CFA Ethics and Professional Standards 1 — Questions and Answers
Question 1: According to the CFA Institute Code of Ethics, members must act with integrity, competence, diligence, respect, and in an ethical manner with which of the following?
- Only their clients
- The public, clients, prospective clients, employers, employees, colleagues, and other participants in the global capital markets (Correct answer)
- Only their employer and clients
- Only regulators and clients
Correct answer: The public, clients, prospective clients, employers, employees, colleagues, and other participants in the global capital markets
The CFA Institute Code of Ethics requires members to act ethically with the public, clients, prospective clients, employers, employees, colleagues, and all capital market participants.
Question 2: Under Standard I(C) – Misrepresentation, which of the following is LEAST likely a violation?
- Guaranteeing a specific investment return
- Citing a firm's historical track record accurately (Correct answer)
- Plagiarizing research from another analyst
- Omitting material facts that make a statement misleading
Correct answer: Citing a firm's historical track record accurately
Accurately citing historical performance is not a misrepresentation; guaranteeing returns, plagiarism, and misleading omissions all violate Standard I(C).
Question 3: Standard II(A) – Material Nonpublic Information prohibits trading on information that is material and nonpublic. Information is considered material if:
- It was obtained from a corporate insider only
- It would significantly affect the price of a security or a reasonable investor would want to know it before investing (Correct answer)
- It relates exclusively to earnings announcements
- It has been disclosed to at least one analyst
Correct answer: It would significantly affect the price of a security or a reasonable investor would want to know it before investing
Material information is defined as information that would affect a security's price or that a reasonable investor would want to know before making an investment decision.
Question 4: Which of the following best describes the 'mosaic theory' as it relates to Standard II(A)?
- Combining material nonpublic information with public information to make a trade
- Combining nonmaterial nonpublic information with public information to reach a conclusion (Correct answer)
- Using only public information to conduct research
- Using insider tips alongside public data
Correct answer: Combining nonmaterial nonpublic information with public information to reach a conclusion
Mosaic theory allows analysts to legally combine nonmaterial nonpublic information with public information to form investment conclusions.
Question 5: Under Standard IV(A) – Loyalty, if an employee plans to leave and start a competing firm, which action is PERMISSIBLE before resigning?
- Soliciting current clients for the new firm
- Copying confidential client lists from the employer
- Making arrangements with a new employer while keeping current responsibilities (Correct answer)
- Using employer resources to prepare for the new business
Correct answer: Making arrangements with a new employer while keeping current responsibilities
Arranging future employment with a new employer is permissible, provided the member continues to fulfill current job duties and does not use employer resources improperly.
Question 6: A CFA charterholder who discovers their employer is engaged in fraudulent activity should FIRST:
- Immediately report the employer to regulators
- Report the activity to the appropriate supervisor or compliance department (Correct answer)
- Resign immediately without taking any action
- Publicly disclose the fraud to the media
Correct answer: Report the activity to the appropriate supervisor or compliance department
Members should first attempt to resolve the issue internally by reporting it to their supervisor or compliance department before escalating externally.
