CFA Ethics and Professional Standards 2 — Questions and Answers
Question 1: Standard III(A) – Loyalty, Prudence, and Care requires that members place whose interests first when managing a portfolio?
- Their own interests
- Their employer's interests
- Clients' interests (Correct answer)
- Regulatory bodies' interests
Correct answer: Clients' interests
Standard III(A) requires members to act in their clients' best interests and place client interests before their own or their employer's.
Question 2: Which of the following is required under Standard III(B) – Fair Dealing when disseminating investment recommendations?
- Providing all clients with identical investment recommendations simultaneously
- Ensuring all clients have an equal opportunity to act on new recommendations (Correct answer)
- Sharing information with institutional clients before retail clients
- Issuing all trade orders at the same time for all clients
Correct answer: Ensuring all clients have an equal opportunity to act on new recommendations
Fair dealing requires that all clients have an equal opportunity to act on new recommendations, though simultaneous communication and identical recommendations are not strictly required.
Question 3: Under Standard V(A) – Diligence and Reasonable Basis, an analyst recommending a complex derivative product must:
- Rely solely on the product manufacturer's research
- Have a reasonable and adequate basis supported by appropriate research (Correct answer)
- Disclose only the risks that are publicly known
- Base the recommendation on at least five years of historical data
Correct answer: Have a reasonable and adequate basis supported by appropriate research
Standard V(A) requires analysts to have a reasonable, adequately researched basis for any investment recommendation, regardless of product complexity.
Question 4: The Global Investment Performance Standards (GIPS) are primarily designed to:
- Set minimum capital requirements for investment firms
- Ensure fair representation and full disclosure of investment performance (Correct answer)
- Regulate the compensation of portfolio managers
- Establish trading rules for global financial markets
Correct answer: Ensure fair representation and full disclosure of investment performance
GIPS standards ensure investment firms present performance results fairly and completely, allowing clients to make meaningful comparisons.
Question 5: Which of the following is a violation of Standard VI(B) – Priority of Transactions?
- An analyst buying a stock after issuing a buy recommendation to clients
- A portfolio manager front-running by trading personal accounts before executing client trades (Correct answer)
- A member disclosing their personal holdings to their employer
- A member waiting until client trades are completed before trading for their own account
Correct answer: A portfolio manager front-running by trading personal accounts before executing client trades
Front-running—trading personal accounts ahead of client orders to benefit from anticipated price movements—violates Standard VI(B).
Question 6: Under the Asset Manager Code, a manager that exercises proxy voting authority must:
- Always vote in favor of management proposals
- Vote proxies in the best interest of clients (Correct answer)
- Abstain from voting to avoid conflicts of interest
- Delegate all proxy votes to a third-party service
Correct answer: Vote proxies in the best interest of clients
The Asset Manager Code requires managers to exercise proxy voting authority in the best interest of their clients, not management or other parties.
CFA Ethics and Professional Standards 2
Standard III(A) – Loyalty, Prudence, and Care requires that members place whose interests first when managing a portfolio?