CFA Level I - Ethical and Professional Standards Flashcards

Question 1

What is the primary purpose of the CFA Institute Code of Ethics?

Accepted Answer

To guide members and candidates in maintaining the highest ethical standards, promoting integrity in the global investment profession, and placing client interests above personal gain.

Question 2

Define 'Integrity' as a component of the CFA Code of Ethics.

Accepted Answer

Members and candidates must act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues, and other participants in the global capital markets.

Question 3

Define 'Competence' as a component of the CFA Code of Ethics.

Accepted Answer

Members and candidates must maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Question 4

Define 'Diligence' as a component of the CFA Code of Ethics.

Accepted Answer

Members and candidates must use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.

Question 5

Define 'Respect' as a component of the CFA Code of Ethics.

Accepted Answer

Members and candidates must practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.

Question 6

Define 'Ethical Conduct' as a component of the CFA Code of Ethics.

Accepted Answer

Members and candidates must promote the integrity and viability of the global capital markets for the ultimate benefit of society.

Question 7

Define 'Independence' as a component of the CFA Code of Ethics.

Accepted Answer

Members and candidates must place the integrity of the investment profession and the interests of clients above their own personal interests, ensuring objectivity and avoiding conflicts.

Question 8

Summarize Standard I(A) Knowledge of the Law.

Accepted Answer

Members and candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code and Standards) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In case of conflict, the stricter law/standard applies.

Question 9

Example of a violation of Standard I(A) Knowledge of the Law.

Accepted Answer

A CFA member discovers that their firm's marketing materials violate local advertising regulations but continues to use them, arguing that the firm's internal compliance approved them. This violates the duty to comply with all applicable laws.

Question 10

Summarize 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. They must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity.

Question 11

Summarize 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.

Question 12

Example of a violation of Standard II(A) Material Nonpublic Information.

Accepted Answer

A portfolio manager overhears executives discussing an impending merger before it's publicly announced. The manager then buys shares of the target company for clients' portfolios. This is insider trading.

Question 13

Summarize 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. They must act for the benefit of their clients and place client interests before their own.

Question 14

Example of a violation of Standard III(A) Loyalty, Prudence, and Care.

Accepted Answer

An advisor recommends an investment product to a client solely because it offers the advisor a higher commission, despite a more suitable, lower-commission alternative being available.

Question 15

Summarize Standard IV(A) Loyalty (Duties to Employers).

Accepted Answer

Members and candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.

Question 16

Example of a violation of Standard IV(A) Loyalty.

Accepted Answer

An employee plans to start their own competing firm and, while still employed, uses company resources (e.g., office time, computers) to solicit existing clients for their future business.

Question 17

Summarize Standard V(A) Diligence and Reasonable Basis.

Accepted Answer

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

Question 18

Example of a violation of Standard V(A) Diligence and Reasonable Basis.

Accepted Answer

An analyst issues a 'buy' recommendation for a stock based solely on a rumor heard at a social event, without conducting any independent research or due diligence.

Question 19

Summarize 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 their respective duties to clients, prospective clients, and employers.

Question 20

Example of a violation of Standard VI(A) Disclosure of Conflicts.

Accepted Answer

A portfolio manager recommends a specific mutual fund to clients without disclosing that their spouse is a senior executive at the fund's management company and receives performance bonuses.

Question 21

Summarize Standard VII(A) Conduct as Members and Candidates in the CFA Program.

Accepted Answer

Members and candidates must not engage in any conduct that compromises the reputation or integrity of the CFA Institute or the CFA designation, or the integrity, validity, or security of the CFA examinations.

Question 22

Example of a violation of Standard VII(A) Conduct as Members and Candidates.

Accepted Answer

A CFA candidate posts specific exam questions and answers on an online forum immediately after taking the CFA Level I exam.

CFA Level I - Ethical and Professional Standards

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