US Treasury bonds. He makes the following statements to his clients:
❖ “The payment of the bonds is guaranteed by the US government; therefore, the
default risk of the bonds is virtually zero.”
❖ “If you invest in the mutual fund, you will earn a 10% rate of return each year for the
next several years based on historical performance of the market.”

Did Grey’s statements violate the CFA Institute Code and Standards?
A. Neither statement violated the Code and Standards.
The correct answer is C. This question involves Standard I(C)–Misrepresentation.
B.Statement I is a factual
Only statement statement
I violated thatand
the Code discloses to clients and prospects accurate
Standards.
information about the terms of the investment instrument. Statement II, which guarantees a
C.specific
Onlyrate
statement II violated
of return the Code
for a mutual fund, and
is anStandards.
opinion stated as a fact and, therefore,
violates Standard I(C). If statement II were rephrased to include a qualifying statement,
such as “in my opinion, investors may earn . . . ,” it would not be in violation of the
Standards.
 • Which of the following is a correct statement of a member’s or candidate’s duty
under the Code and Standards?
A. In the absence of specific applicable law or other regulatory requirements, the
Code and Standards govern the member’s or candidate’s actions.
B. TheAcorrect
member or candidate
answer is A becauseis this
required to comply
question relates toonly with applicable
Standard I(A)–Knowledgelocaloflaws,
the
rules, regulations,
Law—specifically, or customs,
global application even
of the Codethough the Code
and Standards. and Standards
Members and candidates may
whoimpose
practicea in multiple
higher jurisdictions
degree may be subject
of responsibility to various
or a higher duty securities laws andor
on the member
regulations. If applicable law is stricter than the requirements of the Code and Standards,
candidate.
members and candidates must adhere to applicable law; otherwise, members and
C. candidates
A member must adhere to the Code and Standards. Therefore, answer A is correct.
or candidate who trades securities in a securities market where no
Answer B is incorrect because members and candidates must adhere to the higher
applicable
standard set by local lawsand
the Code or Standards
stock exchange rules regulate
if local applicable thestrict.
law is less useAnswer
of material
C is
incorrect becauseinformation
non-public when no applicable
may lawtakeexists, members and
investment candidates
action basedareonrequired to
material
adhere to the Code and Standards, and the Code and Standards prohibit the use of
non-public information.
material nonpublic information.
 • Michelieu tells a prospective client, “I may not have a long-term track record yet,
but I’m sure that you’ll be very pleased with my recommendations and service. In
the three years that I’ve been in the business, my equity-oriented clients have
averaged a total return of more than 26% a year.” The statement is true, but
Michelieu only has a few clients, and one of his clients took a large position in a
penny stock (against Michelieu’s advice) and realized a huge gain. This large
return caused the average of all of Michelieu’s clients to exceed 26% a year.
Without
The thisanswer
correct one investment,
is C. This the average
question gaintowould
relates have I(C)–Misrepresentation.
Standard been 8% a year. Has
Michelieu
Although violated the
Michelieu’s Standards?
statement about the total return of his clients’ accounts on average
may be technically true, it is misleading because the majority of the gain resulted from one
A.client’s
No, because Michelieu
large position takenis against
not promising that advice.
Michelieu’s he can Therefore,
earn a 26% thisreturn in the
statement
future.
misrepresents the investment performance the member is responsible for. He has not
taken steps to present a fair, accurate, and complete presentation of performance. Answer
B.B isNo, because the statement is a true and accurate description of Michelieu’s
thus incorrect. Answer A is incorrect because although Michelieu is not guaranteeing
track
future record.
results, his words are still a misrepresentation of his performance history.
C. Yes, because the statement misrepresents Michelieu’s track record.
 • Long has been asked to be the keynote speaker at an upcoming investment conference.
The event is being hosted by one of the third-party investment managers currently used
by his pension fund. The manager offers to cover all conference and travel costs for
Long and make the conference registrations free for three additional members of his
investment management team. To ensure that the conference obtains the best speakers,
the host firm has arranged for an exclusive golf outing for the day following the
conference on a local championship-caliber course. Which of the following is least likely
Answer A is correct. Standard I(B)–Independence and Objectivity emphasizes the need for
to violateand
members Standard I(B)? to maintain their independence and objectivity. Best practices
candidates
dictate that firms adopt a strict policy not to accept compensation for travel arrangements.
A. Long may accept only the offer to have his conference-related expenses paid by the
At times, however, accepting paid travel would not compromise one’s independence and
host firm.
objectivity. Answers B and C are incorrect because the added benefits—free conference
B.admission
Long may foraccept
additional staffto members
the offer and an exclusiveexpenses
have his conference-related golf retreat for may
paid and the
speaker—could be viewed as inducements related to the firm’s working arrangements and
not attend
solely the exclusive
related to thegolf outing at
speaking the expenseShould
engagement. of the hosting firm.to bring other team
Long wish
C.members
Long may or participate
accept the in the package
entire golf outing, he or his offered
of incentives firm should be responsible
to speak for the
at this conference.
associated fees.
 • Gabrielle Gabbe, CFA, has been accused of professional misconduct by one of
her competitors. The allegations concern Gabbe’s personal bankruptcy filing ten
years ago when she was a college student and had a large amount of medical
bills she could not pay. By not disclosing the bankruptcy filing to her clients, did
Gabbe most likely violate any CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, related to Misconduct.
C. Yes, related to Misrepresentation.

A is correct as a personal bankruptcy does not necessarily constitute a violation of Standard

I(D). If the circumstances of the bankruptcy involved fraudulent or deceitful business
conduct, then failing to disclose it may constitute a violation of the Standards.
 • Belen Zapata, CFA, is the owner of Kawah Investments. Kawah promises
investors returns of up to 12% per year and claims to achieve this by investing in
non-investment-grade
B is correct because the bondsmemberand has other fixed-income
misrepresented instruments.
the returns she couldOver the next
realistically
achieve
12 months,for herbond
clients, violating
market Standard
yields reachI(C), which prohibitslows,
unprecedented members
and and candidates
Zapata finds it
from guaranteeing clients any specific return on volatile investments.
impossible to achieve the returns she expected. No investments are ever made
byis Kawah,
A incorrect and clients
because the are completely
member paid investor
has returned back allcapital,
of their original
which is not investment.
a violation
of the Code
Zapata mostand Standards.
likely violatedHowever,
the CFAthe member
Institute has violated
Standards Standard I(C),Conduct
of Professional which
prohibits members and candidates from guaranteeing clients any specific return on
because of the:
volatile investments. With the return of their capital, investors did not lose their original
A. investment,
return of but they did suffer an economic opportunity loss.
capital.
B. C promised
is incorrectreturns.
because the investment mandate is not a violation of the Code and
Standards. The mandate is very broadly defined and while it may or may not be
C. appropriate,
investment mandate.
there is not enough information in the vignette to make this determination.
The promised, but unachieved, yield is the violation that can be clearly identified.
 • James Woods, CFA, is a Portfolio Manager at ABC Securities. Woods has
reasonable grounds to believe his colleague, Sandra Clarke, a CFA Level II
Candidate, is engaged in unethical trading activities that may also be in violation
of local securities laws. Woods is not Clarke’s supervisor, and her activities do not
impact Woods or any of the portfolios for which he is responsible. Based on the
Code and Standards, the recommended course of action is for Woods to:
A. not take any action because he is not directly involved.
B. report Sandra Clarke to ABC’s trading supervisor or compliance department.
C. report Sandra Clarke to the appropriate governmental or regulatory
B isorganization.
correct because under Standard I(A) in situations where a member or candidate is
aware of employer engagement in unethical or illegal activity, it is recommended that they
attempt to stop the behavior by bringing it to the attention through a supervisor or the firm’s
compliance department.
 • Oni Erobo, CFA, the General Partner in a real estate development project, is
responsible for completing the project within an 18-month period and within
budget. Erobo will receive an equity stake of 20% in the project if it comes within
budget. Concerned that project costs could escalate, the Limited Partners require
Erobo to cap expenses at 15% above budget. Costs were within expectation up
until the last month of construction when imported lighting fixture costs
(accounting for roughly 5% of total costs) escalated by more than 50%. As a
result, the overall return declined below the partners expected 35% ROI. Erobo
did not inform the Limited Partners about the increased costs. Did Erobo most
likely violate the CFA Code of Ethics and Standards of Professional Conduct?
A. No.
A is correct because no violation took place. Erobo was not required to inform the Limited
B.Partners
Yes, because
about the returns
increaseare
in lower
lightingthan expected
fixture cost asby
thethe Partners.
increase would not cause the
overall project cost to escalate higher than the 15% budget variance contingency agreed
C. Yes, because he did not disclose the increased costs to his Partners.
within the partnership.
 • Dilshan Kumar, CFA, is a world-renowned mining analyst based in London. Recently he
received an invitation from Cerberus Mining, a London Stock Exchange listed company
with headquarters in Johannesburg, South Africa. Cerberus asked Kumar to join a group
of prominent analysts from around the world on a tour of their mines in South Africa,
some of which are in remote locations, not easily accessible. The invitation also includes
an arranged wildlife safari to Krueger National Park for the analysts. Kumar accepts the
C is correct because Standard I(B)–Independence and Objectivity requires members and
invitation planning to visit other mining companies he covers in Namibia and Botswana
candidates to use reasonable care and judgment to maintain their independence and
after the insafari.
objectivity To prevent activities.
their professional violating anyBest CFA Institute
practice Standards
dictates of Professional
that Kumar only accept
Conduct, it isto most
transportation appropriate
the remote miningfor
sitesKumar
in thattoit only accepthewhich
is unlikely would type of paid
be able travel
to source
commercial
arrangements flights
fromtoCerberus?
the locations and ground transport may not be viable. As Kumar
would normally visit mining sites around the world as part of his job and the fact that he is
A. combining
Ground this
transportation
trip to othertomines
KruegersiteNational Park.
in different countries, it would be inappropriate for
Cerberus to pay for the analyst’s travel expenses from London. While Kumar could go on
B. Economy class round trip ticket from London to Johannesburg.
safari with the group of analysts, he should pay his own way so as to restrict any influence
C. such a gift
Flights on could possibly
a private have
airplane when
to the making
remote mining hissites
investment recommendations on
in South Africa.
Cerberus.
 • Sue Kim, CFA, a US citizen, works as an analyst for a subsidiary of a US
investment firm on a small island that attracts offshore investment accounts. Local
securities laws allow insider trading. While having dinner with the CEO of a local
company, Kim learns that the firm is in negotiations to be acquired for a significant
premium. Would Kim most likely comply with the CFA Institute Standards if she
purchased the company’s shares for her client accounts?
A. No.
B. Yes, local laws allow insider trading.
C. Yes, if she receives permission from compliance department.
A is correct because Standard II(A) prohibits members or candidates from acting on material
nonpublic information no matter if local laws or a compliance department allow it. In the
event of conflict between the Code and Standards and local laws, Standard I(A) requires
members or candidates to comply with the stricter law, rule, or regulation.
 • Maria Martinez is a research analyst and a Level II CFA candidate. Recently,
friends of Martinez organized a party for her thirtieth birthday. At the party,
Martinez received an inexpensive gift from a friend who is the CEO of a publicly
listed company Martinez recommends to clients. Martinez also received gifts from
some of the firm’s best clients. Aware of her employer’s policy requiring her to
report all gifts received within one week of receipt, Martinez declares the gifts she
received from the firm’s clients two days after the party. Does Martinez most likely
violate the CFA Institute Standards of Professional Conduct?
A.A isYes.
correct because Standard I(D)–Misconduct states that members and candidates must
not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any
B.act that
No, reflects
because her CEO
adversely on friend’s gift was inexpensive.
their professional reputation, integrity, or competence. By only
reporting the gifts she received from clients but not the inexpensive gift from her CEO
C.friend,
No,she
because
does the
not gifts do not
conform to impact her research
her employer’s independence
gift policy andallobjectivity.
of reporting gifts. Her
non-compliance with employer policies reflects adversely on her professional reputation
and honesty.
Standard II: Integrity of Capital Markets
Standard II(A) Material non-public information
❖ Members who possess material non-public information that could affect the
value of an investment must not act or cause others to act on the information.
❖ Information is “material” if its disclosure would affect the price of a security.
❖ Information is “non-public” until it has been made available to the marketplace.
❖ An analyst conference call is not public disclosure.
❖ It is the member’s responsibility to determine if information she receives has been
publicly disseminated prior acting or causing others to act on it.
❖ Under the so-called mosaic theory, reaching an investment conclusion through
perceptive analysis of public information combined with non-material non-public
information is not a violation of the Standard
❖ Recommendation for firms:
❖ Use a firewall within the firm, with elements including:
❖ Monitor and restrict proprietary trading while a firm is in possession of material non-public
information. However, prohibiting all proprietary trading while a firm is in possession of
material non-public information may be inappropriate because it may send a signal to the
market.
❖ For example, when a firm act as a market maker, a prohibition on proprietary trading may be
counterproductive to the goals of maintaining market liquidity.

❖ Make reasonable efforts to achieve public dissemination of the information.

Standard II(B) Market manipulation
Members and Candidates must not engage in practices that distort prices or
artificially inflate trading volume with the intent to mislead market participants.
❖ Liquidity pumping strategy: If firm fully discloses its agreement with members to
boost transactions over some initial launch period, it doesn’t violate Standard
II(B).
 • The mosaic theory holds that an analyst:
A. Violates the Code and Standards if the analyst fails to have knowledge of and
comply with applicable laws.
B. Can use material public information and nonmaterial non-public information in
the analyst's analysis.
C. Should use all available and relevant information in support of an investment
recommendation.
The correct answer is B. This question deals with Standard II(A)–Material Nonpublic
Information. The mosaic theory states that an analyst may use material public information
and nonmaterial nonpublic information in creating a larger picture than shown by any
individual piece of information and the conclusions the analyst reaches become material
only after the pieces are assembled. Answers A and C are accurate statements relating to
the Code and Standards but do not describe the mosaic theory.
 • An investment banking department of a brokerage firm often receives material
The correct answer
non-public is B. that
information The best
couldpolicy
havetoconsiderable
prevent violation of Standard
value if used in II(A)–Material
advising the
Nonpublic Information is the establishment of firewalls in a firm to prevent exchange of
firm’s brokerage
insider information.clients. In order
The physical andtoinformational
conform to barrier
the Code of aand Standards,
firewall betweenwhich
the
one of the banking
investment followingdepartment
is the bestand
policy
the for the brokerage
brokerage operationfirm?
prevents the investment
banking department from providing information to analysts on the brokerage side who
A. mayPermanently prohibit both “buy”
be writing recommendations on a and “sell”stock.
company recommendations of the stocksofof
Prohibiting recommendations
theclients
stock of
of the
companies
investment that banking
are clients of the investment banking department is an
department.
alternative, but answer A states that this prohibition would be permanent, which is not the
B. best
Establish
answer. physical
Once an and informational
offering is completebarriers
and thewithin thenonpublic
material firm to information
prevent the
obtained
exchangeby theof investment
information banking department
between becomes public,
the investment resuming
banking and publishing
brokerage
recommendations on the stock is not a violation of the Code and Standards because the
operations.
information of the investment banking department no longer gives the brokerage
C. operation
Monitoran the
advantage in writing the report. Answer C is incorrect because no exchange
exchange of information between the investment banking
of information should be occurring between the investment banking department and the
department
brokerage and the
operation, so brokerage
monitoring operation.
of such exchanges is not an effective compliance
procedure for preventing the use of material nonpublic information.
 • Andrews, a private wealth manager, is conducting interviews for a new research analyst
for his firm. One of the candidates is Wright, an analyst with a local investment bank.
During the interview, while Wright is describing his analytical skills, he mentions a
current merger in which his firm is acting as the adviser. Andrews has heard rumours of
a possible merger between the two companies, but no releases have been made by the
companies concerned. Which of the following actions by Andrews is least likely a
violation of the Code and Standards?
Answer C is correct. The guidance to Standard II(A)–Material Nonpublic Information
A.recommends
Waiting until adding
the securities
next day to the firm’s
before restricted
trading on thelist when the firm
information has or
to allow may
time forhave
it to
material
become nonpublic
public. information. By adding these securities to this list, Andrews would
uphold this standard. Because waiting until the next day will not ensure that news of the
B.merger is made
Notifying public, answer
all investment A is incorrect.
managers in his Negotiations mayinformation
firm of the new take much longer
so nonebetween
of their
the clients
two companies, and the merger may never happen. Andrews must wait until the
are disadvantaged.
information is disseminated to the market before he trades on that information. Answer B is
C.incorrect
Placing because Andrews
the securities should not
mentioned disclose
as part of thethemerger
information
on thetofirm’s
otherrestricted
managers; no
trading
trading
list. is allowed on material nonpublic information.
 • Pietro, president of Local Bank, has hired the bank’s market maker, Vogt, to seek a merger
partner. Local is currently listed on a stock exchange and has not reported that it is seeking
strategic alternatives. Vogt has discussed the possibility of a merger with several firms, but they
have all decided to wait until after the next period’s financial data are available. The potential
buyers believe the results will be worse than the results of prior periods and will allow them to
pay less for Local Bank.

• Pietro wants to increase the likelihood of structuring a merger deal quickly. Which of the
following actions would most likely be a violation of the Code and Standards?
Answer B is correct. Through placing a personal purchase order that is significantly greater
A. Pietro could instruct Local Bank to issue a press release announcing that it has retained Vogt
than the average volume, Pietro is violating Standard IIB–Market Manipulation. He is
to find a merger partner.
attempting to manipulate an increase in the share price and thus bring a buyer to the
B.negotiating
Pietro could place
table. Theanews
buy order
of a for 2,000 merger
possible shares (orandfour times the average
confirmation weekly
of the firm’s volume)
earnings
throughmay
guidance Vogtalso
for his
havepersonal
positiveaccount.
effects on the price of Local Bank, but Pietro’s actions in
C.instructing the release
After confirming of the chief
with Local’s information
financialdoes notPietro
officer, represent a violation
could instruct Localthrough
to issue market
a press
manipulation. Announcements
release reaffirming of this
the firm’s prior nature are
announced common
earnings and practical
guidance for the fulltofiscal
keepyear.
investors
informed. Thus, answers A and C are incorrect.
 • During a round of golf, Rodriguez, chief financial officer of Mega Retail, mentions
to Hart, a local investment adviser and long-time personal friend, that Mega is
having an exceptional sales quarter. Rodriguez expects the results to be almost
10% above the current estimates. The next day, Hart initiates the purchase of a
large stake in the local exchange-traded retail fund for her personal account.
A. Hart violated the Code and Standards by investing in the exchange-traded fund
Answer A is correct. Hart’s decision to invest in the retail fund appears directly correlated
withthat includedstatement
Rodriguez’s Mega Retail.about the successful quarter of Mega Retail and thus violates
Standard II(A)–Material Nonpublic Information. Rodriguez’s information would be
B.considered
Hart did material
not violate the Code and Standards because she did not invest directly
because it would influence the share price of Mega Retail and
in securities
probably influenceof the
Mega Retail.
price of the entire exchange-traded retail fund. Thus, answer B is
incorrect. Answer C is also incorrect because Rodriguez shared information that was both
C.material
Rodriguez did notCompany
and nonpublic. violate the Code
officers and have
regularly Standards becauseabout
such knowledge the their
comments
firms,
made
which to aHart
is not were The
violation. not intended
sharing of to solicit
such an investment
information, in even
however, MegainRetail.
a conversation
between friends, does violate Standard II(A).
 • In Darden Crux, CFA, a portfolio manager at SWIFT Asset Management Ltd. (SWIFT),
calls a friend to join him for dinner. The friend, a financial analyst at Cyber Kinetics (CK)
declines the invitation and explains she is performing due diligence on Orca Electronics,
a company CK is about to acquire. After the phone call, Crux searches the Internet for
any news of the acquisition but finds nothing. Upon verifying that Orca is on SWIFT’s
approved stock list, Crux purchases Orca’s common stock and call options for selective
ASWIFT
is correct as members/candidates
clients. Two weeks later, CK whoannounces
possess material nonpublic
its intention information
to acquire Orca.that
Thecould
next
affect
day, the
Cruxvalue
sellsofall
anofinvestment
the Orca should not act
securities, or cause
giving others
the fund to act of
a profit on $3
themillion.
information.
What
Crux traded on the material information that Orca is about to be acquired by Cyber
action should
Kinetics. Crux most islikely
The information take tobecause
nonpublic avoid violating
it is notany CFA available,
publicly Institute Standards
which wasof
Professional
verified when Conduct?
Crux researched Orca on the Internet and found nothing about the
acquisition [Standard II(A)].
A. Refuse to trade based on the information.
B.B isPurchase
incorrect because
the stockthe
andinformation is for
call options material and nonpublic and should not be traded.
all clients.
C.C isTrade onlybecause
incorrect after analyzing the stock
the information is diligently andnonpublic
material and thoroughly.
and should not be traded.
 • James Simone, CFA, the CFO of a publicly listed company, seeks to improve the
quality of his company’s communication with institutional fund managers. He
holds an investor briefing with this group the evening before the company
earnings are announced. The company’s quarterly earnings are broadcast in a
A is correct because Simone violated Standard II(A)–Material Nonpublic Information by
pressinstitutional
giving release the next
fund day before
managers thetomarket
access materialopens. Theinformation
nonpublic earnings prior
information
to publicin
the investor (i.e.,
dissemination briefing is identical
the press release).toBythat in theearnings
releasing press release.
results toDid Simone
a select groupmost
of
institutional fund
likely violate themanagers prior toStandards
CFA Institute a public press release, Simone
of Professional allows the institutional
Conduct?
fund managers a time advantage over other investors not invited to the investor briefing.
A. Yes
B is incorrect because it is the timing of the release of the information that causes a
B. violation
No, because investor
of Standard II(A). briefing and press release information are identical.

C. C is
No, because
incorrect the company
because despite releases
releasing information while
the information thethe
after market
close is
of closed.
the market,
institutional investors have been given access to nonpublic information in advance of any
public dissemination through a press release in violation of Standard II(A).
 • Which of the following is least likely part of the CFA Institute Standards of
Professional Conduct, Standard II–Integrity of Capital Markets? Members and
Acandidates:
is correct. The Code of Ethics of CFA Institute states that Members of CFA Institute
A. (including CFA charterholders)
must promote the integrityandand
candidates
viability for
of the
theCFA designation
global capital (“Members and
markets for the
Candidates”) must promote the integrity and viability of global capital markets for the
ultimate
ultimate benefit
benefit of society.
of society. It is not part of the CFA Institute Standards of Professional
Conduct, Standard II–Integrity of Capital Markets.
B. who possess material nonpublic information that could affect the value of an
investment
B is must notII–Integrity
incorrect. Standard act or cause othersMarkets
of Capital to act on
(A) the information.
Material Nonpublic Information
states that Members and Candidates who possess material nonpublic information that
C. could
must not the
affect engage
value in practices
of an that must
investment distort
not prices
act or or artificially
cause inflate
others to trading
act on the
volume with the intent to mislead market participants.
information.

C is incorrect. Standard II–Integrity of Capital Markets (B) Market Manipulation states that
Members and Candidates must not engage in practices that distort prices or artificially
inflate trading volume with the intent to mislead market participants
 • Zhao Xuan, CFA, is a sell side investment analyst. While at a software industry
conference, Zhao hears rumors that Green Run Software may have falsified its
financial results. When she returns to her office, Zhao conducts a thorough
analysis of Green Run. Based on her research, including discussions with some
of Green Run’s customers, Zhao is convinced that Green Run’s reported 50%
Bincrease
is correctinbecause the analyst
net income duringhas conducted
recent thorough
quarters research that
is completely indicates
fictitious. So the
far,
company falsified its financial results, and she should request the company address this
however,
issue Zhao
publicly is the only by
as recommended analyst
Standardsuspicious about
II(A)–Material Green Information.
Nonpublic Run’s reportedIf a
earnings.
member Accordingdetermines
or candidate to the CFA Institute Code
that information of Ethics
is material, and Standards
the member or candidateof
should make reasonable
Professional efforts
Conduct, the to achieve
least publicaction
appropriate dissemination
for Zhao ofis the
to: information. This
effort usually entails encouraging the issuer company to make the information public. If
A.public dissemination
report is nottopossible,
her suspicions the member
Green Run’s or candidate must communicate the
management.
information only to the designated supervisory and compliance personnel within the
B.member’s
do nothing until otherfirm
or candidate’s analysts support
and must her analysis.
not take investment action on the basis of the
information.
C. recommend that her clients sell their Green Run shares immediately.
 • Richard Cardinal, CFA, is the founder of Volcano Capital Research, an investment
management firm whose sole activity is short selling. Cardinal seeks out companies
whose stocks have had large price increases. Cardinal also pays several lobbying firms
Cto isupdate
correct,
himasimmediately
Cardinal’s actions related to or
on any legislative theregulatory
public relations
changes campaign
that mayand classhis
impact
action lawsuits areCardinal
target companies. specifically intended
sells short thosetotarget
manipulate share
companies he prices lower
estimates are and
near to
the
advantage the manager. Cardinal has made deliberate attempts to create artificial price
peak of their sales and earnings and that his sources identify as facing legal or
volatility designed to have a material impact on the price of an issuer’s stock, in violation
regulatory
of Standard challenges.
II(B)–MarketImmediately
Manipulation.after he sells a stock, Cardinal conducts a public
relations campaign to disclose all of the negative information he has gathered on the
Acompany, evenbecause
is incorrect if the information is not
selling stock yet public.
short Which of Cardinal’s
is a management strategy following
and does actions
not
necessarily
is most likelyviolate
to beany aspect ofofthe
in violation theCode
CFA and Standards.
Institute Standards of Professional Conduct?
A. B is
Selling stockasshort
incorrect, it appears a reasonable and diligent effort has been made as required
B. by Trading
StandardonV(A)–Diligence andlobbyists
information from Reasonable Basis to determine the investment action is
sound and suitable for his clients. Information gathering is an integral part of investment
C. analysis
Disclosing information
and the methodsabout targetdo
described companies
not necessarily violate any aspect of the CFA
Code and Standards.
 • Diana Fairbanks, CFA, is married to an auditor who is employed at a large
accounting firm. When her husband mentions that a computer firm he audits will
receive a qualified opinion she thinks nothing of it. Later that week when she
reviews a new client account she notices that there are substantial holdings of
this computer firm. When she does a thorough internet search for news on the
company, she does not find anything about its most recent audit or any other
A is correct as the information concerning the qualified opinion is nonpublic and if it is
adversesheinformation.
material Which of
would be in violation the following
of Standard actions
II(A) if she concerningaction
took investment the based
computer
on
stock
the should She
information. Fairbanks most
should also makelikely take toefforts
reasonable avoidto violating the CFA
achieve public Institute
dissemination
ofStandards
the information.
of Professional Conduct?
A. B Take no investment
is incorrect becauseaction.
she should make reasonable efforts to achieve public
dissemination of the information prior to selling the stock.
B. Complete a thorough and diligent analysis of the company and then sell the
C stock.
is incorrect because she should make reasonable efforts to achieve public
dissemination of the information prior to selling the stock.
C. Sell the stock immediately as she has a reasonable basis for taking this
investment action.
 • When a client asks her how she makes investment decisions, Petra Vogler, CFA,
B is correct
tells because
the client she auses
violation of Standard
mosaic theory. II(A)–Material
According toNonpublic
Vogler, the Information is likely
theory involves
to occur when using information that is selectively disclosed by corporations to a small
analyzing public and nonmaterial nonpublic information including the evaluation of
group of investors, analysts, or other market participants. Earnings estimates given in a
statements meeting
one-on-one made to her likely
would by company insiders
be considered in one-on-one
material and nonpublic meetings where
information.
Information
management made availablenew
discusses to analysts
earnings remains nonpublic
projections until it istomade
not known available
the public. to
Vogler
investors in general. Under the mosaic theory it is acceptable to use information from
also gathers general industry information from industry experts she has
industry contacts as long as the analyst uses appropriate methods to arrive at her
contacted. Vogler
conclusions. mostitlikely
Additionally, violatestothe
is acceptable useCFA Institutenonpublic
nonmaterial Standards of Professional
information in her
analysis,
Conductand this useofisher
because notuse
a violation
of: of Standard II(A)–Material Nonpublic Information.

A. A is
industry expert
incorrect information.
because under the mosaic theory it is acceptable to use information from
industry contacts as long as the analyst uses appropriate methods to arrive at her
B. conclusions.
one-on-one meeting information.
C. nonmaterial nonpublic information.
C is incorrect because it is acceptable to use nonmaterial nonpublic information in her
analysis, and this use is not a violation of Standard II(A)–Material Nonpublic Information.
 • Edo Ronde, CFA, an analyst for a hedge fund, One World Investments, is attending a key
industry conference for the microelectronics industry. At lunch in a restaurant adjacent to the
conference venue, Ronde sits next to a table of conference attendees and is able to read their
Anametags.
is correctRonde
because realizes
Rondethe group
shouldincludes
refuse the president
to follow his of a publicly traded
supervisor’s request.company in the
If Ronde
microelectronics
revises industry,
his research Fuldabased
report Manufacturing,
on the ainformation
company Ronde follows. Ronde
he overheard at the overhears
industrythe
president complain
conference he would about violate
a production delay II(A)–Material
Standard problem Fulda’sNonpublic
factories are experiencing.
Information. The
The
president mentions
production that the delay
delay information is will reduceand
material Fulda earnings more
considered than 20%
nonpublic until during the next
it is widely
year if not solved.
distributed, Ronde not
so it should relays
be this information
included to the research
in Ronde’s portfolio manager
report orheacted
reportsontountil
at One
it
World explaining
becomes public. that
Rondein ashould
recent research report heFulda
try to encourage recommended
to make theFulda as a buy. The
information manager
public.
asks Ronde to write up a negative report on Fulda so the fund can sell the stock. According to
BtheisCFA Institutebecause
incorrect Code of theEthics and Standards
production delay of Professional
information is Conduct
considered Ronde shouldand
material least
likely:
nonpublic until it is widely distributed and should not be included in Ronde’s research
report or acted on until it becomes public.
A. revise his research report.
B. C is
leave his research
incorrect report
because theasinformation
it is. Ronde overheard at the industry conference is
material nonpublic information and should not be acted on until it becomes public.
C. request the portfolio manager not act on the information.
 • Oliver Opdyke, CFA, works for an independent research organization that does not
manage any client money. In the course of his analysis of Red Ribbon Mining he hears
rumors that the president of Red Ribbon, Richard Leisberg, has recently been
diagnosed with late stage Alzheimer’s disease, a fact not publicly known. The final stage
of Alzheimer’s is when individuals lose the ability to respond to their environment, the
ability to speak, and, ultimately, the ability to control movement. Leisberg is the
charismatic founder of Red Ribbon, and under his leadership the company grew to
become one of the largest in the industry. According to the CFA Institute Code of Ethics
and Standards of Professional Conduct, the most appropriate action for Opdyke is to:
C is correct because members and candidates should make reasonable efforts to achieve
A.public
immediately publish
dissemination a sell recommendation
of information forand
that is material Rednonpublic,
Ribbon Mining.
as required by Standard
II(A)–Material Nonpublic Information. This effort usually entails encouraging the issuer
B.company
confirm to the president’s
make diagnosis
the information before
public. publishing
In this his diagnosis
case, if the research report.
is fact and not rumor,
C.thenencourage
this information
Red isRibbon
materialMining
and should be disclosed.
management to disclose the president’s medical
condition.
 • Merchant Capital Partners, a regional investment bank, acts as a market maker
for Vital Link Health Services and other small firms listed on an over-the-counter
exchange. For those shares for whom Merchant acts as market maker, it trades
for its own book as well as engaging in risk arbitrage trading. Merchant allows
staff members to trade in shares once clients and the company have traded.
Merchant recently obtained material nonpublic information regarding Vital’s
C is correct because according to Standard II(A)–Material Nonpublic Information,
planned reverse
Recommended takeover
Procedures of a publicly
for Compliance, listed stopped
if Merchant competitor.
marketIn making,
order atoform
be ofin
proprietary
compliance trading,
with due to being
the CFA in possession
Institute Code andof material nonpublic
Standards, whichinformation, it couldin
type of trading
tip off investors that Vital is likely to be making a major announcement in the near future.
Vital shares should Merchant least likely suspend?
This would be counterproductive to the goals of maintaining the confidentiality of
A.information
Personaland providing market liquidity. The Standard recommends that market makers
remain passive when in possession of material nonpublic information. The Standard also
B.requires
Risk arbitrage
personal trading to be suspended when in possession of material nonpublic
information, and it is prudent to suspend arbitrage trading to prevent profits from insider
C.trading.
Passive proprietary
 • While waiting in the business class lounge before boarding an airplane, Becca
Msafari, CFA, an equity analyst, overhears a conversation by a group of senior
managers, including members of the Board, from a large publicly listed bank. The
managers discuss staff changes necessary to accommodate their regional
Cexpansion
is correct because in order hears
plans. Msafari to comply with the
several staffCode and mentioned.
names Standards, a Under
memberwhator
candidate cannot use material nonpublic information when making investment
circumstances could Msafari most likely use this information when making an
recommendations. The information overheard would not be considered material only if any
investment
public recommendation
announcement of the staff to her clients?
removal would be unlikely to move the share price of the
bank, nor would the regional expansion substantially impact the value of the bank.
A. Under no circumstances.
B. A isIfincorrect
she does because if the staff
not breach under discussion
the confidentiality of for possible
names termination are in low-level
of staff.
positions, the information is unlikely to be considered material.
C. If the discussed changes are unlikely to affect investor perception of the bank.
B is incorrect because the absence of specific names being mentioned does not
necessarily make the information non-material when disclosed to clients prior to any
public dissemination.
 • Christy Pasley, CFA, is the Chief Investment Officer for Risen Investment Funds
(RIF) a mutual fund organization. At a meeting between Homeland Builders (HB),
a publicly traded company, Pasley learns HB sales are much slower than
expected. In fact, HB sales declined more than 20% in the last quarter, but this
information has not yet been widely disseminated. Immediately after meeting with
HB, Pasley purchases put options on HB stock. Subsequently, HB issues a press
release with their most recent sales figures. Has Pasley most likely violated the
CFA Institute Standards of Professional Conduct?
A.A isYes.
correct, as 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
B.information.
No, because the securities
Even though purchased
the information were options.
is disclosed in a meeting with the mutual fund, this
has not made the information public and it should not be used until it is more widely
C.disseminated,
No, because the information
a violation was
of Standard obtained
II(A). It does directly from
not matter thatthe
thecompany.
securities purchased
are options rather than stocks.
Standard III: Duties to Clients
Standard III(A) Loyalty, Prudence and Care
❖ 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.
❖ Make investment decisions in the context of the total portfolio.
❖ Inform clients of any limitations in an advisory relationship (e.g., an advisor who may only recommend her own firm’s
products).
❖ Vote proxies in an informed and responsible manner. Due to cost-benefit considerations, it may not be necessary to vote all
proxies.
❖ Client brokerage, or “soft dollars” or “soft commissions,” must be used to benefit the client.

❖ Recommendation for members:

❖ Submit to clients, at least quarterly, itemized statements showing all securities in custody and al transactions during the
period.
❖ Disclose conflicts.
❖ Disclose compensation arrangements.
❖ Maintain confidentiality.
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.
❖ Do not discriminate against any clients when disseminating recommendations or taking investment
action.
❖ “Fairly” does not mean “equally.”
❖ Different service levels are acceptable, but they must not negatively affect or disadvantage any clients.
❖ Disclose the different service levels to all clients and prospects, and make premium levels of service available
to all those willing to pay for them.
❖ Give all clients a fair opportunity to act on every recommendation.
❖ Clients who are unaware of a change in the recommendation for a security should be advised of the change
before an order for the security is accepted.
❖ Treat clients fairly in light of their investment objectives and circumstances. Treat both individual and
institutional clients in a fair and impartial manner.
❖ Members and candidates should not take advantage of their position in the industry to disadvantage clients
(e.g., taking shares of an oversubscribed IPO).
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 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.
❖ 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.
❖ Judge the suitability of investments in the context of the client’s total portfolio.

❖ 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.
Unsolicited Trade Requests
❖ 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 trade may or may not
have a material effect on the risk characteristics of the client’s total portfolio and the
requirements are different for each case.
❖ In either case, however, 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.
❖ If the manager determines that the effect on the risk/return profile of the client’s total portfolio is
minimal, the manager, after discussing with the client how the trade does not fit the IPS goals and
constraints, may follow his firm’s policy with regard to unsuitable trades.
❖ Regardless of firm policy, the client must acknowledge the discussion and an understanding of why
the trade is unsuitable.
❖ If the trade would have a material impact on the risk/return profile of the client’s total portfolio, one
option is to update the IPS so the client accepts a changed risk profile that would permit the trade. If
the client will not accept a changed IPS, the manager may follow firm policy, which may allow the
trade to be made in a separate client-directed account.
❖ In the absence of other options, the manager may need to reconsider whether to maintain the relationship
with the client.
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.
❖ 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.
❖ For brief presentations, members must make detailed information available on request and
indicate that the presentation has offered only limited information.
❖ Recommendations for Members
❖ Encourage firms to adhere to Global Investment Performance Standards.
❖ Consider the sophistication of the audience to whom a performance presentation is addressed.
❖ Present the performance of a weighted composite of similar portfolios rather than the performance of
a single account.
❖ Include terminated accounts as part of historical performance and clearly state when they were
terminated.
❖ Include all appropriate disclosures to fully explain results (e.g., model results included, gross or net of
fees, etc.).
❖ Maintain data and records used to calculate the performance being presented.
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; or
❖ The client or prospective client permits disclosure of the information.
❖ If illegal activities by a client are involved, members may have an obligation to
report the activities to authorities.
❖ The confidentiality Standard extends to former clients as well.
❖ The requirements of this Standard are not intended to prevent members and
candidates from cooperating with a CFA Institute Professional Conduct Program
(PCP)investigation.
 • Smith, a research analyst with a brokerage firm, decides to change his
recommendation for the common stock of Green Company, Inc., from a “buy” to a
“sell.” He mails this change in investment advice to all the firm’s clients on
Wednesday. The day after the mailing, a client calls with a buy order for 500
The correct
shares answer
of Green is B. ThisIn question
Company. involves Standard
this circumstance, III(B)–Fair Dealing. Smith
Smith should:
disseminated a change in the stock recommendation to his clients but then received a
A. request
Acceptcontrary to that recommendation from a client who probably had not yet received
the order.
the recommendation. Prior to executing the order, Smith should take additional steps to
B. ensure
Advisethatthe
the customer
customer ofhasthe change
received theinchange
recommendation before accepting
of recommendation. the
Answer A is
incorrect
order.because the client placed the order prior to receiving the recommendation and,
therefore, does not have the benefit of Smith’s most recent recommendation. Answer C is
C. alsoNot acceptsimply
incorrect; the order because
because it is contrary
the client request istocontrary
the firm’s recommendation.
to the firm’s recommendation
does not mean a member can override a direct request by a client. After Smith contacts
the client to ensure that the client has received the changed recommendation, if the client
still wants to place a buy order for the shares, Smith is obligated to comply with the client’s
directive.
 • Which statement about a manager’s use of client brokerage commissions violates
the Code and Standards?
A. A client may direct a manager to use that client’s brokerage commissions to
purchase goods and services for that client.
The correct answer is C. This question involves Standard III(A)–Loyalty, Prudence, and
B. CareClient
and brokerage
the specific commissions should
topic of soft dollars or be
softused to benefit
commissions. the client
Answer andcorrect
C is the should
choice because client brokerage
be commensurate with the commissions
value of themay not be directed
brokerage to pay services
and research for the
investment
received.manager’s operating expenses. Answer B describes how members and
candidates should determine how to use brokerage commissions—that is, if the use is in
C. theClient
best interests of clients
brokerage and is commensurate
commissions with the value
may be directed of thefor
to pay services provided.
the investment
Answer A describes a practice that is commonly referred to as “directed brokerage.”
manager’s operating expenses.
Because brokerage is an asset of the client and is used to benefit the client, not the
manager, such practice does not violate a duty of loyalty to the client. Members and
candidates are obligated in all situations to disclose to clients their practices in the use of
client brokerage commissions.
 • Brown works for an investment counselling firm. Green, a new client of the firm, is
meeting with Brown for the first time. Green used another counselling firm for financial
advice for years, but she has switched her account to Brown’s firm. After spending a few
minutes getting acquainted, Brown explains to Green that she has discovered a highly
undervalued stock that offers large potential gains. She recommends that Green
purchase the stock. Brown has committed a violation of the Standards. What should she
have done differently?
The correct answer is A. In this question, Brown is providing investment recommendations
A. before
Brown should
making have about
inquiries determined Green’s
the client’s needs,
financial objectives,
situation, and tolerance
investment for risk
experience, or
investment objectives.
before making Brown is thus violating
a recommendation Standard
of any type III(C)–Suitability. Answers B and C
of security.
provide examples of information members and candidates should discuss with their clients
B. at the
Brown should
outset have
of the thoroughlybut
relationship, explained the characteristics
these answers of the company
do not constitute to list
a complete Green,
of
those factors.the
including Answer A is the best
characteristics answer.
of the industry in which the company operates.
C. Brown should have explained her qualifications, including her education, training, and
experience and the meaning of the CFA designation.
 • Stewart has been hired by Goodner Industries, Inc., to manage its pension fund.
Stewart’s duty of loyalty, prudence, and care is owed to:
A. The management of Goodner.
B. The participants and beneficiaries of Goodner’s pension plan.
C. The shareholders of Goodner.

The correct answer is B. Under Standard III(A)–Loyalty, Prudence, and Care, members
and candidates who manage a company’s pension fund owe these duties to the
participants and beneficiaries of the pension plan, not the management of the company or
the company’s shareholders.
 • Stafford is a portfolio manager for a specialized real estate mutual fund. Her firm
clearly describes in the fund’s prospectus its soft dollar policies. Stafford decides
that entering the CFA Program will enhance her investment decision-making skill
and decides to use the fund’s soft dollar account to pay the registration and exam
fees for the CFA Program. Which of the following statements is most likely
correct?
Answer C is correct. According to Standard III(A)–Loyalty, Prudence, and Care, the CFA
A. Program
Stafford didbenot
would violate athe
considered Codeor and
personal Standards
firm expense and because
should not the prospectus
be paid for with
theinformed
fund’s brokerage
investors commissions. Soft
of the fund’s dollar
soft accounts
dollar should be used only to purchase
policies.
research services that directly assist the investment manager in the investment
B. decision-making
Stafford violatedprocess,
the not to assist
Code and the management
Standards of the improving
because firm or to further education.
her investment
Thus, answer
skills is notA ais reasonable
incorrect. Answer B is
use of incorrect
the because
soft dollar the reasonableness of how the
account.
money is used is not an issue; the issue is that educational expense is not research.
C. Stafford violated the Code and Standards because the CFA Program does not
meet the definition of research allowed to be purchased with brokerage
commissions.
 • Paper was recently terminated as one of a team of five managers of an equity
fund. The fund had two value-focused managers and terminated one of them to
reduce costs. In a letter sent to prospective employers, Paper presents, with
written permission of the firm, the performance history of the fund to demonstrate
his past success.
A. Paper did not violate the Code and Standards.
B. Paper violated the Code and Standards by claiming the performance of the
entire fund as his own.
C.Answer
PaperB isviolated
correct.the
Paper hasand
Code violated Standard
Standards byIII(D)–Performance Presentation
including the historical resultsby
of not
his
disclosing that he was part of a team of managers that achieved the results shown. If he
prior employer.
had also included the return of the portion he directly managed, he would not have violated
the standard. Thus, answer A is incorrect. Answer C is incorrect because Paper received
written permission from his prior employer to include the results.
 • Townsend was recently appointed to the board of directors of a youth golf
program that is the local chapter of a national not-for-profit organization. The
program is beginning a new fund-raising campaign to expand the number of
annual scholarships it provides. Townsend believes many of her clients make
annual donations to charity. The next week in her regular newsletter to all clients,
she includes a small section discussing the fund-raising campaign and her
Answer A is correct. Townsend has not provided any information about her clients to the
position on the organization’s board.
leaders or managers of the golf program; thus, she has not violated Standard
A. III(E)–Preservation
Townsend did not of Confidentiality.
violate the CodeProviding contact information about her clients for a
and Standards.
direct-mail solicitation would have been a violation. Answer B is incorrect because the
B. notice in the newsletter
Townsend violated does not violate
the Code and Standard
Standards III(E).
by Answer C is
soliciting incorrect because
donations from her
theclients
golf program’s
through the fund-raising
newsletter.campaign had already begun, so discussing the
opportunity to donate was appropriate.
C. Townsend violated the Code and Standards by not getting approval of the
organization before soliciting her clients.
 • Noor Mawar, CFA, manages a trust fund with the beneficiary being an orphaned
18-year-old student. The investment policy dictates that trust assets are expected
to provide the student with a stable low-risk source of income until she reaches
the age of 30 years. Based on information from an Internet blog, the student asks
Mawar to invest in a new business venture that she expects will provide high
B is correct because the client is the trust/trustees, not the beneficiary. Mawar followed
returns over
Standard the next five
III(C) –Suitability years. Mawar
by managing the trustignores
assets inthe request,
a way instead
that would securing
likely result in
aconservative
stable source investments
of income while to keeping
providethe
sufficient income.
risk profile Did Mawar
low, thereby complyingmostwithlikely
the
investment
violate theobjectives of theCode
CFA Institute trust. of Ethics and Standards of Professional Conduct?

A. A isYes.
incorrect because Mawar did not violate any Standard as she managed trust assets
considering the suitability for the client, not the beneficiary.
B. No, because the client’s objectives were met.
C is incorrect because the client is the trust/trustees, not the beneficiary. Therefore the
C. time
No, because
horizon of thethe investment
investment time
is not frame does not match the investment horizon.
relevant.
 • Alexander Newton, CFA, is the chief compliance officer for Mills Investment
Limited. Newton institutes a new policy requiring the pro rata distribution of new
security issues to all established discretionary accounts for which the new issues
A is correct because under Standard III(B)–Fair Dealing, members and candidates should
are appropriate. The policy also provides for the exclusion of newly established
disclose to clients and prospective clients how they select accounts to participate in an
discretionary
order and how theyaccounts fromthethe
determine distribution
amount untileach
of securities they have will
account reached their
buy or sell.
Trade allocation
one-month procedures
anniversary mustThis
date. be policy
fair andisequitable,
disclosedand disclosure
to all existingofand
inequitable
potential
allocation methods does not relieve the member or candidate of this obligation. All
clients. Did Newton most likely violate any CFA Institute Standards of Professional
discretionary accounts should be treated in the same manner. Treating newer accounts
Conduct?would be considered inequitable regardless if this policy is disclosed.
differently
A. B isYes.
incorrect because making new accounts wait for an arbitrary anniversary date before
B. participating
No, because is notthis
fair allocation
or equitable.
policy is not inequitable under the Standards.
C. C is
No,incorrect
becausebecause under Standard
this policy has beenIII(B) inequitabledisclosed
adequately allocation methods cannot be
to all existing and
disclosed away.
potential clients.
 • Bronson provides investment advice to the board of trustees of a private
university endowment fund. The trustees have provided Bronson with the fund’s
financial information, including planned expenditures. Bronson receives a phone
call on Friday afternoon from Murdock, a prominent alumnus, requesting that
Bronson fax him comprehensive financial information about the fund. According to
Murdock,
The correct he has isaB.potential
answer contributor
This question butStandard
relates to needs III(A)–Loyalty,
the information that day
Prudence, andto
closeand
Care the Standard
deal and cannot contact anyofofConfidentiality.
III(E)–Preservation the trustees. Based
In this on the the
case, CFAmember
Institute
manages funds
Standards, of a private
Bronson endowment. Clients, who are, in this case, the trustees of the
should:
fund, must place some trust in members and candidates. Bronson cannot disclose
A. confidential financialthe
Send Murdock information to anyone
information because without the permission
disclosure of the fund,
would benefit regardless
the client.
of whether the disclosure may benefit the fund. Therefore, answer A is incorrect. Answer C
B. is incorrect
Not send Murdock
because the information
Bronson must notify to
thepreserve
fund and confidentiality.
obtain the fund’s permission before
publicizing the information.
C. Send Murdock the information, provided Bronson promptly notifies the trustees.
 • Which one of the following actions will help to ensure the fair treatment of
brokerage firm clients when a new investment recommendation is made?
A. Informing all people in the firm in advance that a recommendation is to be
disseminated.
B. TheDistributing
correct answer is C. This question,
recommendations which relatesclients
to institutional to Standard
prior III(B)–Fair Dealing,
to individual accounts.
tests the knowledge of the procedures that will assist members and candidates in treating
C. clients
Minimizing
fairly whenthe timeinvestment
making betweenrecommendations.
the decision The and step
thelisted
dissemination
in C will help of a
ensure the fair treatment of clients. Answer A may have negative effects on the fair
recommendation.
treatment of clients. The more people who know about a pending change, the greater the
chance that someone will inform some clients before the information’s release. The firm
should establish policies that limit the number of people who are aware in advance that a
recommendation is to be disseminated. Answer B, distributing recommendations to
institutional clients before distributing them to individual accounts, discriminates among
clients on the basis of size and class of assets and is a violation of Standard III(B).
 The correct answer is B. This question relates to Standard III(A)–Loyalty, Prudence, and
• One of the discretionary accounts managed by Farnsworth is the Jones Corporation employee
Care—specifically, a member’s or candidate’s responsibility for voting proxies and the
profit-sharing plan. Jones, the company president, recently asked Farnsworth to vote the shares
use of client brokerage. According to the facts stated in the question, Farnsworth did not
in the profit-sharing plan in favour of the slate of directors nominated by Jones Corporation and
violate Standard III(A). Although the company president asked Farnsworth to vote the
against the directors sponsored by a dissident stockholder group. Farnsworth does not want to
shares
lose this of the because
account Jones Corporation
he directs all profit-sharing plan to
the account’s trades a acertain
brokerage way,
firmFarnsworth
that provides
investigated
Farnsworth with theuseful
issueinformation
and concluded, independently,
about tax-free the Although
investments. best waythis to information
vote. Therefore,
is not of
even though his decision coincided with the wishes of the company
value in managing the Jones Corporation account, it does help in managing several other president,
Farnsworth
accounts. The is brokerage
not in violation of his responsibility
firm providing to be
this information loyal
also and
offers thetolowest
provide care to hisfor
commissions
clients.
trades andIn this case,best
provides the execution.
participants and the beneficiaries
Farnsworth of the
investigates the profit-sharing
director plan are
issue, concludes that
the management-nominated
clients, not the company’s management.
slate Hadlong-run
is better for the Farnsworth not investigated
performance the issue
of the company than
or
thehad he yielded
dissident group’stoslate,
the president’s wishes andFarnsworth:
and votes accordingly. voted for a slate of directors that he had
determined was not in the best interest of the company, Farnsworth would have violated
A. Violated the Standards in voting the shares in the manner requested by Jones but not in
hisdirecting
responsibilities
trades to to
thethe beneficiaries
brokerage firm. of the plan. In addition, because the brokerage
firm provides the lowest commissions and best execution for securities transactions,
B. Farnsworth
Did not violate the his
has met Standards in voting
obligations theclient
to the shares in thethis
in using manner requested
brokerage firm.by Jonesnot
It does or in
directing
matter thattrades to the brokerage
the brokerage firm.provides research information that is not useful for
firm also
C. theViolated
account thegenerating
Standards the commission
in directing tradesbecause Farnsworth
to the brokerage firm is
butnot
notpaying extra
in voting moneyas
the shares
of requested
the client’sbyfor that information.
Jones.
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.
❖ 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.
❖ Independent practice for compensation is allowed if a notification is provided to the employer fully
describing all aspects of the services, including compensation, duration, and the nature of the
activities and the employer consents to all terms of the proposed independent practice before it
begins.
❖ When a member conducts unrelated non-competitive services to clients outside of business hours, then no
prior approval is required, disclosure will serve the purpose.
❖ Lying about passing the CFA examination could cause the firm to misrepresent candidate’s
progression in the CFA Program to a client, leading to reputational damage if discovered.
❖ When leaving an employer, members must continue to act in their employer’s best
interests until their resignation is effective.
❖ Soliciting employer’s clients with the help of data gathered during the course of the job is
a violation of this standard.
❖ However, members can solicit clients from former employers through memory or publicly
available information.
❖ Employer records on any medium (e.g., home computer, tablet, cell phone) are the
property of the firm.
❖ When an employee has left a firm, simple knowledge of names and existence of former
clients is generally not confidential. There is also no prohibition on the use of experience
or knowledge gained while with a former employer.
❖ If an agreement exists among employers (e.g., the U.S. “Protocol for Broker Recruiting”) that
permits brokers to take certain client information when leaving a firm, a member may act
within the terms of the agreement without violating the Standard.
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.
❖ If a client offers a bonus that depends on the future performance of her account,
this is an additional compensation arrangement that requires written consent in
advance.
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.
❖ Members must make reasonable efforts to prevent employees from violating laws, rules,
regulations, or the Code and Standards, as well as make reasonable efforts to detect
violations.
❖ An adequate compliance system must meet industry standards, regulatory requirements, and
the requirements of the Code and Standards.
❖ Members with supervisory responsibilities have an obligation to bring an inadequate
compliance system to the attention of firm’s management and recommend corrective action.
❖ 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.
❖ If there is a violation, respond promptly and conduct a thorough investigation while increasing
supervision or placing limitations on the wrongdoer’s activities.
 • Miller heads the research department of a large brokerage firm. The firm has
many analysts, some of whom are subject to the Code and Standards. If Miller
delegates some supervisory duties, which statement best describes her
responsibilities under the Code and Standards?
A. Miller’s supervisory responsibilities do not apply to those subordinates who are
not subject to the Code and Standards.
B. Miller no longer has supervisory
The responsibility
correct answerfor those
is dutiesUnder
C. delegated to her
Standard
subordinates. IV(C)–Responsibilities of Supervisors, members and
candidates may delegate supervisory duties to subordinates
C. Miller retains supervisory responsibility
but such for not
delegation does allrelieve
subordinates
members ordespite her
candidates
delegation of some duties.
of their supervisory responsibilities. As a result, answer B is
incorrect. Moreover, whether or not Miller’s subordinates are
subject to the Code and Standards is irrelevant to her
supervisory responsibilities. Therefore, answer A is incorrect.
 • Jurgen is a portfolio manager. One of her firm’s clients has told Jurgen that he will
compensate her beyond the compensation provided by her firm on the basis of
the capital appreciation of his portfolio each year. Jurgen should:
A. Turn down the additional compensation because it will result in conflicts with the
interests of other clients’ accounts.
B. The correct
Turn downanswer is C. This compensation
the additional question involves Standard
because it IV(B)–Additional
will create undueCompensation
pressure on
Arrangements. The arrangement described in the question—whereby Jurgen would be
her to achieve strong short-term performance.
compensated beyond the compensation provided by her firm, on the basis of an account’s
C. performance—is not a from
Obtain permission violation
her ofemployer
the Standards
prior as
to long as Jurgen
accepting discloses the
the compensation
arrangement in writing to her employer and obtains permission from her employer prior to
arrangement.
entering into the arrangement. Answers A and B are incorrect; although the private
compensation arrangement could conflict with the interests of other clients and lead to
short-term performance pressures, members and candidates may enter into such
agreements as long as they have disclosed the arrangements to their employer and
obtained permission for the arrangement from their employer.
 • Patrick Reyes, CFA, just started his job as an investment adviser with Grant
Corporation. On his first day of work, his supervisor asked him to solicit clients of
his previous employer for business. Will Reyes violate the Standard if he follows
his supervisor’s instruction?
A. Yes, because those clients belong to his former employers.
B. Yes, because he should have waited for 60 days before contacting the clients.
C. No, as long as he knows the clients’ contact information from memory or
publicly available information.

The correct answer is C. Member can solicit clients from former employees
through memory or publicly available information.
 • Which of the following statements is correct under the Code and Standards?
A. CFA Institute members and candidates are prohibited from undertaking
independent practice in competition with their employer.
B. Written consent from the employer is necessary to permit independent practice
that could result in compensation or other benefits in competition with a
member’s The correct answer
or candidate’s is B. Under Standard IV(A)–Loyalty, members and
employer.
candidates may undertake independent practice that may result in
C. Members compensation
and candidatesor other benefit
are in competition
prohibited from with their employer
making as long asor
arrangements
they obtain consent from their employer. Answer C is not consistent with the
preparations to go into a competitive business before terminating their
Standards because the Standards allow members and candidates to make
relationship with their employer.
arrangements or preparations to go into competitive business as long as
those arrangements do not interfere with their duty to their current
employer. Answer A is not consistent with the Standards because the
Standards do not include a complete prohibition against undertaking
independent practice.
 • Preeta Singh, a CFA candidate, is an asset manager employed by a fund
management company managing very large segregated pension funds. In her
spare time outside of working hours, Singh likes to provide management
consulting services to small companies to help grow their businesses, focusing on
strategic planning. Singh is paid for the consulting services and has also provided
her employer information about these outside activities. Does Singh most likely
violate the CFA
A is Code
correctofbecause
Ethics with
Singhregard to violate
does not Dutiesany
to Employers?
Standard relating to Duties
to Employers. She conducts unrelated non-competitive services to clients
A. No. outside of business hours and thus does not deprive her employer of the
B. advantage
Yes, with regard of her skills and abilities, nor is there any indication that she
to Loyalty.
divulges confidential information or otherwise causes harm to her employer.
C. She also
Yes, with regard to does not need
Additional to divulge information
Compensation relating to her additional
Arrangements.
compensation or to seek permission, as her management consulting
services do not create a conflict of interest with her employer’s interest.
 • A former hedge fund manager, Jackman, has decided to launch a new private wealth
management firm. From his prior experiences, he believes the new firm needs to
achieve US$1 million in assets under management in the first year. Jackman offers a
$10,000 incentive to any adviser who joins his firm with the minimum of $200,000 in
committed investments. Jackman places notice of the opening on several industry web
portals and career search sites. Which of the following is correct according to the Code
and Standards?
A. A member or candidate is eligible for the new position and incentive if he or she can
arrange forAnswer
enoughC current
is correct. Standard
clients IV(A)–Loyalty
to switch discusses
to the new activities
firm and if the member or
permissible to members and candidates when they are leaving their current
candidate discloses the incentive fee.
employer; soliciting clients is strictly prohibited. Thus, answer A is
B. A member inconsistent
or candidate withmay not accept
the Code employment
and Standards even with the
therequired
new firm because
disclosure.
Jackman’s Answer
incentiveB offer violates
is incorrect the Code
because theand
offerStandards.
does not directly violate the Code
and Standards. There may be out-of-work members and candidates who
C. A member or candidate is not eligible for the new position unless he or she is currently
can arrange the necessary commitments without violating the Code and
unemployed because soliciting the clients of the member’s or candidate’s current
Standards.
employer is prohibited.
Standard V: Investment Analysis, Recommendation and Actions
Standard V(A) Diligence and Reasonable Basis
Members and Candidates must:
❖ Exercise diligence, independence, and thoroughness in analysing investments, making
investment recommendations, and taking investment actions.
o The level of research needed to satisfy the requirement for due diligence will differ depending on the
product or service offered. (Quick and simple doesn’t necessarily mean he was not diligent)
❖ Have a reasonable and adequate basis, supported by appropriate research and investigation,
for any investment analysis, recommendation, or action.
o 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.
▪ Fees and historical results for a mutual fund.
▪ Limitations of any quantitative models used.
▪ A determination of whether peer group comparisons for valuation are appropriate.
❖ Recommendations for Members: 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:
o Review assumptions used.
o Determine how rigorous the analysis was.
o Identify how timely the research is.
o Evaluate objectivity and independence of the recommendations.
o (When a member has reason to suspect that either secondary or
third-party research or information comes from a source that lacks a
sound basis, the member must not rely on that information).
Standard V(B) Communication with Clients and Prospective Clients
Members and Candidates must:
❖ 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.
❖ Disclose to clients and prospective client’s significant limitations and risks associated with the
investment process.
o In all cases, members should communicate the potential gains and losses on the investment clearly
in terms of total returns.
o Two examples of such limitations are liquidity and capacity. Liquidity refers to the ability to exit an
investment readily without experiencing a significant extra cost from doing so. Capacity refers to an
investment vehicle’s ability to absorb additional investment without reducing the returns it is able to
achieve.
❖ 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.
❖ Distinguish between fact and opinion in the presentation of investment analyses
and recommendations.
o Expectations based on statistical modelling and analysis are not facts.
o When using projections from quantitative models and analysis, members may violate
the Standard by not explaining the limitations of the model and the assumptions it
uses, which provides a context for judging the uncertainty regarding the estimated
investment result.
❖ Members must communicate significant changes in the risk characteristics of an
investment or investment strategy.
Standard V(C) Record Retention
❖ 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.
❖ Members must maintain research records that support the reasons for the analyst’s conclusions and
any investment actions taken. Such records are the property of the firm.
o When a member or candidate leaves a firm to seek other employment, the member or candidate cannot take
the property of the firm, to the new employer without the express consent of the previous employer.
o The member or candidate cannot use historical recommendations or research reports created at the previous
firm because the supporting documentations is unavailable.
o For future use, the member or candidate must re-create the supporting records at the new firm with
information gathered through public sources or directly from covered company and not from memory or
sources obtained at the previous employer.
❖ Recommendations for Members
• If no regulatory standards or firm policies are in place, the Standard recommends a seven-year
minimum holding period.
❖ Recommendations for Firms
• This recordkeeping requirement generally is the firm’s responsibility.
 • Willier is the research analyst responsible for following Company X. All the
information he has accumulated and documented suggests that the outlook for
the company’s new products is poor, so the stock should be rated a weak “hold.”
During lunch, however, Willier overhears a financial analyst from another firm
whom he respects offer opinions that conflict with Willier’s forecasts and
expectations. Upon returning to his office, Willier releases a strong “buy”
recommendation to the public. Willier:
The correct answer is B. This question relates to Standard V(A)–Diligence and
A. Reasonable
Violated Basis. The
the Standards by opinion of distinguish
failing to another financial analyst
between is not
facts andanopinions
adequatein
basis for Willier’s action in changing the recommendation. Answer C is thus
his recommendation.
incorrect. So is answer A because, although it is true that members and
B. candidates
Violated must distinguish
the Standards because between
he did facts
notand opinions
have in recommendations,
a reasonable the
and adequate
question does not illustrate a violation of that nature. If the opinion overheard by
basisWillier
for hishad
recommendation.
sparked him to conduct additional research and investigation that
justified a change of opinion, then a changed recommendation would be
C. Was in full compliance with the Standards.
appropriate.
 • Cannan has been working from home on weekends and occasionally saves
correspondence with clients and completed work on her home computer.
Because of worsening market conditions, Cannan is one of several employees
released by her firm. While Cannan is looking for a new job, she uses the files
she saved at home to request letters of recommendation from former clients. She
also provides to prospective clients some of the reports as examples of her
abilities.
A. Cannan violated the Code and Standards because she did not receive
Answer A is correct. According to Standard V(C)–Record Retention, Cannan
permission
needed from her former
the permission employer
of her employer to
to keep or the
maintain use
filesthe files after
at home her
after her
employment ended.
employment ended. Without that permission, she should have deleted the files. All
files created as part of a member’s or candidate’s professional activity are the
B. Cannan did not violate the Code and Standards because the files were created
property of the firm, even those created outside normal work hours. Thus, answer
and saved on her own
B is incorrect. timeCand
Answer computer.
is incorrect because the Code and Standards do not
prohibit using one’s personal computer to complete work for one’s employer.
C. Cannan violated the Code and Standards because she is prohibited from
saving files on her home computer
 • Which of the following is least likely part of the CFA Institute Standards of
Professional Conduct, Standard V(B)–Communication with Clients and
Prospective Clients? Members and candidates must:
A. make reasonable efforts to ensure that when communicating investment
performance information, it is fair, accurate, and complete.
B. disclose to clients and prospective client’s significant limitations and risks
associated with the investment process.
A is correct. The statement, “When communicating investment performance
C. information,
distinguish Members
between and opinion
fact and Candidates must
in the make reasonable
presentation efforts toanalysis
of investment ensure
that it is fair, accurate, and complete.” can be found in The CFA Institute
and recommendations.
Standards of Professional Conduct, Standard III–Duties to Clients (D)
Performance Presentation. It is not part of Standard V–Investment Analysis,
Recommendations, and Actions (B) Communication with Clients and Prospective
Clients.
 • Vincent Allen, CFA, was a stock analyst with a large investment bank. He recently
left to start his own research firm. Based on his memory, he constructed a few
research reports on companies that he covered during his employment. He was
able to find all the supporting documents for his report online, except the meeting
notes he had with the management of the covered companies, then he published
the reports. Did Allen most likely violate the CFA Institute Standards?
A. No
B. Yes, with regard to duties to employers
C. Yes, with regard to Record Retention C is correct because he used the
information in the meeting notes for
his report, but he didn’t have the
documentation to support that
 • Gregor Pavlov, CFA, is a fund manager working for the general partner of a new
private equity fund. Pavlov includes in the fund marketing material his
performance history from his previous employer. He received permission from his
former employer to take his historical return figures and the supporting research
reports he used to make the related investment decisions. Did Pavlov most likely
violate the CFA Institute Standards?
A. No
B. Yes, with regard to Loyalty
C is correct because even though Pavlov had his former
C. Yes, with regard to Recordemployer’s
Retentionpermission to take his performance record and
supporting research reports with him, he does not have the
underlying performance data to support those historical
return calculations and is therefore most likely in violation of
Standard V(C)–Record Retention.
Standard VI: Conflict of Interest
Standard VI (A) Disclosure of Conflicts
❖ 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 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 requirement that all potential areas of conflict be disclosed allows clients and prospects to
judge motives and potential biases for themselves.
❖ The most common conflict that requires disclosure is actual ownership of stock in companies
that the member recommends or that clients hold.
❖ Another common source of conflicts of interest is a member’s compensation/bonus structure,
which can potentially create incentives to take actions that produce immediate gains for the
member with little or no concern for longer-term returns for the client.
❖ Recommendations for Members: Any special compensation arrangements, bonus programs,
commissions, and incentives should be disclosed.
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.
❖ Personal transactions may be undertaken only after clients and the member’s employer have
had an adequate opportunity to act on a recommendation. Note that family member accounts
that are client accounts should be treated just like any client account; they should not be
disadvantaged.
❖ Recommendations for Members: Members can avoid conflicts that arise with IPOs by not
participating in them.
❖ Recommendations for Firms
o Establish limitations on employee participation in equity IPOs.
o Establish blackout/restricted periods. Employees involved in investment decision making should
have blackout periods prior to trading for clients—no front running (i.e., purchase or sale of securities
in advance of anticipated client or employer purchases and sales). The size of the firm and the type
of security should help dictate how severe the blackout requirement should be.
o Establish reporting procedures, including duplicate trade confirmations, disclosure of personal
holdings and beneficial ownership positions, and preclearance procedures.
• Standard VI(C) Referral Fees
❖ 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.
❖ Members must inform employers, clients, and prospects of any benefit received for referrals of
customers and clients, allowing them to evaluate the full cost of the service as well as any
potential partiality. All types of consideration must be disclosed.
❖ Appropriate disclosure means that members and candidates must advise the client or
prospective client, before entry into any formal agreement for services, of any benefit given or
received for the recommendation of any services provided by the member or candidate. In
addition, the member or candidate must disclose the nature of the consideration.
o If disclosure is not there, still the member refused the referral payment, there would not be any
violation.
❖ Recommendations for Members: Members should provide their employers with updates at
least quarterly.
❖ Recommendations for Firms: Firms that do not prohibit referral fees should have clear
procedures for approval and policies regarding the nature and value of referral compensation
received.
 • Jamison is a junior research analyst with Howard & Howard, a brokerage and
investment banking firm. Howard & Howard’s mergers and acquisitions
department has represented the Britland Company in all of its acquisitions for the
past 20 years. Two of Howard & Howard’s senior officers are directors of various
Britland subsidiaries. Jamison has been asked to write a research report on
The correctWhat
Britland. answer is C.
is the This
best question
course involves
of action forStandard VI(A)–Disclosure of Conflicts.
her to follow?
The question establishes a conflict of interest in which an analyst, Jamison, is asked to
A. write a research
Jamison may report on the
write a company
report that
but is a client
must of thefrom
refrain analyst’s employer.
expressing In addition,
any opinions
twobecause
directorsofofthe
thespecial
company are seniorbetween
relationships officers of
theJamison’s employer. Both facts
two companies.
establish that there are conflicts of interest that must be disclosed by Jamison in her
B. research
Jamison should
report. notBwrite
Answer the report
is incorrect because
because the two
an analyst Howard
is not & Howard
prevented officers
from writing a
report
serve simply because for
as directors of subsidiaries
the special relationship
of Britland.the analyst’s employer has with the
company as long as that relationship is disclosed. Answer A is incorrect because whether
C. or not
Jamison
Jamison may write the
expresses anyreport if she
opinions discloses
in the report isthe special
irrelevant to relationships with the
her duty to disclose a
conflict
company of interest. Not expressing opinions does not relieve the analyst of the
in the report.
responsibility to disclose the special relationships between the two companies.
 • Smith is a financial analyst with XYZ Brokerage Firm. She is preparing a
purchase recommendation on JNI Corporation. Which of the following situations
is most likely to represent a conflict of interest for Smith that would have to be
disclosed?
A. Smith frequently purchases items produced by JNI.
B. XYZ holds for its own account a substantial common stock position in JNI.
C. Smith’s brother-in-law is a supplier to JNI.
The correct answer is B. This question involves Standard VI(A)–Disclosure of
Conflicts—specifically, the holdings of an analyst’s employer in company stock. Answers A
and C do not describe conflicts of interest that Smith would have to disclose. Answer A
describes the use of a firm’s products, which would not be a required disclosure. In answer
C, the relationship between the analyst and the company through a relative is so tangential
that it does not create a conflict of interest necessitating disclosure.
 • Which of the following statements is a stated purpose of disclosure in Standard
VI(C)–Referral Fees?
A. Disclosure will allow the client to request discounted service fees.
B. Disclosure will help the client evaluate any possible partiality shown in the
recommendation of services.
C. Disclosure means advising a prospective client about the referral arrangement
once a formal client relationship has been established.
The correct answer is B. Answer B gives one of the two primary reasons listed in the
Handbook for disclosing referral fees to clients under Standard VI(C)–Referral Fees. (The
other is to allow clients and employers to evaluate the full cost of the services.) Answer A is
incorrect because Standard VI(C) does not require members or candidates to discount their
fees when they receive referral fees. Answer C is inconsistent with Standard VI(C) because
disclosure of referral fees, to be effective, should be made to prospective clients before
entering into a formal client relationship with them.
 • Rose, a portfolio manager for a local investment advisory firm, is planning to sell a
portion of his personal investment portfolio to cover the costs of his child’s
academic tuition. Rose wants to sell a portion of his holdings in Household
Products, but his firm recently upgraded the stock to “strong buy.” Which of the
following describes Rose’s options under the Code and Standards?
A. Based on his firm’s “buy” recommendation, Rose cannot sell the shares
because he would be improperly prospering from the inflated recommendation.
B. Rose is free to sell his personal holdings once his firm is properly informed of
Thehis intentions.
correct answer is B. Standard VI(B)–Priority of Transactions does not limit transactions
C.of company
Rose canemployees
sell his that differ from
personal current
holdings butrecommendations as long
only when a client as the
of the firmsale does an
places
not disadvantage current clients. Thus, answer A is incorrect. Answer C is incorrect because
order to buy
the Standard doesshares of Household.
not require the matching of personal and client trades.
 • Ian O'Sullivan, CFA, is the owner and sole employee of two companies, a public
relations firm and a financial research firm. The public relations firm entered into a
contract with Mallory Enterprises to provide public relations services, with
O'Sullivan receiving 40,000 shares of Mallory stock in payment for his services.
Over the next 10 days, the public relations firm issued several press releases that
discussed Mallory's excellent growth prospects. O'Sullivan, through his financial
research firm, also published a research report recommending Mallory stock as a
"buy." According to the CFA Institute Standards of Professional Conduct,
O'Sullivan is most likely required to disclose his ownership of Mallory stock in the:
A. press releases only.
B.C isresearch
correct because
report members
only. should disclose all matters that reasonably could be
expected to impair the member’s objectivity [Standard I(B), Standard VI(A)].
C. both the press release and the research report.
 • A large manufacturing company is seeking help finding a fund manager for its pension
plan. After a comprehensive but unsuccessful search, Brett Arun, CFA, is hired to solicit
C is correct
proposals from various fund because
managers. ArunThehasclient
violated
paysStandard VI(C)–Referral
Arun a lump sum fee Fees
for his
because he did not disclose the referral fee arrangement
services. The search concludes with Ramport Investments being hired as the pension with Ramport
plan’s manager. A to year
his client prior to is
after Ramport Ramport being
hired, the appointed
pension as the client’s
administrator fund a
sends Arun
manager.
letter telling him how Thisthedisclosure
satisfied is necessary
pension trustees are withforthe
theservices
client to be ablebyto
provided the
determine Arun’s level of independence and objectivity in
fund manager. Subsequently, without the plan sponsor’s knowledge, Arun receives a
recommending Ramport to the fund. If Arun had made proper
payment from Ramport for successfully introducing it to the pension plan under an
disclosure, he would be able to accept the payment without violating
agreement Arun entered into with Ramport when the initial contact with the fund
any Standards.
manager was made. With regard to the payment received, did Arun most likely violate
B is incorrect because Arun violated Standard VI(C)–Referral Fees
the CFA Institute Code of Ethics and Standards of Professional Conduct?
when he accepted the fee paid by Ramport. Disclosure after the fact
A. No. would not cure the acceptance of the fee because disclosure should
have occurred prior to the search being conducted. Withholding this
B. Yes, because he did not disclose the referral fee to the client.
information raises the question of a potential lack of objectivity in the
C. Yes, because he recommendations
should have refusedArun is making.from
payment Theretheare also
fund questions concerning
manager.
the legality of having firms pay so that they may be entered in the
money manager search.
Standard VII: Responsibility as a CFA Institute Member or CFA Candidate
Standard VII(A) Conduct as Participants in CFA Institute Programs
❖ Members must not engage in any conduct that compromises the reputation or integrity of CFA
Institute or the CFA designation.
❖ This Standard applies to conduct that includes:
o Cheating on the CFA exam or any exam.
o Revealing anything about either broad or specific topics tested, content of exam questions, or
formulas required or not required on the exam.
▪ Members are not precluded from expressing their opinions regarding the exam program or CFA Institute but
must not reveal confidential information about the CFA Program.
o Giving confidential information on the CFA Program to candidates or the public.
▪ Members who is an exam grader discusses with friends the guideline answer for and relative candidate
performance on a specific question he graded on the CFA exam.
o Improperly using the designation to further personal and professional goals.
▪ R is an investment-relations consultant for several companies that are seeking greater exposure to
investors. He is also the program chair for the CFA Institute society in the city where he works. To the
exclusion of the other companies, R only schedule companies that are his clients to make presentation to
the society.
o Misrepresenting information on the Professional Conduct Statement (PCS).
VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program
❖ When referring to CFA Institute, Members must not misrepresent or exaggerate the
meaning or implications of membership in CFA Institute.
❖ Members must not make promotional promises or guarantees tied to the CFA
designation, such as over-promising individual competence or over-promising
investment results in the future (i.e., higher performance, less risk, etc.).
❖ Members must satisfy these requirements to maintain membership:
o Sign the PCS annually: must disclose, all matters that question their
professional conduct, such as involvement in litigation.
o Pay CFA Institute membership dues annually.
o If they fail to do this, they are no longer active members.
❖ There is no partial CFA designation. It is acceptable to state that a candidate
successfully completed the program in three years if, in fact, he did, but claiming
superior ability because of this is not permitted.
 Proper references Improper references
“Completion of the CFA Program has enhanced my portfolio “CFA charter holders achieve better performance results.”
management skills.”
“John Smith passed all three CFA Program examinations in three “John Smith is among the elite, having passed all three
consecutive years.” CFA examinations in three consecutive attempts.”

“The CFA designation is globally recognized and attests to “As a CFA charter holder, I am the most qualified to
a charter holder’s success in a rigorous and comprehensive manage client investments.”
study program in the field of investment management and
research analysis.”
“The credibility that the CFA designation affords and the “As a CFA charter holder, Jane White provides the best value in
skills the CFA Program cultivates are key assets for my trade execution.”
future career development.”
“I enrolled in the CFA Program to obtain the highest set of “Enrolling as a candidate in the CFA Program ensures one of
credentials in the global investment management industry.” becoming better at valuing debt securities.”

“I passed Level I of the CFA Program.” “CFA, Level II”

“I am a 2010 Level III candidate in the CFA Program.” “CFA, Expected 2011”

“I passed all three levels of the CFA Program and may be “CFA, Expected 2011”
eligible for the CFA charter upon completion of the required “John Smith, Charter Pending”
work experience.”
 • Carolina Ochoa, CFA, is the chief financial officer at Pantagonia Computing.
Ochoa is currently the subject of an inquiry by Pantagonia’s corporate
investigations department. The inquiry is the result of an anonymous complaint
accusing Ochoa of falsifying travel expenses for senior management related to a
government contract. According to the CFA Institute Code of Ethics and
Standards of Professional Conduct, it is most appropriate for Ochoa to disclose
the allegations:
A. on her Professional Conduct Statement. A is correct because members and
candidates must self-disclose on the
B. to CFA Institute when the investigation concludes.
annual Professional Conduct Statement
all matters that question their
C. to CFA Institute if the allegations are provenprofessional
correct. conduct, such as
involvement in civil litigation or criminal
investigations or being the subject of a
written complaint.
 • Albert and Tye, who recently started their own investment advisory business,
have registered to take the Level III CFA examination. Albert’s business card
reads, “Judy Albert, CFA Level II.” Tye has not put anything about the CFA
designation on his business card, but promotional material that he designed for
the business describes the CFA requirements and indicates that Tye participates
in the CFA Program and has completed Levels I and II. According to the
Standards:
A. Albert has violated the Standards, but Tye has not.
The correct answer is A. Standard VII(B)–Reference to CFA Institute, the CFA Designation,
B.andTye
the has
CFAviolated
Programthe Standards,
is the subject ofbut
thisAlbert has The
question. not. reference on Albert’s business
card implies that there is a “CFA Level II” designation; Tye merely indicates in promotional
C.material
Both that
Albert and Tye have violated the Standards.
he is participating in the CFA Program and has completed Levels I and II.
Candidates may not imply that there is some sort of partial designation earned after
passing a level of the CFA exam. Therefore, Albert has violated Standard VII(B).
 • Rule has worked as a portfolio manager for a large investment management firm for the past 10
years. Rule earned his CFA charter last year and has decided to open his own investment
management firm. After leaving his current employer, Rule creates some marketing material for
his new firm. He states in the material, “In earning the CFA charter, a highly regarded credential
in the investment management industry, I further enhanced the portfolio management skills
learned during my professional career. While completing the examination process in three
consecutive years, I consistently received the highest possible scores on the topics of Ethics,
Alternative Investments, and Portfolio Management.” Has Rule violated Standard
VII(B)–Reference
Answer to CFA
B is correct Institute,tothe
according CFA Designation,
Standard and the CFA
VII(B)–Reference Program
to CFA in his the
Institute, marketing
CFA
material?
Designation, and the CFA Program. CFA Program candidates do not receive their actual
A. scores
Ruleon the exam.
violated TopicVII(B)
Standard and subtopic
in statingresults
that heare groupedthe
completed intoexams
three in
broad
threecategories,
consecutive
andyears.
the exam is graded only as “pass” or “fail.” Although a candidate may have achieved a
topical score of “above 70%,” she or he cannot factually state that she or he received the
B. highest
Rule violated
possibleStandard VII(B) in that
score because stating that he received
information is notthe highest scores
reported. Thus, in the topics
answer C isof
Ethics,Answer
incorrect. Alternative
A isInvestments,
incorrect asand
longPortfolio Management.
as the member or candidate actually completed the
C. exams
Rule consecutively. StandardVII(B).
did not violate Standard VII(B) does not prohibit the communication of factual
information about completing the CFA Program in three consecutive years.
 • Park is very frustrated after taking her Level II exam. While she was studying for the
exam, to supplement the curriculum provided, she ordered and used study material from
a third-party provider. Park believes the additional material focused her attention on
specific topic areas that were not tested while ignoring other areas. She posts the
following statement on the provider’s discussion board: “I am very dissatisfied with your
firm’s CFA Program Level II material. I found the exam extremely difficult and myself
unprepared for specific questions after using your product. How could your service
provide such limited instructional resources on the analysis of inventories and taxes
when the exam had multiple questions about them? I will not recommend your products
to other candidates.”
A.Answer
Park Cviolated
is correct. Standard
the Code VII(A)–Conduct
and Standards as Members
by purchasing and Candidates
third-party in the CFA
review material.
Program prohibits providing information to candidates or the public that is considered
B.confidential
Park violated
to thethe Code
CFA and Standards
Program. by providing
In revealing her opinion
that questions on to
related thethe
difficulty
analysisof the
of
exam. and analysis of taxes were on the exam, Park has violated this standard.
inventories
C.Answer
ParkBviolated
is incorrect
the because
Code andtheStandards
guidance for
by the standard
providing explicitly
specific acknowledges
information that
on topics
members andthe
tested on candidates
exam. are allowed to offer their opinions about the CFA Program.
Answer A is incorrect because candidates are not prohibited from using outside resources.
 • Quinn sat for the Level III CFA exam this past weekend. He updates his resume
with the following statement: “In finishing the CFA Program, I improved my skills
related to researching investments and managing portfolios. I will be eligible for
the CFA charter upon completion of the required work experience.”
A. Quinn violated the Code and Standards by claiming he improved his skills
through the CFA Program.
B. Quinn violated the Code and Standards by incorrectly stating that he is eligible
for the
Answer CFA
B is charter.
correct. According to Standard VII(B)–Reference to CFA Institute, the CFA
Designation, and the CFA Program, Quinn cannot claim to have finished the CFA Program
C.or be
Quinn didfor
eligible notthe
violate the Code
CFA charter untiland Standards
he officially withthat
learns hishe
resume update.
has passed the Level III
exam. Until the results for the most recent exam are released, those who sat for the exam
should continue to refer to themselves as “candidates.” Thus, answer C is incorrect.
Answer A is incorrect because members and candidates may discuss areas of practice in
which they believe the CFA Program improved their personal skills.
 • Millicent Plain has just finished taking Level II of the CFA examination. Upon
leaving the examination site, she meets with four Level III candidates who also
just sat for their exams. Curious about their examination experience, Plain asks
the candidates how difficult the Level III exam was and how they did on it. The
candidates say the essay portion of the examination was much harder than they
had expected and they were not able to complete all questions as a result. The
candidates go on to tell Plain about broad topic areas that were tested and
complain about specific formulas they had memorized that did not appear on the
C exam.
is correctThe Level
because III candidates
discussing leastoflikely
the level of difficulty violated
the essay portion ofthe
the CFA Institute
examination did notStandards of
violate Standard
VII(A)–Conduct as Members and Candidates in the CFA Program. Standard VII(A) and the Candidate Pledge were
Professional
violated Conduct
by candidates by discussing:
revealing broad topical areas and formulas tested or not tested on the exam.

A.A is specific
incorrect asformulas.
Standard VII(A)–Conduct as Members and Candidates in the CFA Program and the Candidate
Pledge was violated by candidates revealing specific formulas.
B. broad topic areas.
B is incorrect as Standard VII(A)–Conduct as Members and Candidates in the CFA Program and the Candidate
C.Pledge
thewas violated by candidates
examination essays.revealing portions of the CBOK covered on the exam and areas not covered.
 • Joanne Bryce recently received notification she had successfully completed the
Level III CFA exam. Having met all the necessary requirements, Bryce would
soon be awarded her charter. Bryce’s employer wanted to recognize her
accomplishment and placed an ad in the local newspaper. Which of the following
C is correct. The ad should not include the statement, “Ms. Bryce passed all three levels of the exam consecutively,
statements
placing would
her in an elite group.” least likelyVII(B):
CFA Standard comply with
References the
to CFA CFAthe Institute
Institute, Standards
CFA Designation, and the CFAof
Programs states, “When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in
Professional
the Conduct?
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.” CFA charterholders
A. are The
those CFA
individuals who have
charter is a earned the right
key asset in to usedevelopment
the the CFA designation granted
of her by CFA Institute.
investment career. These
individuals have satisfied certain requirements, including completion of the CFA Program and the required years of
B. acceptable
By work experience. It would not have been a violation to simply state that Ms. Bryce had consecutively
becoming a the
passed all three levels of charterholder, shebehas
exam; it would simply significantly
a statement improved
of fact. Adding her her
that it places standing
in an elite within
group
is anthe
exaggeration
firm. of her accomplishment and could be viewed as misleading.
A and B are incorrect. The statements “The CFA charter is a key asset in the development of her investment career”
C. andMs. Bryce apassed
“By becoming all three
charterholder, she haslevels of the
significantly exam
improved consecutively,
her standing placing
within the firm” can be her in in
included an
the elite
ad. Thegroup
charter can be considered a key asset, and that it has significantly improved her standing within the firm
simply indicates that her firm holds the charter in high regard. Neither statement misrepresents nor exaggerates the
meaning or implication of holding the CFA designation.
 • Jeffrey Jones passed the Level I CFA examination in 1997 and the Level II
examination in 2009. He is not currently enrolled for the Level III examination.
According to the CFA Institute Standards of Professional Conduct, which of the
following is the most appropriate way for Jones to refer to his participation in the
CFA Program?
A. Jeffrey Jones, CFA (expected 2014)
B. Candidate in the CFA Institute CFA Program
C.C is correct
Passed because no designation
Level II of the exists
CFA for someone who has
examination in passed
2009 Level I, Level II, or Level III of the CFA exam
[Standard VII(B)]. Persons who have passed a certain level of the exam may state that they have completed that
level. A person can only state he is a Candidate if he is currently enrolled in the CFA Program. It is also an improper
reference to use “expected” a part of the designation.

A is incorrect as it is an improper reference to use “expected” as part of the designation.

B is incorrect as a person can only state he is a Candidate if he is currently enrolled in the CFA Program.
 • Bob White is a new CFA charterholder and he is updating his resume and
company biography (bio) to reflect this accomplishment. In his bio, he states that
he successfully passed all three CFA exams in three consecutive years. On his
resume he adds the following line: “CFA, 2013, CFA Society of Pittsburgh”. Are
either his bio or his resume in violation of the Standards regarding referencing the
CFA designation and program?
A. No.
B. Yes, his resume is incorrect.
B is correct because his resume should read CFA, 2013, CFA Institute. The resume is incorrect because it lists the
C.CFA Yes,
Societyboth his bio
of Pittsburgh andofhis
instead resume
the CFA Instituteare in organization
as the violation associated
of the Standards.
with the CFA designation.

A is incorrect because his resume is wrong.

C is incorrect because stating that he passed the three exams in three years is simply a statement of fact (assuming it
is true) and permissible.
 • Stian Klun, CFA, is preparing a brochure to advertise his firm. The brochure
includes the following disclosures:
“I am a CFA so I am a member of the CFA Institute, which constitutes the most elite
group of professionals within the investment management business. In order to
become a CFA charterholder, I had to complete a comprehensive program of study
in the investment management field.”
Klun is least likely to have violated the CFA Institute Standards of Professional
Conduct
B is correctrelated toProgram
as the CFA referencing
has beenthe:
properly referenced while the CFA Institute and CFA Designation have
been improperly referenced in violation of Standard VII(B)–Reference to the CFA Institute, the CFA Designation, and
A.the CFA
CFA Program. CFA Institute cannot be referred to as the most elite group of professionals within the investment
Institute.
management business as this is an opinion that cannot be objectively determined. The CFA acronym should be used
an adjective rather than a noun, i.e. CFA Charterholder.
B. CFA Program.
A is incorrect as individuals must not exaggerate the meaning or implications of membership in CFA Institute.
C. CFA Designation.
C is incorrect because Klum has indicated that he is a CFA and improperly referenced the designation.
 • Hezi Cohen, a CFA candidate, is a heavy user of social networking sites on the
Internet. His favorite site only allows a limited number of characters for each entry
so he has learned to abbreviate everything, including CFA trademarks. Cohen
also enjoys professional networking sites and contributes regularly to blogs that
discuss the broad topical areas covered within the CFA Program. In addition, he
posts to these blogs pieces he has written in his area of expertise: retirement
planning. By claiming to be an expert on retirement planning, he believes his
stature within the investment community increases and he can gain more clients.
B Which
is correct internet
because theactivity
Standardscan
do notCohen
prevent a most likely
person from continue
claiming to be anto be inintheir
expert compliance with
area of specialty as
theit isCFA
long not a Standards of and/or
misrepresentation Professional Conduct?
an exaggeration of their skill and expertise.

A.A is incorrect
Use ofbecause according to Standard VII, CFA Institute trademarks are not allowed to be abbreviated.
abbreviations.
B.C is incorrect because Standard VII–Responsibilities as a CFA Institute Member or CFA Candidate restricts the
Claiming retirement planning expertise.
disclosing of all aspects of the CFA exam, including broad topical areas. These are considered confidential and thus
should not be discussed over the Internet.
C. Blogging about broad topical areas within the CFA Program.
 • Tammi Holmberg is enrolled to take the Level I CFA examination. While taking the
CFA examination, the candidate on Holmberg’s immediate right takes a stretch
break and a piece of paper from his pocket falls onto Holmberg's desk. Holmberg
glances at the paper and realizes there is information written on the paper, which
includes a formula Holmberg needs for the question she is working on. Holmberg
had not memorized this formula and could not complete the question without this
information. Holmberg pushes the paper off her desk and uses the formula to
A complete the Holmberg’s
is correct because question. According
conduct compromisedto thethe CFA
validity Institute
of her exam and Code of Ethics
violated Standard VII(A). and
Her
conduct was also a violation of the rules and regulations of the CFA Program, the Candidate pledge, and the CFA
Standards
Institute Code andofStandards.
Professional Conduct, Holmberg most likely:
A.B is incorrect
compromised her exam.
because Holmberg was not free to use the information and her conduct compromised the validity of her
exam and violated Standard VII(A). Her conduct was also a violation of the rules and regulations of the CFA Program
B.and the
was free topledge,
Candidate act on
andthe information
the CFA Institute Codethat fell on her desk.
and Standards.

C.C is is responsible
incorrect for notifying
because Holmberg exam proctors
has an obligation ofviolation
to report her her neighbor’s
but does not violation.
have an obligation to report
potential violations of the Code and Standards by fellow members, even though CFA Institute encourages such
action.
 • At the conclusion of the afternoon section of the Level I CFA examination, the
exam proctor instructs all candidates to stop writing and put their pencils down
immediately. Krishna Chowdary sees other candidates in front of him continue to
fill in their answer sheets. Chowdary has two questions left to complete so he
randomly fills in one of the ovals on his answer sheet before putting his pencil
down on the table. Did Chowdary’s actions most likely violate the CFA Institute
Code of Ethics and Standards of Professional Conduct?
A. Yes.
B.AVII(A)–Conduct
is correct because by completing a question on his examination after time was called, Chowdary violated Standard
No, because other candidates continued writing.
as Members and Candidates in the CFA Program. By continuing to write, Chowdary took advantage of
other candidates, and his conduct compromised the validity of his exam performance.
C. No, because he randomly answered one question.
B is incorrect because Chowdary violated Standard VII(A) by working on his examination after time was called.

C is incorrect because Chowdary violated Standard VII(A) by working on his examination after time was called.
 • Upon receiving notification that he passed his Level III CFA exam, Paulo Garcia
updates his educational background on his social media site by adding
“completed the CFA course.” Does Garcia most likely violate the CFA Institute
Standards of Professional Conduct?
A. No.
B. Yes, because it could imply he has obtained the charter.
B is correct because Standard VII(B)–Reference to CFA Institute, the CFA Designation, and the CFA Program forbids
C.candidates
Yes, because
to imply that he
they doesn’t describe
have a partial theor certification
designation cite an expectedprocess.
completion date of any level of the CFA
Program. Final award of the Charter is subject to meeting the CFA Program requirements and approval by the CFA
Institute Board of Governors. Garcia should state, “passed Level III CFA exam” or “passed all three levels of the CFA
exams”. By stating that he “passed the CFA Course” it could be taken to mean he obtained his Charter, which is
incorrect.

A is incorrect because Garcia violates Standard VII(B)–by implying he has obtained the CFA Charter, when he has
not.

C is incorrect because describing the process is not required by the Standards.