Question 1
Multiple ChoiceA national financial regulator penalizes a mid-sized commercial bank for failing to comply with regulations concerning the classification and provisioning of non-performing assets. Edgar Tran, CFA, serves as a non-executive director on the bank’s board and leads the audit oversight committee responsible for reviewing and approving the bank’s provisioning framework. Priya Nduka, CFA, is the bank’s external auditor and conducts portfolio reviews based on international audit standards, including randomized sampling to assess adherence to regulatory guidelines. Which charterholder is most likely in violation of the CFA Institute Code and Standards?
Explanation
Edgar Tran is most likely in violation of Standard I(A) – Knowledge of the Law, part of the CFA Institute's Code and Standards, because he chaired the audit oversight committee that approved policies contradicting the national regulator’s requirements. His role implies he had a duty to ensure that provisioning practices complied with applicable regulations. Priya Nduka followed standard auditing procedures using random sampling and, with no evidence she knowingly overlooked the violations, does not appear to have violated any standards.
Question 2
Multiple ChoiceJordan Lee, a financial analyst at a large investment advisory firm, revises his investment opinion on Radiant Solar Corp., downgrading it from “outperform” to “underperform.” He issues an updated research report and ensures it is distributed to all firm clients on Thursday morning. On Friday afternoon, one of the firm’s clients calls and places an order to purchase 800 shares of Radiant Solar. Lee suspects the client has not yet reviewed the updated report. What should Lee do in this situation?
Explanation
Under Standard III(B) – Fair Dealing, members must ensure that clients have equal access to updated investment information. Because the client’s order contradicts the new recommendation and there is reason to believe the client has not seen the revised report, Lee must inform the client before executing the trade. If, after being informed, the client wishes to proceed, Lee may execute the order.
Question 3
Multiple ChoiceWhich of the following actions is a violation of the CFA Institute Code and Standards regarding the use of client brokerage commissions?
Explanation
Standard III(A) – Loyalty, Prudence, and Care prohibits the use of client brokerage to pay for a manager’s general operating expenses, such as rent. Client brokerage must be used for the direct benefit of the client, typically through brokerage and research services that support the investment decision-making process. Directed brokerage arrangements (as described in option C) are permissible when they benefit the client and are fully disclosed.
Question 4
Multiple ChoiceLina Mendoza is registered for the upcoming Level I CFA exam. Her colleague, David Noor, took the exam the previous year and still had access to a set of copyrighted study materials from a popular third-party prep provider. Noor scanned the materials and emailed the files to Mendoza, who used them as her primary study resource. Who is most likely in violation of the CFA Institute Code of Ethics or Standards of Professional Conduct?
Explanation
Both individuals are in violation of Standard I(A) – Knowledge of the Law. Sharing or using copyrighted materials without proper authorization breaches intellectual property laws. Noor violated the standard by distributing copyrighted content, while Mendoza violated it by knowingly using that unauthorized material. Members and candidates must comply with applicable laws and avoid engaging in or facilitating any illegal activity.
Question 5
Multiple ChoiceElena Rodriguez is a junior equity analyst at Armitage Securities, a firm that provides investment banking services. For over a decade, Armitage has served as the primary advisor to Northgate Logistics in several high-profile acquisitions. Additionally, two of Armitage’s senior partners currently sit on the boards of Northgate’s affiliated companies. Elena has been asked to prepare a research report on Northgate. What is the most appropriate course of action under the CFA Institute Code and Standards?
Explanation
Standard VI(A) – Disclosure of Conflicts requires members and candidates to avoid or fully disclose any conflicts that may compromise their objectivity. In this case, the combination of a long-standing investment banking relationship and the presence of Armitage’s partners on Northgate’s affiliate boards represents a substantial conflict. The best practice is for Elena to recuse herself from writing the report to preserve independence and maintain public trust in the integrity of research.
Question 6
Multiple ChoiceA CFA charterholder employed at a global asset management firm is contacted by CFA Institute’s Professional Conduct Program (PCP) and asked to provide information related to an ongoing investigation. The requested details involve confidential client transactions. The charterholder shares the information, despite knowing that local privacy regulations prohibit such disclosure without client consent. Has the charterholder most likely violated the CFA Institute Code and Standards?
Explanation
Under Standard I(A) – Knowledge of the Law, CFA Institute members and candidates must adhere to the most stringent applicable law, rule, or regulation. In this case, although the PCP may request assistance, members must not violate local laws in responding. Because the local law prohibits disclosing client information without consent, the charterholder is in violation of the standard by choosing to comply with CFA Institute’s request instead of following the stricter law.
Question 7
Multiple ChoiceAmara Chen, CFA, is the deputy investment officer for Horizon Foundation and is responsible for overseeing the foundation’s Educational Support Endowment. Chen issues a Request for Proposal (RFP) seeking international fixed-income managers. Her longtime friend, Marcus Patel, CFA, introduces her to advisors at Orion Asset Management, who submit a proposal. Chen selects Orion based on its strong historical risk-adjusted returns. Soon after, Patel—previously employed at a different investment firm—joins Orion in a senior portfolio management role. Who most likely violated the CFA Institute Standards of Professional Conduct?
Explanation
Under Standard I(B) – Independence and Objectivity, CFA members and candidates must use reasonable care and judgment to maintain independence and objectivity. There is no evidence of misconduct in Chen’s selection of Orion, which was based on demonstrated performance, nor in Patel’s decision to accept employment at Orion. Both decisions appear to be merit-based and not influenced by personal relationships or conflicts of interest. Therefore, no violation occurred.
Question 8
Multiple ChoiceWhich of the following statements most clearly contradicts the recommended compliance procedures outlined in the CFA Institute Standards of Practice Handbook?
Explanation
According to the Standards of Practice Handbook, employees’ personal trading activity should be regularly monitored by the employer, even when not explicitly required by law. This oversight ensures that no conflicts arise between personal and client transactions. Therefore, stating that disclosure is only necessary when mandated by law violates the guidance under Standard VI(A) – Disclosure of Conflicts and Standard IV(A) – Loyalty. The other statements reflect recommended best practices.
Question 9
Multiple ChoiceKareem Douglas, CFA, is the sole proprietor of both a media consultancy and an investment analysis firm. His media firm recently signed a deal with Zephyr Technologies to provide brand strategy services, for which Douglas received 25,000 shares of Zephyr stock as compensation. Over the following two weeks, his media firm issued promotional articles highlighting Zephyr’s innovative product pipeline. Simultaneously, his investment firm released a research report rating Zephyr as a “strong buy.” According to the CFA Institute Standards of Professional Conduct, Douglas is most likely required to disclose his ownership of Zephyr stock in:
Explanation
Under Standard I(B) – Independence and Objectivity and Standard VI(A) – Disclosure of Conflicts, CFA members and candidates must disclose any potential conflicts of interest that could impair their objectivity. Douglas’s ownership of Zephyr stock presents a conflict that must be disclosed in both the promotional content and the investment recommendation to maintain transparency and uphold professional integrity.
Question 10
Multiple ChoiceDaphne Lin, CFA, advises the investment committee of a nonprofit medical foundation. The committee has entrusted Lin with access to confidential data, including upcoming funding allocations and long-term financial projections. On a Friday evening, Lin receives an urgent call from Quentin Reyes, a well-known philanthropist, requesting immediate access to the foundation’s financials to help secure a large donation from another donor. Reyes explains that the committee is unreachable but insists that the disclosure would directly support the foundation’s mission. According to the CFA Institute Standards of Professional Conduct, Lin should:
Explanation
Standard III(E) – Preservation of Confidentiality requires members and candidates to maintain the confidentiality of client information unless the client consents to its disclosure. Even if the disclosure appears beneficial, Lin must first receive explicit permission from the foundation’s committee before releasing the data. Sharing the information without prior consent would breach the duty of loyalty and prudence owed to the client.