CFA Level I - Ethical & Professional Standards Flashcards

Question 1

Standard I(A): Knowledge of the Law

Accepted Answer

Members and Candidates must understand and comply with all applicable laws, rules, and regulations. In the event of a conflict, they must follow the **stricter rule, law, or regulation**.

*Violation Example:* Following local law that allows client data sharing when CFA Standards explicitly prohibit it.
*Recommended Practice:* Maintain a compliance file and consult compliance/legal counsel when in doubt.

Question 2

Standard I(B): Independence and Objectivity

Accepted Answer

Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities.

*Rules:* Do not offer, solicit, or accept gifts, benefits, or compensation that compromises independence.
*Violation Example:* Accepting lavish travel/lodging from a company under coverage.
*Recommended Practice:* Restrict participation in corporate visits; issuers should pay for modest travel/accommodations only.

Question 3

Standard I(C): Misrepresentation

Accepted Answer

Members and Candidates must not knowingly make misrepresentations regarding investment analysis, recommendations, actions, or other professional activities.

*Key Issues:* Plagiarism, guaranteeing returns on risky investments, misrepresenting academic credentials or firm capabilities.
*Recommended Practice:* Maintain source citations; provide full disclosure of investment risks without guarantees.

Question 4

Standard I(D): Misconduct

Accepted Answer

Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, deceit, or commit any act that reflects adversely on their professional reputation, integrity, or competence.

*Violation Example:* Engaging in personal bankruptcy due to fraudulent activities, or committing tax evasion.
*Note:* Personal conduct does not violate this standard unless it reflects poorly on professional integrity/competence.

Question 5

Standard II(A): Material Nonpublic Information

Accepted Answer

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 information.

*Mosaic Theory Exception:* Combining nonmaterial nonpublic information with public information to reach an investment conclusion is **permitted**.
*Recommended Practice:* Firewalls, restricted lists, and rumor controls.

Question 6

Standard II(B): Market Manipulation

Accepted Answer

Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

*Information-based manipulation:* Spreading false rumors to pump up stock prices.
*Transaction-based manipulation:* Executing trades to create a false impression of activity or liquidity.

Question 7

Standard III(A): Loyalty, Prudence, and Care

Accepted Answer

Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment.

*Key Concept:* The client's interest ALWAYS comes before the employer's or personal interests.
*Soft Dollars:* Must be used only to purchase research/services that directly benefit the client.

Question 8

Standard III(B): Fair Dealing

Accepted Answer

Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making recommendations, or taking investment action.

*Violation Example:* Giving premium/oversubscribed IPO allocations to favorite clients or personal accounts before general distribution.
*Recommended Practice:* Disseminate recommendations simultaneously; execute trades on a pro-rata basis for block orders.

Question 9

Standard III(C): Suitability

Accepted Answer

When in an advisory relationship, Members/Candidates must inquire about a client's risk/return objectives and constraints before making recommendations and update the **Investment Policy Statement (IPS)** at least annually.

*Key Rule:* Judge suitability in the context of the **entire portfolio**, not on an isolated security basis.

Question 10

Standard III(D): Performance Presentation

Accepted Answer

When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.

*Violation Example:* Showing a simulated backtested strategy as actual past performance without clear disclosure.
*Recommended Practice:* Adhere to Global Investment Performance Standards (GIPS).

Question 11

Standard III(E): Preservation of Confidentiality

Accepted Answer

Members and Candidates must keep information about current, former, and prospective clients confidential unless:
1. The information concerns illegal activities on the part of the client.
2. Disclosure is required by law.
3. The client permits disclosure.

*Note:* CFA Institute Professional Conduct investigations are considered confidential disclosure.

Question 12

Standard IV(A): Loyalty (Duties to Employers)

Accepted Answer

In matters related to 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.

*Independent Practice:* Requires **written consent** from the employer prior to engaging in competitive independent practice.
*Leaving an Employer:* May not take proprietary client lists or models, but general skills/knowledge acquired are permitted to be used.

Question 13

Standard IV(B): Additional Compensation Arrangements

Accepted Answer

Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might create a conflict of interest with their employer's interest unless they obtain **written consent from all parties involved**.

*Difference from Standard I(B):* IV(B) requires written permission from employers prior to acceptance of additional performance incentives from clients.

Question 14

Standard IV(C): Responsibilities of Supervisors

Accepted Answer

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.

*Recommended Practice:* Establish an adequate compliance system, delegate supervisory responsibilities clearly, and promptly investigate suspected non-compliance.

Question 15

Standard V(A): Diligence and Reasonable Basis

Accepted Answer

Members and Candidates must exercise diligence, independence, and thoroughness in analyzing investments, making recommendations, and taking actions, backed by a **reasonable and adequate basis**.

*Secondary/Third-Party Research:* Permitted if the member exercises due diligence in validating the research methodology and assumptions.

Question 16

Standard V(B): Communication with Clients and Prospective Clients

Accepted Answer

Members and Candidates must:
1. Disclose basic format and principles of investment processes used.
2. Disclose significant limitations and risks involved.
3. **Distinguish clearly between fact and opinion** in investment analysis and recommendations.
4. Notify clients of any significant changes in the investment process.

Question 17

Standard V(C): Record Retention

Accepted Answer

Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients.

*Default Requirement:* Maintain research and compliance records for at least **7 years** unless local law mandates otherwise.

Question 18

Standard VI(A): Disclosure of Conflicts

Accepted Answer

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 clients, prospective clients, and employers.

*Key Disclosures:* Stock ownership in covered companies, board memberships, fee arrangements, soft dollar usage.

Question 19

Standard VI(B): Priority of Transactions

Accepted Answer

Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.

*Execution Hierarchy:* Clients $\rightarrow$ Employer $\rightarrow$ Personal Accounts.
*Recommended Practice:* Implement blackout/restricted periods for personal trading.

Question 20

Standard VI(C): Referral Fees

Accepted Answer

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.

*Timing:* Disclosure must be made **before** entering into any agreement or client transaction.

Question 21

Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate

Accepted Answer

Covers Standard VII(A) Conduct in CFA Programs and VII(B) Reference to CFA Institute, Designation, and Program.

*Key Violations:* Cheating on the exam, disclosing confidential exam content, overstating the meaning of the designation (e.g., claiming superior performance).
*Proper Usage:* "John Doe, CFA" or "CFA charterholder" (used as an adjective, not a noun; no partial designation for passing Level I).

Question 22

GIPS (Global Investment Performance Standards): Purpose & Scope

Accepted Answer

GIPS are ethical standards for investment performance presentation created by CFA Institute to prevent misrepresentation.

*Scope:* Applies to **investment management firms** on a voluntary basis (not individual professionals).
*Core Requirement:* Must include all actual, discretionary, fee-paying portfolios in at least one **composite** based on defined strategies.

CFA Level I - Ethical & Professional Standards

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