Reading: Ethics and Trust in the Investment Profession

Learning Outcomes as per CFA Institute

a. Explain ethics.
b. Describe the role of a code of ethics in defining a profession.
c. Describe professions and how they establish trust.
d. Describe the need for high ethical standards in investment management.
e. Explain professionalism in investment management.
f. Identify challenges to ethical behavior.
g. Compare and contrast ethical standards with legal standards.
h. Describe a framework for ethical decision making.

1. [LOS a] Benchmarks for minimally acceptable behaviors of community members are:

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

2. [LOS b, c, d] Specialized knowledge and skills, a commitment to serve others, and a shared code
of ethics best characterize a(n):
A. vocation.
B. profession.
C. occupation.

3. [LOS f] Which of the following best identifies an internal trait that may lead to poor ethical decision
making?
A. Overconfidence
B. Loyalty to employer
C. Promise of money or prestige

4. [LOS f] Situational influences in decision making will most likely be minimized if:
A. strong compliance programs are in place.
B. longer-term consequences are considered.
C. individuals believe they are truthful and honest.

5. [LOS f] Decision makers who use a compliance approach are most likely to:
A. avoid situational influences.
B. oversimplify decision making.
C. consider more factors than when using an ethical decision-making approach.

6. [LOS b, c, d] When unethical behavior erodes trust in an investment firm, that firm is more likely
to experience:
A. lower revenues only.
B. higher expenses only.
C. lower revenues and higher expenses.

7. [LOS g] Which is an example of an activity that may be legal but that CFA Institute considers
unethical?
A. Making legally required disclosures in marketing materials
 Ethics and Trust in the Investment Profession

B. Trading while in possession of material nonpublic information

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

8. [LOS h] An ethical decision-making framework will most likely:

A. include a pre-determined, uniform sequence.
B. focus exclusively on confirmable facts and relationships.
C. help avoid a decision that has unanticipated ethical consequences.

9. [LOS b, c, d] High ethical standards are distinguishing features of which of the following bodies?
A. Craft guilds
B. Trade bodies
C. Professional bodies

10. [LOS b, c, d] Fiduciary duty is a standard most likely to be upheld by members of a(n):
A. employer.
B. profession.
C. not-for-profit body.

11. [LOS f] To maintain trust, the investment management profession must be interdependent with:
A. regulators.
B. employers.
C. investment firms.

12. [LOS h] When an ethical dilemma occurs, an investment professional should most likely first raise
the issue with a:
A. mentor outside the firm.
B. professional body’s hotline.
C. senior individual in the firm.

13. [LOS f] A research analyst is facing a moral dilemma and decides to use an ethical decision-making
framework. After looking at the facts at hand and identifying the situational influences, he still
cannot make a decision on the best course of action. His least appropriate next step is to:
A. determine what additional information is needed.
B. decide, act, monitor, and reflect.
C. ask someone else to give guidance.

14. [LOS c] The belief that one’s ethical standards are above average is most likely a reflection of which
of the following behavioral biases?
A. Overconfidence
B. Short-term focus
C. Situational influence

15. [LOS e] A regulator who requires financial advisers to merely consider the suitability of a product
when making recommendations to their clients would most likely be setting:
A. both a legal and an ethical standard.
B. an ethical standard.
C. a legal standard.

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16. [LOS a] Which of the following best outlines the minimally acceptable behaviors expected of a
member belonging to a societal group?
A. Standards of conduct
B. Code of ethics
C. A firm’s employee handbook

17. [LOS e] How does ethical conduct most likely compare with what is legally required?
A. Ethical conduct goes beyond what is legally required.
B. There are no differences between the two; they are the same.
C. Doing what is legally required removes the need for ethical conduct.

18. [LOS b] The goals of the CFA Institute Code of Ethics would least likely include:
A. publicly communicating established principles.
B. addressing past ethical failings.
C. fostering public confidence.

19. [LOS f] The most important factor in promoting ethical decision making among an investment
firm’s employees is:
A. a strong culture of integrity by the firm’s senior management.
B. adoption of a code of ethics that clearly defines the firm’s ethical principles.
C. the investment professional’s natural desire to do the right thing.

20. [LOS f] What is most likely a critical aspect of the Consider phase of an ethical decision-making
framework?
A. Distinguishing duties to stakeholders
B. Contemplating your decision
C. Seeking additional guidance

21. [LOS f] If you are seeking guidance from the firm’s code of ethics or written policies, your actions
most likely reflect which phase of an ethical decision-making framework?
A. Decide
B. Reflect
C. Consider

22. [LOS f] Which of the following is least likely a phase in an ethical decision-making framework?
A. Multiple iterations of analysis
B. Reflection on the outcome versus what was anticipated
C. Consideration of situational influences, additional guidance, and alternative actions

23. [LOS f] The benefits of an ethical decision-making framework would least likely include:
A. making wise decisions.
B. focusing on immediate consequences.
C. limiting unintended consequences.

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24. [LOS b] An investment fund manager has a finance degree and over 20 years of experience working
for a top-ranking asset management firm. Based only on this information, could the investment
fund manager most likely claim to be part of a profession?
A. Yes, a person working in this industry requires specialized knowledge and skills.
B. No.
C. Yes, as part of the industry, he is providing a service to others.

25. [LOS a] Ethical conduct is most likely behavior that:

A. simply considers both the direct benefit and indirect consequences on others.
B. is perceived to be beneficial as per society’s ethical expectations.
C. conforms to expectations as laid out by laws and regulations.

26. [LOS d] Can an individual most likely cause the public to lose confidence in the global financial
markets?
A. Yes.
B. No, a negative event would need to be considered systemic.
C. No, a single person does not have enough influence.

27. [LOS c] Which of the following is most likely an example of an overconfidence bias leading to poor
ethical decision making?
A. “I’m sure I did the right thing.”
B. “I’m smart; that will keep me out of trouble.”
C. “I’m aware of my ethical obligations.”

28. [LOS a] Which of the following statements is most accurate? Ethical principles are sets of beliefs
centered around:
A. societies’ views on what is considered good or bad conduct.
B. acceptable conduct based on the direct and indirect consequences on others.
C. rules established by a government with regard to what is acceptable behavior.

29. [LOS b] A code of ethics most likely plays an important part in establishing a profession because:
A. clients are assured a standardized level of care from all industry professionals.
B. customers rely heavily on ongoing specialized services to achieve their desired outcome.
C. a client relationship is based on trust whereby the professional puts his or her client’s interests
first.

30. [LOS c] Which of the following is least likely to be a situational influence challenging ethical
conduct?
A. Loyalty to coworkers
B. The bystander effect
C. An overconfidence bias

31. [LOS e] Which of the following best distinguishes ethical conduct from legal conduct? Ethical
conduct typically:
A. is narrow in scope.
B. follows an existing market practice.
C. considers and benefits multiple stakeholders.

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32. [LOS f] A general ethical decision-making framework will most likely:

A. define a series of actions for each possible situation.
B. facilitate the decision-making process for all decisions.
C. ensure a decision or plan of action does not harm stakeholders.

Solutions
1. C is correct. Standards of conduct are applied to specific communities or societal groups and
identify specific behaviors required of community members. These standards of conduct serve as
benchmarks for the minimally acceptable behavior of community members. Codes of ethics serve
as a general guide for how community members should act; they communicate the organization’s
values and overall expectations regarding member behavior, but they do not identify specific
behaviors required of community members. Laws and regulations are rules of conduct defined by
governments and related entities about obligatory and forbidden conduct broadly applicable for
individuals and entities under their jurisdiction.

2. B is correct. A profession has several characteristics that distinguish it from an occupation or

vocation, such as specialized knowledge and skills, service to others, and a code of ethics shared
by its members. A profession is the ultimate evolution of an occupation, resulting from excellence
in practice, a mastery mindest, and expected adherence to a code of ethics and standards of
practice.

3. A is correct. An overconfidence bias can lead individuals to put too much importance on internal
traits and intrinsic motivations, such as their own perceptions of personal honesty, that can lead
to faulty decision making. Loyalty to an employer and promise of money or prestige are situational
influences that can lead to faulty decision making.

4. B is correct. Consciously considering long-term consequences will help offset situational

influences. We more easily recognize and consider short-term situational influences than longer-
term considerations because longer-term considerations have fewer immediate consequences
than situational influences do. When decision making is too narrowly focused on short-term
factors, we tend to ignore longer-term risks and consequences, and the likelihood of poor ethical
decision-making increases. A strong compliance policy is a good first step toward developing an
ethical culture; a focus on rules adherence may not be sufficient. Emphasis on compliance may
not encourage decision makers to consider the larger picture and can oversimplify decision
making. Taken to the extreme, a strong compliance culture can become another situational
influence that blinds employees to other important considerations. An overconfidence bias can
place too much importance on internal traits and intrinsic motivations, such as “I’m honest and
would not lie,” even though studies have shown that internal traits are generally not the main
determinant of whether or not someone will behave ethically in a given situation.

5. B is correct. A compliance approach can oversimplify decision making and may not encourage
decision makers to consider the larger picture. A strong compliance culture may be a good start
in developing an ethical culture but can become another situational influence that may result in
employees failing to consider other important factors.

6. C is correct. Unethical behavior ultimately harms investment firms. Clients are not attracted if they
suspect unethical behavior, leading to less business and lower revenues. Investment firms may

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also experience higher relative costs because regulators are more likely to have cause to initiate
costly investigations.

7. B is correct. The investment industry has examples of conduct that may be legal but that CFA
Institute considers unethical. Trading while in possession of material nonpublic information is not
prohibited by law worldwide and can, therefore, be legal, but CFA Institute considers such trading
unethical.

8. C is correct. Using an ethical decision-making framework consistently will help you develop sound
judgment and decision-making skills and avoid making decisions that have unanticipated ethical
consequences. The decision-making process is often iterative, and the decision maker may move
between phases of the framework. A decision maker should consider more than confirmable facts
and relationships; for example, the decision maker should consider situational influences and
personal biases.

9. C is correct. High ethical standards distinguish professions from the craft guilds or trade bodies.
Unlike trade bodies, professional bodies also typically have a mission to serve society and enforce
professional conduct rules for practitioners.

10. B is correct. Fiduciary duty is an obligation to deliver a high standard of care when acting for the
benefit of another party. Professionals must act in the best interest of the client, exercising a
reasonable level of care, skill, and diligence. Other entities—including employers, regulators,
trade associations, and not-for-profit bodies—may also support an industry but are not the same
as professional bodies. Unlike professions, these other entities generally do not exist to set and
maintain professional standards.

11. C is correct. The investment management profession and investment firms must be
interdependent to maintain trust. Employers and regulators have their own standards and
practices, which may differ from regulations and standards set by professional bodies.

12. C is correct. When a dilemma occurs, raising an issue internally with a senior employee is often a
good starting place and creates an opportunity for an independent internal review. Protecting the
client and the firm may take priority over the position of an individual professional raising a
concern.

13. B is correct. The least appropriate action would be for the decision maker to go ahead and make
a decision based on insufficient information. By doing so, the decision maker could cause harm
and make the situation worse. The ethical decision-making framework is iterative, and users can
move between phases rather than undertaking them in any one order. If a decision maker is not
yet ready to make a decision, the most appropriate course of action would be to ask someone else
to give guidance and determine what additional information is needed to clarify the situation.

A is incorrect. If a decision maker is not yet ready to make a decision the most appropriate course
of action would be to ask someone else to give guidance and determine what additional
information is needed to clarify the situation.

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C is incorrect. If a decision maker is not yet ready to make a decision the most appropriate course
of action would be to ask someone else to give guidance and determine what additional
information is needed to clarify the situation.

14. A is correct. The belief that one’s ethical standards are above average illustrates an
overconfidence bias. An overconfidence bias will most likely lead individuals to overestimate the
morality of their own behavior and can lead to a failure to consider important inputs and variables
needed to make the best ethical decisions.

B is incorrect. A short-term focus is an aspect of situation influences. Our brains more easily and
quickly identify, recognize and consider short-term situational influences versus longer-term
considerations. Long-term considerations have less immediate consequences making them less
obvious as factors to consider in a decision and therefore, less likely to influence our overall
decision making.

C is incorrect. Situational influences are external factors that shape our thinking, decision making,
and behavior. Learning to recognize a situational influence is critical to making good decisions
however it is not a behavioral bias.

15. C is correct. The regulator only sets a legal standard when requiring a financial adviser to merely
consider suitability when making recommendations to their clients. Requiring advisers to act as
fiduciaries would be setting both a legal and an ethical standard; it would require the interests of
the client to be above those of the firm or employee.

A is incorrect. Requiring financial advisers to act as fiduciaries would be setting both a legal and
an ethical standard by requiring the interests of the client to be above those of the firm or
employee

B is incorrect. The regulator is not setting an ethical standard by requiring a financial adviser to
consider suitability; they are setting a legal standard.

16. A is correct. Standards of conduct outline the minimally acceptable behaviors expected of a
member of a societal group. The code of ethics serves as a general guide for how community
members should act.

B is incorrect. A code of ethics does not outline the minimally acceptable behaviors expected of
its societal members, it serves as a general guide for how community of members should act.

C is incorrect. A firm’s employee handbook does not outline the minimally acceptable behaviors
expected of its societal members, it outlines the expected behavior of the firm’s employees.

17. A is correct. Ethical conduct goes beyond what is legally required and encompasses what most
societies, communities, and professional organizations consider to be ethically correct behavior.
Good ethical judgement requires considering the interests of a multiple of stakeholders while
minimizing their risks.

B is incorrect. While there is an overlap where ethical conduct and doing what is legally required
may be the same, many instances exist where they are not.

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C is incorrect. Doing what is legally required does not displace the need for ethical conduct. There
are instances in the investment industry where an individual’s conduct may be legal, but also
considered unethical.

18. B is correct. Addressing past ethical failings is not a goal of the CFA Institute Code of Ethics.
Fostering public confidence and publicly communicating established principles are both goals of
the CFA Institute Code of Ethics.

A is incorrect. A goal of the CFA Institute Code of Ethics would include publicly communicating
established principles.

C is incorrect. A goal of the CFA Institute Code of Ethics would include fostering public confidence.

19. A is correct. The single most important factor in promoting ethical behavior within an investment
firm is done by the development, maintenance, and demonstration of a strong culture of integrity
by the firm’s senior management.

B is incorrect. While adopting a code that clearly lays out the ethical principles that guide the
thought processes and conduct the firm expects of its employees, a code of ethics alone is
insufficient.

C is incorrect. while an investment professional’s natural desire to do the right thing can be
reinforced by the firm’s culture of integrity, it is not the single most important factor in promoting
ethical behavior.

20. C is correct. Seeking additional guidance in the Consider phase of the ethical decision-making
framework is a critical step in viewing the situation from different perspectives. It is best to seek
guidance from someone who is not affected by the same situational influences or behavioral
biases to provide a fresh perspective. Additional guidance can be obtained from the firm’s policies
and procedures and the CFA Institute Code and Standards.

A is incorrect. Distinguishing duties to stakeholders can be found in the Identify phase of the
ethical decision-making framework.

B is incorrect. Contemplating your decision is found in the Reflect phase of the ethical decision-
making framework.

21. C is correct. If you are seeking guidance from the firm’s code of ethics or written policies, you are
in the Consider phase of the ethical decision-making framework. This phase involves taking time
to consider the situation influences as well as personal behavioral biases that could affect your
thinking and decision making. During this phase, you may also seek guidance from such trusted
sources as the firm's compliance department or outside counsel.

A is incorrect. The Decide phase of the ethical decision-making framework does not involve
seeking guidance from the firm’s code of ethics or written policies.

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B is incorrect. The Reflect phase of the ethical decision-making framework does not involve
seeking guidance from the firm’s code of ethics or written policies but rather reflecting on and
assessing your decision and its outcome.

22. A is correct. Multiple iterations of analysis is not a phase in the ethical decision-making framework.
The ethical decision-making process includes multiple phases, and the process of developing the
framework involves multiple iterations. The iterative aspect of developing the framework is
essential to the process, but it is not a phase in the ethical decision-making process.

B is incorrect. Reflect on whether the outcome is in line with what was expected? Reflect on the
decision multiple times as the immediate and longer term consequences of your decision and
actions become apparent.

C is incorrect. Consideration is a phase in the ethical decision making framework. You will need to
take time to consider the situational influences as well as personal behavioral biases that could
affect your thinking and thus decision making. You should also seek additional guidance and
consider alternative actions.

23. B is correct. The benefits of an ethical decision-making framework are least likely to include
focusing on immediate consequences. The framework allows the decision maker to focus on
multiple perspectives and does not limit the decision maker to a short-term focus.

A is incorrect. Making wise decisions is a benefit of an ethical decision-making framework.

C is incorrect. Limiting unintended consequences is a benefit of an ethical decision-making

framework.

24. B is correct. For the investment fund manager to claim he is part of a profession, the activity must
be based on specialized knowledge and skills, must include service to others, and must be
practiced by members who share and agree to adhere to a common code of ethics. Investment
management is based on providing service to a firm’s clients and also requires specialized
knowledge and skills, but it would not be considered a profession unless there exists a common
code of ethics among similar investment fund managers.

A is incorrect. For the fund manager to claim he is part of a profession the activity must be based
on a specialized knowledge and skills, service to others, and practiced by members who share and
agree to adhere to a common code of ethics.

C is incorrect. For the fund manager to claim he is part of a profession the activity must be based
on a specialized knowledge and skills, service to others, and practiced by members who share and
agree to adhere to a common code of ethics.

25. B is correct. Ethical conduct includes those actions that are perceived as beneficial and conforming
to the ethical expectations of society.

A is incorrect. Ethical conduct balances self-interest with both the direct and indirect
consequences of the behavior on others.

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C is incorrect. Expectations of ethical conduct cannot be stipulated in laws and/or regulations.

26. A is correct. Any negative publicity regarding a financial sector employee can lead to the public
losing market confidence and trust in the investment industry. Consequently, it is critical for
individuals working in the financial services industry to act in an ethical manner. Without market
confidence and trust in investment professionals, investors will remove their capital and the
industry and economy will suffer.

B is incorrect. An individual can cause the loss of market confidence and trust in investment
professionals.

C is incorrect because any negative publicity regarding a financial sector employee can lead to the
public losing market confidence. Bernie Madolf is an example of a single person that caused the
general public to lose trust of investment professionals.

27. B is correct. An overconfidence bias is shown by thinking that your intelligence level will prevent
you from acting in an unethical manner. A person who understands ethical behavior, no matter
her intelligence level, can often decipher unethical behavior by looking at the long-term
consequences of improper actions by an individual.

A is incorrect. Overconfidence bias causes people to not realize they can be subject to poor ethical
decision making in the future, not in hindsight.

C is incorrect. Being aware of your ethical obligations does not necessarily provide a sense of
overconfidence that you will do the right thing. You can be well versed in ethical obligations but
yet purposely set out to act in an unethical behavior.

28. A is correct. Ethical principles can be described as societies’ beliefs about what is considered good
or bad conduct. Ethics can be described as a set of shared beliefs or moral principles regarding
standards of behavior expected or required by a community or societal group.

B is incorrect because acceptable conduct based on ethical principles balances self-interest with
both the direct and indirect consequences of the behavior for others, not just the direct and
indirect consequences alone.

C is incorrect because although governments may create a set of laws they require their citizens
to abide by, acceptable behavior considered to be ethical is determined outside any legal
requirements. An action can be legal yet unethical.

29. C is correct. A code of ethics plays an important part in establishing a profession because a client
relationship is based on trust, whereby the professional puts his or her client’s interest first. The
code enables a relationship to be established on the basis of trust, because clients rely heavily on
the specialized knowledge and skills of professionals to achieve their goals. The code also requires
the interests of the clients to be placed above those of the professional.

A is incorrect because a code of ethics does not ensure standardized care from within the same
industry. The levels of care by professionals within the industry can vary widely. A code of ethics
would establish only a minimum standard of care.

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B is incorrect because customers, as opposed to clients, typically purchase non-specialized

services, not ongoing services, in a single transaction or a series of transactions without
establishing a relationship with the provider of the services. The desired outcome is more reliant
on the customer than the provider of the services.

30. C is correct. An overconfidence bias is not a situational influence, nor is it determined by external
factors; instead, it is determined by a person’s judgment about his or her own capabilities or those
of others with whom the person is associated. Loyalty to coworkers (or colleagues) and the
bystander effect are examples of situational influences challenging ethical conduct.

A and B are incorrect because loyalty to coworkers or colleagues and the bystander effect are
examples of situational influences.

31. C is correct. Ethical conduct typically considers and provides benefits to multiple stakeholders.
Ethical conduct requires actively considering the interests of all stakeholders and tries to benefit
multiple stakeholders, including clients, employers, and all market participants, and minimizes
risks.

A is incorrect. As opposed to ethical conduct, legal conduct is based on legal requirements that
are typically narrow in scope. Regulators’ and legislatures’ responses typically take significant
time, during which the problematic practice may continue or even become more common. Once
enacted, a new regulation or law may be vague, conflicting, or too narrow in scope.

B is incorrect because legal conduct, as opposed to ethical conduct, typically follows market
practices. Regulators may proactively design laws and regulations to address existing or
anticipated practices that may adversely affect the fairness and efficiency of markets or reactively
design laws and regulations in response to a crisis.

32. B is correct. Ethical decision-making frameworks are designed to facilitate the decision-making
process for all decisions. They help people look at and evaluate a decision from multiple
perspectives, enabling them to identify important issues they might not otherwise consider.

A is incorrect because the ethical decision-making process helps facilitate the decision-making
process but does not specifically define a series of actions for every possible situation that may
arise.

C is incorrect because a decision-making framework does not ensure that either a decision or a
course of action will safeguard stakeholders. The framework helps one gain a broader perspective
so as to create a plan of action that is less likely to harm stakeholders.

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