CFA Level 1 - Ethical & Professional Standards Flashcards

Question 1

What are the six components of the CFA Institute Code of Ethics?

Accepted Answer

1. Act with integrity, competence, diligence, and respect. 2. Place the integrity of the investment profession and client interests above personal interests. 3. Use reasonable care and exercise independent professional judgment. 4. Practice and encourage others to practice in a professional and ethical manner. 5. Promote the integrity and viability of the global capital markets. 6. Maintain and improve professional competence.

Question 2

Standard I(A) - Knowledge of the Law: What is the most stringent rule when a conflict exists between the CFA Standards and local law?

Accepted Answer

Members and Candidates must always adhere to the stricter of the two—either the applicable law/regulation or the CFA Institute Standards of Professional Conduct.

Question 3

Standard I(B) - Independence and Objectivity: What actions should members take to maintain independence and objectivity?

Accepted Answer

Avoid accepting gifts, benefits, compensation, or consideration that could compromise independence. If unavoidable, disclose to employer. For research, ensure fair representation and avoid undue influence from issuers or clients.

Question 4

Standard I(C) - Misrepresentation: What constitutes misrepresentation under the Standards?

Accepted Answer

Misrepresentation includes any untrue statement of a material fact or any omission of a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading. This applies to oral, written, and electronic communications.

Question 5

Standard I(D) - Misconduct: What types of conduct are prohibited under Misconduct?

Accepted Answer

Prohibits any conduct, professional or personal, that involves dishonesty, fraud, deceit, or is detrimental to the reputation of the investment profession. This includes criminal acts and unethical behavior that reflects poorly on the member.

Question 6

Standard II(A) - Material Nonpublic Information: What are the key components and recommended action?

Accepted Answer

Information is 'material' if its disclosure would likely affect the price of a security or if reasonable investors would want to know it. It is 'nonpublic' until it has been disseminated to the marketplace generally. Members must not act or cause others to act on such information. Establish firewalls and disclosure procedures.

Question 7

Standard II(B) - Market Manipulation: What types of activities are prohibited under market manipulation?

Accepted Answer

Prohibits practices that distort prices or artificially inflate trading volume with the intent to mislead market participants. This includes spreading false rumors (information-based manipulation) or engaging in transactions that create a misleading appearance of activity (transaction-based manipulation).

Question 8

Standard III(A) - Loyalty, Prudence, and Care: What is the primary duty of a member to their clients?

Accepted Answer

Members and Candidates must act for the benefit of their clients and place their clients' interests before their employer's or their own interests. This includes acting with the care, skill, and diligence that a prudent person would exercise.

Question 9

Standard III(B) - Fair Dealing: What does 'fair dealing' imply in the context of client transactions?

Accepted Answer

Members must treat all clients fairly and objectively. This does not mean treating them equally, but rather considering their investment objectives and circumstances. For example, all clients participating in an investment recommendation should have a fair opportunity to act on it.

Question 10

Standard III(C) - Suitability: What must members do to ensure investment recommendations are suitable for clients?

Accepted Answer

Members must make a reasonable inquiry into a client's investment experience, risk and return objectives, and financial constraints. They must update this information regularly and ensure that any investment recommendations or actions are consistent with the client's objectives and constraints.

Question 11

Standard III(D) - Performance Presentation: What are the requirements for presenting investment performance?

Accepted Answer

Members must make reasonable efforts to ensure that performance presentations are fair, accurate, and complete. They must not misrepresent past performance or mislead clients about potential future returns. This includes disclosing calculation methodologies and any limitations.

Question 12

Standard III(E) - Preservation of Confidentiality: When can a member disclose confidential client information?

Accepted Answer

Members must keep client information confidential unless: 1) the information concerns illegal activities, 2) disclosure is required by law, or 3) the client or prospective client permits disclosure.

Question 13

Standard IV(A) - Loyalty: What are a member's obligations to their employer?

Accepted Answer

Members must act for the benefit of their employer and not cause harm to the employer. This includes refraining from independent practice that could conflict with the employer's interests, and not disclosing confidential information or soliciting clients prior to leaving employment.

Question 14

Standard IV(B) - Additional Compensation Arrangements: What must members do regarding additional compensation?

Accepted Answer

Members must obtain written consent from their employer before accepting any gifts, benefits, compensation, or consideration that could be perceived as creating a conflict of interest with their employer's interests.

Question 15

Standard IV(C) - Responsibilities of Supervisors: What are the key responsibilities of supervisors under the Standards?

Accepted Answer

Supervisors must make reasonable efforts to ensure that those subject to their supervision comply with applicable laws, rules, regulations, and the Code and Standards. This includes establishing and implementing adequate compliance procedures and training.

Question 16

Standard V(A) - Diligence and Reasonable Basis: What is required for investment analysis and recommendations?

Accepted Answer

Members must exercise diligence, independence, and thoroughness in analyzing investments, making recommendations, and taking investment actions. They must have a reasonable and adequate basis, supported by research and investigation, for any investment judgment.

Question 17

Standard V(C) - Record Retention: What are the requirements for record retention?

Accepted Answer

Members must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications. These records are the property of the firm and must be retained for at least seven years.

Question 18

Standard VI(A) - Disclosure of Conflicts: What types of conflicts must be disclosed?

Accepted Answer

Members must disclose all matters that could reasonably be expected to impair their independence and objectivity or interfere with their duties to clients, prospective clients, or their employer. This includes ownership of securities, compensation structures, and relationships.

Question 19

Standard VI(B) - Priority of Transactions: How should members prioritize transactions?

Accepted Answer

Client and employer transactions must take precedence over personal transactions. Members should avoid profiting from knowledge of client trades. Personal transactions should not adversely affect client interests.

Question 20

Standard VI(C) - Referral Fees: What must be disclosed regarding referral fees?

Accepted Answer

Members must disclose to their employer, and to clients or prospective clients, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.

Question 21

Standard VII(B) - Reference to CFA Institute, CFA Designation, and CFA Program: How can members refer to their CFA status?

Accepted Answer

Members may use the CFA designation after their name. They must not misrepresent the meaning or implications of membership or the designation. They cannot imply superior performance or guarantee future results. The designation should not be used as a title or part of a company name.

Question 22

What is the primary purpose of the Global Investment Performance Standards (GIPS)?

Accepted Answer

GIPS are a set of ethical standards for investment firms to follow when presenting their investment performance. Their purpose is to ensure fair representation and full disclosure of investment performance, enabling comparability among investment management firms globally.

Question 23

What are some fundamental characteristics of GIPS compliance?

Accepted Answer

GIPS compliance is firm-wide, not just for specific products or composites. Firms must include all fee-paying discretionary portfolios in composites. GIPS requires specific calculation methodologies, disclosure requirements, and presentation standards. Verification by an independent third party is optional but recommended.

CFA Level 1 - Ethical & Professional Standards

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