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Front
A CFA charterholder is asked to write a research report on a company that is also a client of the analyst’s employer. To maintain independence and objectivity, the analyst should:
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disclose the conflict and ensure the report is based on independent and unbiased analysis.
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A CFA charterholder is hired to write research sponsored by a company seeking to raise capital. To comply with the CFA Institute Code and Standards, the analyst should:
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negotiate a fixed compensation amount before conducting the research.
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A CFA charterholder conducts business in a foreign country where new securities regulations were recently introduced. The charterholder unknowingly fails to follow one of these new rules but corrects the mistake immediately upon notification by the local regulatory authority. Has the charterholder violated Standard I(A)?
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Yes, because the charterholder failed to stay informed of applicable laws and regulations.
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A CFA charterholder changes her investment recommendation after overhearing a conversation between two analysts discussing a company's potential merger. She does not conduct any further analysis before issuing the new recommendation. This action is a violation of:
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Standard V(A), Diligence and Reasonable Basis.
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A CFA charterholder is evaluating whether to use client brokerage to purchase third-party research that may benefit other clients. Which Standard primarily governs the member’s responsibility in this situation?
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Standard III(A), Loyalty, Prudence, and Care.
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Priya Nair, CFA, is registered in the country of Westoria, where investment professionals are prohibited from accepting any form of compensation or gifts from external parties in connection with investment analysis. While traveling for business in Eastaria, where no such restrictions exist, Nair receives a valuable bottle of wine from a company she is evaluating for potential investment.What is Nair’s most appropriate course of action under the CFA Institute Code and Standards?
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Decline the gift, because the laws of Westoria prohibit such acceptance.
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Rachel Tan, CFA, relocates her investment advisory practice from a country with stringent disclosure laws to a jurisdiction with relatively relaxed securities regulations. In her new country, she is no longer legally required to inform clients about certain conflicts of interest related to her firm’s compensation arrangements. However, the CFA Institute Code and Standards impose stricter disclosure requirements.According to the CFA Institute Code and Standards, Tan must:
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adhere to the stricter of the local law or the CFA Institute Code and Standards.
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A CFA charterholder is working in a country where securities regulations are less strict than those imposed by the CFA Institute Code and Standards. To remain in compliance, the charterholder must:
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comply with the stricter of the local laws or the CFA Institute Code and Standards.
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Emily Zhang, CFA, is visiting a publicly traded tech firm as part of her industry research. While waiting for a meeting to begin, she overhears senior managers discussing an unannounced partnership with a major global retailer. Believing this could significantly impact the firm’s stock price, Zhang considers updating her recommendation to clients.According to the CFA Institute Code and Standards, Zhang should:
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wait until the news is public, then revise her recommendation accordingly.
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Maya Li, CFA, receives a phone call from a supplier of Orbitron Corp., who reveals that the company has placed a significantly higher number of orders this quarter—information that has not yet been disclosed to the public. Li currently has a neutral rating on Orbitron based on expected flat revenue growth.According to Standard II(A) Material Nonpublic Information, Li should:
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urge Orbitron to disclose the information publicly and refrain from taking any investment action until it is publicly available.
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Sarah Kim, CFA, is a non-executive board member at Orion Industries and receives no financial compensation for her service. During a meeting with company insiders, she learns that Orion has been inflating revenue figures by recognizing sales before contracts are finalized. Kim consults with the firm’s general counsel, who confirms the practice is unlawful. When Kim confronts the CFO, he refuses to revise the statements and claims the auditors have signed off on them.According to the CFA Institute Code and Standards, which of the following actions is least likely appropriate for Kim?
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Report the illegal activity to CFA Institute.
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Michael Torres, CFA, manages assets for the Green Valley Retirement Trust. The trust's administrator asks Torres to direct trades through a specific brokerage firm that offers research services the administrator finds helpful. Torres confirms that the brokerage offers competitive pricing and trade execution. He agrees to the request and begins using the broker.According to the CFA Institute Code and Standards, Torres’s actions:
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do not violate the Standards as long as the research benefits the plan beneficiaries.
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Leonard Hayes, CFA, is drafting a proxy voting policy for his investment firm. The policy aims to ensure votes are cast in the best interests of clients. Which of the following provisions would NOT be appropriate to include in the policy?
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Portfolio managers of passive funds are only required to vote proxies when they personally believe the issue is important.
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Samantha Lee, CFA, gathers nonmaterial nonpublic information through conversations with suppliers and combines it with public data to project that a major retailer will miss its earnings estimates. The company refuses to comment when Lee reaches out for confirmation. She believes her conclusion is sound based on her independent analysis.According to the CFA Institute Code and Standards, Lee:
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may trade or make recommendations based on her analysis.
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David Chen, CFA, recommends the stock of TechFusion Inc. to all his clients after thorough fundamental research. Shortly after his recommendation, TechFusion announces a major partnership that causes the stock price to surge. Chen states he made his recommendation after seeing the CEO of TechFusion speaking with a competitor’s executive at a conference, but did not hear their discussion. His firm lacks clear guidelines on trade allocation, so Chen allocates the shares starting with his largest clients and ending with smaller accounts. Some of his clients are retirees with conservative portfolios, while others are institutional investors with high risk tolerance.Which Standard was NOT violated?
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Standard V(A) — Diligence and Reasonable Basis.
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Rachel Monroe, CFA, is speaking with a friend who works at a financial publication. The friend mentions that tomorrow’s edition will include a report exposing significant legal issues at a publicly traded company. The information is not yet available to the public, but the report has already been finalized and sent to print.According to the CFA Institute Code and Standards, Monroe:
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should wait until the report is released to the public before making any investment decisions.
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While analyzing GrainTech Inc., a CFA charterholder receives several minor, nonpublic remarks from company executives. On their own, the comments are not material. However, when combined with publicly available industry data and earnings trends, the analyst concludes that GrainTech is likely to underperform and issues a sell recommendation.According to the CFA Institute Code and Standards, the analyst:
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may proceed with issuing the report, provided documentation supports that the analysis was based on the mosaic theory.
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Here’s a unique CFA Level I-style question designed to specifically test the candidate’s understanding of the mosaic theory:An analyst gathers the following information while researching a small-cap tech company:Publicly available quarterly financials show a slight drop in gross margins.A supplier casually mentions during a trade show that the company has scaled back on component orders.A former employee posts on a public forum that the company is undergoing a “strategic shift.”Using this information, the analyst issues a report downgrading the stock to a “sell.”According to the CFA Institute Standards of Professional Conduct, the analyst’s actions:
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comply with the Code and Standards if the information was not explicitly confidential and the conclusion was independently derived.
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An investment manager allocates a portion of client trading commissions to a brokerage firm in exchange for research reports and analytical tools that assist in making investment decisions. This arrangement is best described as:
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soft dollar arrangements.
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BrightStone Capital is a wealth management firm that serves retail and institutional clients. The firm has adopted the CFA Institute Code and Standards. Which of the following internal policies is least appropriate under Standard III(B) Fair Dealing?
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Provides advance notice of investment recommendations to select high-net-worth clients before informing others.
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Creston Asset Management adopts a proprietary risk assessment model developed by a third-party analytics firm to assist in portfolio construction. The new model alters how portfolio volatility is measured and reported. To comply with the CFA Institute Code and Standards, Creston should:
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communicate the change in methodology to all clients whose portfolios may be affected.
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Amanda Reyes, CFA, discovers that her employer, a boutique investment bank, is routinely mispricing new issues to benefit insiders and inflate short-term gains. When asked to approve a misleading offering document, Reyes refuses to sign but instead forwards the document to another senior colleague for signature without disclosing her concerns.According to the CFA Institute Code and Standards, Reyes’s action:
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violates the Code and Standards because forwarding the document facilitates the misconduct.
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Thomas Reed, CFA, is meeting with a client at a café when he overhears a nearby conversation between two executives discussing their company’s plan to announce a major acquisition that will likely boost the firm’s stock price. The next day, before the announcement is made public, another client independently calls Reed and asks to increase their position in the company based on a “gut feeling.”According to the CFA Institute Code and Standards, Reed:
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must refuse the trade request until the information becomes public.
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A CFA charterholder resides in Country A, where securities laws are less strict than the CFA Institute Code and Standards. While conducting business in Country B, which has stricter securities regulations than both Country A and the Code and Standards, the charterholder must:
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follow the laws of Country B, as they are the most stringent.
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An equity analyst at a large investment firm receives a detailed industry report from a third-party research provider. Before incorporating the data into his client recommendations, the analyst performs a critical review of the report's methodology and conclusions.To comply with the CFA Institute Code and Standards on independence and objectivity, the analyst:
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may use the third-party report only after conducting a reasonable and diligent review of its content.
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Jessica Warren, CFA, is the head of research at a large investment advisory firm. A journalist from a major financial publication offers her exclusive market intelligence in exchange for early access to the firm’s research reports. The journalist agrees not to publish any of the information until after Warren’s clients have received it. Warren is considering the offer as a way to gain valuable insight that could benefit her clients.According to the CFA Institute Code and Standards, Warren should:
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only share research with the journalist after it has been fully disseminated to all clients.
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Alex Chen, CFA, left his previous employer, Ridge Capital, under strained circumstances and signed a confidential settlement. The agreement included a provision that he would not manage or advise any former Ridge Capital clients for a period of two years, and both parties agreed to keep the terms and circumstances of the departure confidential. Now working at Summit Wealth, Chen is assigned to a new account that was a Ridge Capital client at the time of his departure, though he never directly managed that account.To comply with the CFA Institute Code and Standards, Chen should:
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notify his supervisor that he cannot work on the account due to a legal obligation but not disclose the details of the agreement.
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Jason Miller, CFA, is preparing to buy shares of a small-cap company for several of his clients. He also wants to purchase a small number of shares for his personal account. The stock is thinly traded, and he anticipates that the client trades may drive the price up.According to the CFA Institute Code and Standards, Miller may execute the personal trade:
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only after completing all client trades.
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Emily Carson, CFA, is hired to oversee the research department at a mid-sized investment advisory firm. Upon review, she finds the firm's compliance procedures to be outdated and ineffective. She proposes a new supervisory system aligned with industry best practices, but firm leadership informs her that implementation must wait until the next fiscal year, approximately six months away.According to the CFA Institute Code and Standards, Carson should:
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decline in writing to accept supervisory responsibilities until proper procedures are implemented.
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Lighthouse Investments, a brokerage firm, made a trade execution error that resulted in a small loss in a high-value client’s account. To retain the client, the firm promises exclusive access to a highly anticipated IPO that is expected to be oversubscribed. The offer is not extended to other eligible clients.Which CFA Institute Standard does this action most likely violate?
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The Standard concerning Fair Dealing.
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Thomas Yu, CFA, believes that a colleague at his investment firm has likely committed a violation of federal securities law. He is unsure whether the violation has been reported or addressed internally. According to the CFA Institute Code and Standards, Yu is:
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not required to report the violation to a regulatory agency but must take steps to dissociate from the wrongdoing.
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Linda Chen, CFA, is invited by MountainWind Energy to attend a site tour of their remote wind farms with several other analysts. Because commercial flights do not serve the area, the company charters a small plane to fly the group. MountainWind also covers hotel accommodations during the two-day tour.According to the CFA Institute Code and Standards, Chen:
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may accept both the flight and lodging provided by the company.
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Karen Bell, CFA, receives an order from her client to purchase 2,000 shares of a company in which her firm acts as a market maker. She plans to execute the trade internally to provide efficient execution.According to the CFA Institute Code and Standards, Bell must:
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disclose her firm’s market-making role in the security before executing the trade.
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Which of the following is least likely to be an effective method for preventing the misuse of material nonpublic information within an investment firm?
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Monitoring all broker emails and phone calls in real time.
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A pension fund manager is advised by the plan sponsor to shift the investment portfolio into higher-risk assets in an attempt to improve the underfunded status of the plan. The manager is concerned this strategy may increase the likelihood of large losses that could negatively impact retirees.According to the CFA Institute Code and Standards, the portfolio manager should:
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refuse to adopt the aggressive strategy if it compromises the beneficiaries' best interests.
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Which of the following best reflects the CFA Institute’s position on professional conduct?
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A minimum level of professional responsibility requires members to be aware of and comply with applicable laws, rules, and regulations.
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Tariq Hassan, CFA, learns that a fellow employee has been regularly accepting entertainment gifts from a service provider that exceed the legal limit set by their local jurisdiction. The gifts appear to violate both company policy and local law. Hassan is not directly involved in the activity but is concerned about its implications.According to the CFA Institute Code and Standards, Hassan is required to:
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disassociate from the activity and encourage his firm to ensure the violations cease.
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Kevin Liu, a CFA candidate, becomes aware of potential illegal activity conducted by a colleague at his investment firm. He is unsure whether the behavior constitutes a violation of the law or the CFA Institute Code and Standards.Which of the following actions is NOT required under Standard I(A) Knowledge of the Law?
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Reporting the suspected illegal activity to the relevant regulatory or governmental authority.
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Laura Chen, CFA, manages both an equity mutual fund and several corporate retirement plans. When she receives proxies for companies held in the mutual fund, she instructs her assistant to automatically vote in line with management’s recommendations. For proxies related to the retirement plans, she forwards them directly to the plan sponsor to decide how to vote.According to the CFA Institute Code and Standards, Chen:
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has violated the Standards in her handling of both mutual fund and pension plan proxies.
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CFA Institute members should encourage their employers to do all of the following EXCEPT:
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require employees to submit written personal ethics statements.
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Michael Tran is a portfolio manager at Delta Wealth and uses the firm’s proprietary quantitative allocation model to construct client portfolios. While the model is complex, Delta provides extensive training and expects managers to understand how to input data correctly and interpret the output. Tran does not take the time to fully understand the model and misapplies it for several clients, resulting in inappropriate portfolio allocations. His supervisor discovers the issue during a routine audit.Which of the following statements is CORRECT under the CFA Institute Code and Standards?
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Tran has violated the Standards by not exercising diligence and thoroughness in applying the investment model.
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David Ross, CFA, is the investor relations officer at TechNova Inc. He becomes aware that the company’s quarterly earnings will be significantly below analysts’ expectations. Before the official announcement, Ross considers contacting a few long-time analysts who have provided valuable insights on competitors in the past, believing it would benefit shareholder strategy to maintain those relationships.According to the CFA Institute Code and Standards, Ross should:
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publicly disclose the information through a press release before contacting any analysts.
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Laura Grant is the trustee of a family trust in which Peter Allen is the primary beneficiary. Peter’s spouse is a senior executive at a publicly traded company. One evening, Peter discovers confidential documents at home suggesting that his spouse’s company will soon acquire a major competitor. Peter shares this information with Grant, who promptly purchases shares of the target company for the trust without informing anyone else.According to the CFA Institute Code and Standards, Grant has:
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violated the Standards concerning material nonpublic information.
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Paul Jensen, CFA, is an equity analyst, and Maria Lopez is a portfolio manager. Both attend a conference call hosted by a publicly traded company’s CEO, where it is stated that a major product announcement will be made at a press conference in two days. Both Jensen and Lopez believe the news will positively impact the stock price.According to the CFA Institute Code and Standards, what action is most appropriate?
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Both must wait until the information is publicly disseminated at the press conference before taking any investment action or sharing it with clients.
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Jonathan Reeves, CFA, is a senior analyst at Parkview Investments. After updating his valuation model, he changes his investment recommendation on Delta Corp. from “outperform” to “underperform.” His supervisor signs off on the revised recommendation. Reeves is unsure whether the change needs to be communicated to clients and, if so, what the proper procedure should be.According to the CFA Institute Code and Standards, Reeves is:
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required to ensure that the change is disseminated fairly through an equitable distribution system.
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Sarah Jennings, CFA, is researching a telecommunications company. During a site visit, she overhears two executives mention vague implementation issues related to a new product. The comments are not material on their own. However, when Jennings combines them with recent public filings and her own industry research, she concludes that the product launch will likely be delayed and lowers her recommendation from “hold” to “sell.”According to the CFA Institute Code and Standards, Jennings should:
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issue her sell recommendation, while maintaining records of her supporting analysis and sources.
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