R03.1 Standard I Professionalism - Answers

Question 1
L1R02TB-AC099-1512
LOS: LOS-0040
Lesson Reference: Lesson 1: Standard I: Professionalism
Difficulty: medium
John Fields is a portfolio manager in charge of several mutual funds. In one fund, he had accumulated a
position in several thinly traded stocks that were not performing well. Fields found that by trading the stocks
between the funds he could increase the closing price and volume. Fields hopes that the apparent increased
liquidity will make it easier to exit the positions and minimize his losses. Did Fields violate the Standards of
Professional Conduct with respect to market manipulation?
No.
Yes, because trading the same stock between funds is always a violation.
Yes, because the transactions were intended to alter the price and volume data.
Rationale
 No.
Market manipulation is defined as attempting to distort price or volume data. In this case, Fields
executed trades between two funds that he controlled with the intent to impact the price and volume
data for the stock.
Rationale
 Yes, because trading the same stock between funds is always a violation.
data for the stock.
Rationale
 Yes, because the transactions were intended to alter the price and volume data.
data for the stock.
Question 2
L1ETR02-LIC026-1510
LOS: LOS-0030
Difficulty: medium
Albert Wonghi, CFA, is a fund manager with Prospect Asset Management. At a lunchtime party, hosted by a
brokerage firm to whom he directs 50% of his transactions, Wonghi has too much to drink and behaves
embarrassingly before returning to his office. Other fund managers attend the party. Wonghi's personal
behavior at the party is most likely to violate Standard I(D) of the Code and Standards because:
Wonghi breaks the local laws regarding behavior in public.
Wonghi should not drink any alcohol during business hours.
Wonghi's behavior reflects poorly on him and the investment industry.
Rationale
 This Answer is Correct
With reference to Standard I(D): Misconduct, Wonghi's excessive drinking will inhibit his ability to work
in the afternoon and reflects badly on the profession. The best answer is the third choice.
Question 3
L1R02TB-AC075-1512
LOS: LOS-0040
Difficulty: medium
Patrick Hind manages individual retirement accounts for a number of clients. One of his clients, James
Soltis, is a high net worth individual with over $1 million in his account. Another client, Stephanie Wagner, is
of much more modest means with only $100,000 in her account. Both clients are very conservative and have
over 10 years until retirement. An analysis of their risk tolerance at the beginning of the relationship with
Hind showed that neither would feel comfortable with more than a five percent loss of principal in any given
year. Hind invests Wagner in short- and intermediate-term high-grade corporate bonds and Treasuries. Since
Soltis' high net worth enables him to assume more risk, Hind invests his account in more aggressive
domestic growth stocks and emerging markets. Did Hind violate the Standards of Professional Conduct with
respect to the suitability of the investments chosen for:
Soltis' Account? Wagner's Account?
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
Risk tolerance is related to both the client's willingness and ability to take risk. Although Soltis has a
greater ability to take risk, his willingness is similar to Wagner. Wagner's risk tolerance would imply
that low-volatility assets such as investment grade corporates and Treasury securities would be
appropriate.
Rationale
 Row B
appropriate.
Rationale
 Row C
appropriate.
Question 4
L1R02TB-AC056-1512
LOS: LOS-0030
Difficulty: medium
Kim Sung is a new investment manager at Dai Investments. Sung's supervisor tells him that the firm
subscribes to research services from two third-party providers, Kamp Research and Perk Advisors. While
acquainting himself with these firms, Sung reviews each firm's recommendations history and compiles a list
of questions for their representatives. He notes that Kamp regularly issues sell recommendations and is very
forthcoming when questioned. Perk, on the other hand, rarely issued a sell recommendation and is reluctant
to discuss its sources of compensation. According to the Standards of Professional Conduct, may Sung rely
on research from:
Kamp? Perk?
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
The use of third-party research is acceptable under the Standard as long as the source is credible and
cited. Kamp bears all the characteristics of a credible source, but Perk seems questionable.
Rationale
 Row B
Rationale
 Row C
Question 5
L1R02TB-AC112-1512
LOS: LOS-0040
Difficulty: medium
Barbara White is a portfolio manager with Ajax Advisors. Whenever an oversubscribed issue is offered, she
instructs the firm's brokers to purchase shares for her husband's account along with her client accounts. By
including an allocation to her husband's account, the client accounts receive slightly smaller lots in their
allocations. Did White violate the Standards of Professional Conduct?
Yes.
No, because she did not exclude any client accounts.
No, because her husband's account is a family client account.
Rationale
 Yes.
White's husband's account is, for all intents and purposes, her own. Therefore, she is required to
purchase shares for her clients first and, only if any shares remain after satisfying their demand, then
purchase for herself.
Rationale
 No, because she did not exclude any client accounts.
Rationale
 No, because her husband's account is a family client account.
Question 6
L1R02TB-AC052-1512
LOS: LOS-0040
Difficulty: medium
Kevin Larch works as an investment advisor with Bender Associates. He decided to leave the firm and start
his own advisory company that will compete with Bender. In preparation for leaving Bender, Larch
incorporates his new business, registers with regulatory agencies, and leases office space. Larch did not
discuss his plans with his supervisor at Bender. Did Larch violate the Standards of Professional Conduct?
No.
Yes, because he is planning to compete with his employer.
Yes, because he must notify his employer before taking any actions.
Rationale
 No.
While Larch remains an employee of Bender's, he must perform his duties to the best of his abilities
and not deny his employer of opportunities or his skills. However, making preparations for exiting the
firm is not a violation of the Standard as long as it is done on his own time without the use of Bender's
facilities, equipment or staff.
Rationale
 Yes, because he is planning to compete with his employer.
Rationale
 Yes, because he must notify his employer before taking any actions.
Question 7
L1R02TB-AC072-1512
LOS: LOS-0040
Difficulty: medium
Peter Olson operates a stock market recommendation website called Independent-Researchers.com. Olson
has contracts with several companies that trade on the pink sheets to provide research coverage for their
stocks. He is compensated with a flat fee and stock options on the covered companies. Olson bases all his
recommendations on projections provided by the companies' managements, none of which is verified. He
lists no “sell” recommendations on his site. Most of his recommendations show a significant, if short-lived,
increase in price following initiation of coverage. Has Olson violated the Standards of Professional Conduct
with respect to market manipulation?
No.
Yes, by making recommendations over the Internet.
Yes, by promoting stocks based on questionable information.
Rationale
 No.
The Standard prohibits manipulating security prices. Using questionable research to temporarily pump
up the price of stocks would qualify as a market manipulation.
Rationale
 Yes, by making recommendations over the Internet.
Rationale
 Yes, by promoting stocks based on questionable information.
Question 8
L1R02TB-AC078-1512
LOS: LOS-0040
Difficulty: medium
Robert Duggan is a financial advisor with Atticus Investments. He has been recruited to join Benedict
Advisors and provides notice of his resignation to Atticus, which will be effective in two weeks. Prior to
leaving the firm, Duggan contacts several of his clients, informs them of his pending departure, and asks
their permission to call on them once he moves to Benedict. Did Duggan violate the Standards of
Professional Conduct?
No.
Yes, by soliciting his employer's customers.
Yes, by informing clients of his pending departure.
Rationale
 No.
Duggan must perform his duties on behalf of Atticus until his departure. Soliciting clients is not acting
in his employer's interest and is a violation of the Standard. He may not solicit clients until after he
leaves and without taking any records that belong to Atticus.
Rationale
 Yes, by soliciting his employer's customers.
Rationale
 Yes, by informing clients of his pending departure.
Question 9
L1R02TB-AC051-1512
LOS: LOS-0040
Difficulty: medium
Marie Tipoli is a portfolio manager for NQA Investments. She is assigned to manage the portfolio of Anthony
Barito. Barito's income seems to be derived from a variety of businesses in which he has a minority interest.
A police detective approaches Tipoli and explains that Barito is being investigated for alleged money
laundering. Tipoli immediately discusses the matter with her supervisor and her personal attorney without
contacting Barito. Did she violate the Standards of Professional Conduct by discussing Barito's affairs with
her:
Supervisor? Attorney?
A. Yes Yes
B. Yes No
C. No No
Row A
Row B
Row C
Rationale
 Row A
The Standard does not require members to withhold information from legitimate authorities as
required by law. Furthermore, consulting with her supervisor and attorney may be both prudent and
required in order to adequately perform her duties.
Rationale
 Row B
Rationale
 Row C
Question 10
L1ET-TBPI77-1503
LOS: LOS-0040
LOS: LOS-0050
Difficulty: hard
Analyst Debora Jones was working on a report about the software industry. She entered the growth rate of
the sector as 9% instead of 6% by mistake. She did not notice the error and the report was sent to the clients.
One of the team members noticed the mistake and informed Debora. Debora decided not to make changes
in the report, as the report was already sent to the clients and correcting the mistake at this point would
bring undue attention to the error. Which of the following is most accurate?
Debora has not violated the standards, as it is an unintentional mistake.
Debora has violated the standards by making an error in the report.
Debora has violated the standards by not correcting the error in the report.
Rationale
Debora has violated Standard I(C) related to misrepresentation by not correcting the error in the
report. She should have immediately stopped the circulation of the report.
Question 11
L1ET-TBPI05-1503
LOS: LOS-0040
LOS: LOS-0050
Difficulty: medium
Liza Thomson, an investment advisor, quoted certain economic details taken from the website of the US
Statistics Department in her marketing materials, but did not give any acknowledgment for that. Which of
the following statements is most accurate?
Lisa has violated Standards I(B) Independence and Objectivity and I(C) Misrepresentation.
Lisa has not violated Standard I(C) Misrepresentation.
Lisa has not violated Standard I(C) Misrepresentation, but she has violated I(B) Independence
and Objectivity.
Rationale
Analysts can refer to external research material, but they have to ensure the credibility of the research
and give credit to the source of information. General public information about statistics and economic
details need not be cited.
Question 12
L1ETR02-LIC020-1510
LOS: LOS-0030
Difficulty: medium
Joshua Horne has just been awarded a CFA charter. His employer, AEB Investments, decides to change their
marketing literature since they now employ three CFA charterholders in the company. Which of the following
is an acceptable statement for the firm to include in its brochure?
The credibility of the firms' investments services is underlined by its employment of three
CFAs.
The firm is committed to the highest ethical standards, supported by our three CFA
charterholders.
We have decided to rename the firm AEB Chartered Financial Analysts Corp. to reflect our
commitment to our employees studying for the CFA designation.
Rationale
CFA is an adjective, not a noun. A firm's name should not include the CFA designation, and the CFA
designation should not be used to claim superior investment skills. Statement B is acceptable; CFA
charterholders should be committed to the highest ethical standards.
Question 13
L1ET-PQ0203-1410
LOS: LOS-0040
Difficulty: medium
Frank Clotti is an investment analyst working for a credit rating agency. Clotti has been told by his
immediate supervisor that structured products issued by a certain client should not receive a rating that is
below investment grade, as it might affect the advisory relationship that the credit rating agency has with
the client. Clotti has already conducted his analysis and concluded that several of the structured products
issued by the client should be rated as below investment grade. According to the Standards, Clotti should:
Adhere to the instructions of his supervisor
Assign the structured products the lowest possible investment grade
Refuse to associate with research that assigns a rating of investment grade to the structured
products he has concluded should be rated below investment grade
Rationale
Clotti would be in violation of Standard I(B): Independence and Objectivity if he is associated with
research that assigns a higher credit rating to the structured products than that he has calculated as
fair in his research.
Question 14
L1R02TB-AC062-1512
LOS: LOS-0030
Difficulty: medium
Patrick Stemster is a technology analyst for a mutual fund. To help him identify promising companies in
complex industries, he relies on an expert network service to provide contacts with technical experts.
Stemster is currently considering a recommendation on Terabyte Information Systems (TIS) based on their
cutting edge database system, which is currently in testing. According to the Standards of Professional
Conduct, which of the following experts would least likely be considered a source of material nonpublic
information?
The chief engineer conducting the tests for TIS.
An academic recognized for his research in the same field.
A junior scientist who signed a non-disclosure agreement with TIS.
Rationale
 The chief engineer conducting the tests for TIS.
The determination of whether information is material is based largely on the source. Standard II(A)
permits members to use and rely on outside experts to help them understand and evaluate technical
industries. However, members must be careful not to trade on material nonpublic information
provided by these experts. Clearly, anyone participating in the research and development activities of
the company would be considered an insider. Therefore, the least likely source of material nonpublic
information would be an unaffiliated expert. Members cannot rely on the contracts or agreements
between the experts and the target firms to ensure material information is not passed to them.
Rationale
 An academic recognized for his research in the same field.
Rationale
 A junior scientist who signed a non-disclosure agreement with TIS.
Question 15
L1R02TB-AC103-1512
LOS: LOS-0040
Difficulty: medium
Jason Kessler is responsible for performance reporting for GenZ Investments. The firm's largest portfolios'
performance records are compiled using the Global Investment Performance Standards (GIPS), but Kessler's
supervisor feels that smaller portfolios do not justify the added cost of GIPS compliance. GIPS require that
the standards be applied on a firmwide basis to qualify for a valid claim of GIPS-compliant reporting. Kessler
adds a GIPS compliance statement to each of the large portfolios' performance records, but not the small
portfolios'. Did Kessler violate GIPS or the Standards of Professional Conduct?
GIPS Standards of Professional Conduct
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
GIPS must be applied on a firmwide basis. Therefore, if the Standards are only applied to some
portfolios, a valid claim of compliance cannot be made for any of the portfolios. Making a claim of
compliance with GIPS when the performance presentation does not conform to GIPS is itself a
misrepresentation and a violation of the Standard.
Rationale
 Row B
Rationale
 Row C
Question 16
L1R02TB-AC068-1512
LOS: LOS-0040
Difficulty: medium
Eric Dickens, CFA, is a salesman with Jeta Investments. Jeta provides asset allocation and attribution
analysis using an internally developed proprietary model. Jeta has one equity analyst on staff that primarily
reviews third-party research reports for certain inputs used in the allocation model. During a presentation to
a group of portfolio managers, Dickens is asked about his firm's stock selection methodologies. Dickens
refers to the firm's team of analysts researching fundamental factors to identify stocks with above-average
return prospects. Did Dickens violate the Standards of Professional Conduct?
No.
Yes, by using third-party research reports.
Yes, by overstating his firm's capabilities.
Rationale
 No.
By stating or implying that the firm has a team of researchers on staff performing fundamental
analysis, Dickens is misrepresenting his firm's capabilities. While the lone analyst evaluating third-party
research might be adequate to perform the required tasks, Dickens must not overstate the firm's
capabilities or resources.
Rationale
 Yes, by using third-party research reports.
Rationale
 Yes, by overstating his firm's capabilities.
Question 17
L1R02TB-AC108-1512
LOS: LOS-0040
Difficulty: medium
Robert Lucia is an analyst preparing a report on FranCo Industries. He uses forecasted earnings per share as
a key input to his valuation model. After listening to a management conference call with other analysts,
Lucia uses the projected earnings suggested by the FranCo's CEO to value the firm without further analysis.
In his report, he cites several of the reasons mentioned on the call to support his valuation. Did Lucia have a
reasonable and adequate basis for his valuation?
No.
Yes, because the CEO is best equipped to estimate earnings.
Yes, because he supported his valuation with several reasons.
Rationale
 No.
Relying solely on the company's management estimates lacks the diligence necessary to perform a
valuation analysis. While management's opinions might have analytical merit, they must be judged in
light of other sources or analysis.
Rationale
 Yes, because the CEO is best equipped to estimate earnings.
Rationale
 Yes, because he supported his valuation with several reasons.
Question 18
L1R02TB-AC041-1512
LOS: LOS-0040
Difficulty: medium
Cecil Hernandez is a money manager for Indigo Investors. After purchasing bonds for several accounts, he
neglected to allocate the trades to the affected client accounts right away. Two days later, some of the
bonds have increased in value, while others declined. Hernandez allocates the appreciating bonds to his two
largest clients, and the declining bonds are spread across his smaller accounts. Did Hernandez violate the
Standards of Professional Conduct?
No.
Yes, he should have allocated losing trades to the largest and winners to the smallest
accounts.
Yes, he should have allocated shares prior to executing the trades or done so systematically.
Rationale
 No.
The Standards do not specify how trades are to be allocated. However, members may not favor certain
clients over others. Having neglected to allocate the bonds prior to their price change, Hernandez must
now find a fair allocation method to distribute the bonds among all the relevant clients.
Rationale
 Yes, he should have allocated losing trades to the largest and winners to the smallest
accounts.
Rationale
 Yes, he should have allocated shares prior to executing the trades or done so systematically.
Question 19
L1ET-TBPI03-1503
LOS: LOS-0040
LOS: LOS-0050
Difficulty: hard
Leonard Clark, research analyst, at Zinc Inc. was found to be drunk at work. Leonard's supervisor, Ben
Thomas, found that this is affecting Leonard's work lately. It was also brought to his attention that during
Leonard's official visit to a Middle East country, where it is illegal to consume alcohol, he consumed alcohol.
Which of the following is most accurate?
Statement I: Leonard has not violated any standards related to professional ethics.
Statement II: Ben should warn Leonard because he has violated Standard I(D) related to misconduct.
Statement III: Ben should send all the employees a list of acceptable behavior at work and also
mention the disciplinary actions regarding such behavior.
Statement IV: Leonard has not violated Standard I(A) related to knowledge of law.
Statements II, III, and IV.

Statements II and III.
Statements I, III, and IV only.
Rationale
Ben should warn Leonard about his behavior because his personal habit is affecting his ability to work
and reflects poorly on his character. Also, Ben should make all the employees aware of acceptable
behavior at work. Leonard has not violated Standard I(A) related to knowledge of law, as the standard
is confined only to professional activities.
Question 20
L1R02TB-AC063-1512
LOS: LOS-0040
Difficulty: medium
Nancy Jenkins holds a large number of shares in Small Tech Corp (STC), a thinly traded stock whose growth
prospects have dimmed. She wants to sell out of her position but is afraid that the order would cause a steep
decline in the share price, adding to her already sizeable losses. In order to sell the shares, she recruits
several friends to discuss rumors of an STC acquisition by a large competitor in online chat rooms and social
media sites. Jenkins also spreads her shares among several accounts and has her friends repeatedly buy and
sell shares in the hopes of attracting other investors to the stock. Over the next few months, Jenkins sells off
her position without further price deterioration. Jenkins violated the Standards of Professional Conduct with
respect to intentionally manipulating the stock's:
Price Volume
A. Yes No
B. No Yes
C. Yes Yes
Row A
Row B
Row C
Rationale
 Row A
Jenkins violated Standard II(B) by trying to manipulate both the price and volume of STC shares.
Spreading false rumors that an acquisition is in the offing is an attempt to increase the share price.
Having her friends repeatedly trade the stock is an attempt to give the appearance that the stock is
more liquid than it actually is.
Rationale
 Row B
Rationale
 Row C
Question 21
L1R02TB-AC044-1512
LOS: LOS-0040
Difficulty: medium
Alex Ortiz manages a passive equity index fund designed to mimic the returns of the 30-stock Dow Jones
Industrial Average. Ortiz is convinced that he can achieve better returns by simply excluding stocks in the
index that he considers to be grossly overvalued. Without notifying clients or prospects, he excludes five
stocks and beats the index the following year. Did Ortiz violate the Standards of Professional Conduct?
No, because he acted in his clients' best interest in pursuing higher returns.
No, because his decision actually beat the index the following year.
Yes, by failing to notify clients and prospects of the change in approach.
Rationale
 No, because he acted in his clients' best interest in pursuing higher returns.
As an index fund manager, Ortiz has held his fund out as a passive investment in the index. Removing
certain stocks from the index, effectively tilting the portfolio away from certain stocks, represents a
change in mandate toward active management. Ortiz must inform his clients of this change.
Rationale
 No, because his decision actually beat the index the following year.
Rationale
 Yes, by failing to notify clients and prospects of the change in approach.
Question 22
L1R02TB-AC100-1512
LOS: LOS-0040
Difficulty: medium
Phillip Wilson is a portfolio manager with Safe Investments. Wilson places a portion of his fund's trades with
Better Brokers. Better's commissions are higher than the average broker, but Wilson receives
macroeconomic and industry reports each quarter from their research department that he uses in managing
his portfolios. One of his clients requested that Wilson place his account's trades with Delta Brokers so that
he can get their market commentary newsletter. Delta is not one of Safe Investments' recommended
brokers. Did Wilson violate the Standards of Professional Conduct by placing trades with Better or Delta?
No.
Yes, because Wilson cannot allow a client to direct their brokerage to an unknown broker.
Yes, because Wilson cannot use a client's soft dollars for purposes that don't directly affect
that client's outcomes.
Rationale
If the research that Wilson gets from Better helps him to make investment decisions on behalf of his
clients, then he is justified in paying the higher commissions. These types of “soft dollar” arrangements
are permissible under the Standards as long as they benefit the clients. The Standards also permit
client-directed brokerage as a means to obtain research, as well.
Question 23
L1R02TB-AC096-1512
LOS: LOS-0050
Difficulty: medium
Jennifer Wagner is the director of sales for a boutique research firm. Her travel expenses are reimbursed by
the company. Wagner has arrangements with her hairdresser, dry cleaner, and certain local restaurants to
provide her with backdated receipts that she submits as part of her travel reimbursements. Upon
discovering the padded expenses, her boss terminates her employment. He also considers reporting her to
the CFA Institute Professional Conduct Program.
Did Wagner Violate the Standards? Is Her Boss Required to Report Her to CFAI PCP?
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
Deceptively filing false or misleading expense reports for personal gain is an act of dishonesty, which is
a violation of the Standards. While her boss is well justified in reporting her actions to the CFA Institute
Professional Conduct Program and is encouraged to do so, the Standards do not require him to file a
report.
Rationale
 Row B
report.
Rationale
 Row C
report.
Question 24
L1R03TB-BW004-1612
LOS: LOS-0030
Difficulty: medium
Anthony Lim, CFA, is working in the branch office of a U.S.-based investment company in Poland. Polish law
prohibits portfolio managers from accepting referral fees. Lim is a Chinese citizen, and in China, a portfolio
manager is not required to disclose referral fees. He has been offered a deal with a referral fee. Which
country's requirements should he follow?
China
Poland
CFA Institute
Rationale
 China
The first choice is incorrect.
Rationale
 Poland
The second choice is correct. Under Standard I (A) Knowledge of the Law, when applicable law and the
Code and Standards require different conduct, members and candidates must follow the stricter of the
applicable law or the Code and Standards. In this case, Polish law is the strictest.
Rationale
 CFA Institute
The third choice is incorrect. CFA Code and Standards allow members to accept referral fee as long as
he/she properly discloses it.
Question 25
L1R02TB-AC114-1512
LOS: LOS-0040
Difficulty: medium
Lyle Kent is a broker at Jackson & Phax (J&P), a discount brokerage firm that is expanding into research and
asset management services. In an effort to generate business for the new units, J&P is offering an employee
incentive of $500 for each new client referral from the brokerage unit that signs on with the asset
management group. Kent has made several successful referrals in the first month without disclosing the
incentive program. Did Kent violate the Standards of Professional Conduct?
Yes.
No, because the referral was directed toward his own firm.
No, because the bonus is part of his employment compensation.
Rationale
 Yes.
The Standard does not prohibit referral fees or arrangements but requires that they be disclosed before
entering into a service agreement so that the client can make an informed judgment as to the
motivations of the providers.
Rationale
 No, because the referral was directed toward his own firm.
Rationale
 No, because the bonus is part of his employment compensation.
Question 26
L1R02TB-AC087-1512
LOS: LOS-0030
Difficulty: medium
Richard Pulaski is an equity research analyst who wants to purchase shares in Technical Enterprises for his
personal account. His supervisor has also asked him to write a recommendation for the stock, but Pulaski is
concerned that the firm's reaction to his recommendation will drive up the share price. According to the
Standards of Professional Conduct, Pulaski must:
purchase shares for his personal account before making the recommendation.
purchase shares for his personal account after making the recommendation.
refrain from ever purchasing any shares for his personal account.
Rationale
 purchase shares for his personal account before making the recommendation.
The Standard requires that members place the interests of their clients first, their employers second,
and then their own last. Pulaski, while not prohibited from investing alongside his clients or employer,
must first satisfy their entire orders before purchasing shares for himself.
Rationale
 purchase shares for his personal account after making the recommendation.
Rationale
 refrain from ever purchasing any shares for his personal account.
Question 27
L1R02TB-AC046-1512
LOS: LOS-0030
Difficulty: medium
Rajif Singh is a salesman at Crimson Associates, a small brokerage firm. A&R Corporate Finance provides
investment banking services to middle-market firms in the Midwest. The managing partner at A&R contacted
Singh and offered to provide referrals and prospective client lists if Crimson's brokers would promote an
A&R client's latest issue. According to the Standards of Professional Conduct, may Singh accept such a
proposal?
Yes, provided he discloses the arrangement to his clients and employer.
Yes, because the arrangement does not include a monetary incentive.
No, because arrangement creates an obvious conflict of interest.
Rationale
 Yes, provided he discloses the arrangement to his clients and employer.
The Standard does not categorically prohibit referral fees or arrangements. However, such potential or
perceived conflicts must be disclosed.
Rationale
 Yes, because the arrangement does not include a monetary incentive.
Rationale
 No, because arrangement creates an obvious conflict of interest.
Question 28
L1R02TB-AC066-1512
LOS: LOS-0040
Difficulty: medium
Jim Soltis, a CFA candidate, is an investment banker working on an initial stock offering for ChemCo. After
filing a prospectus with the governing regulatory agency, ChemCo's CFO informs him that the income
statement in the filed report slightly overstated the last two quarters' earnings. Soltis consults with his firm's
legal department. The general counsel advises that the error is minor and the result of a relatively obscure
accounting rule that will likely go unnoticed. Furthermore, even if detected, it will only require a restatement
of the last two quarters. Therefore, the attorney instructs Soltis to let it go, which he does. Did Soltis violate
the Standards of Professional Conduct?
No, because he is following legal advice of competent counsel.
No, because he was unaware of the error at the time he filed the report.
Yes, because seeking legal counsel does not remove his duty to correct the error.
Rationale
 No, because he is following legal advice of competent counsel.
While the Standards do advise seeking the advice of legal counsel, doing so does not remove the
responsibility for ensuring that all communications are true and accurate. Soltis should file a revised
prospectus and inform any prospective investors of the corrected report.
Rationale
 No, because he was unaware of the error at the time he filed the report.
Rationale
 Yes, because seeking legal counsel does not remove his duty to correct the error.
Question 29
L1ET-TBB211-1412
LOS: LOS-0050
Difficulty: medium
When disassociating oneself from activities that are in violation of the Standards of Professional Conduct,
which of the following is not a requirement for charterholders?
Document the violation.
Urge the perpetrator(s) to stop the violation.
Resign your position.
Rationale
Only in extreme circumstances may a charterholder be required to resign their position. It is not an
automatic requirement of disassociating oneself from ethical violations.
Question 30
L1R02TB-AC119-1512
LOS: LOS-0030
Difficulty: medium
Martha Graham was an investment banker and CFA charterholder for 10 years before she was asked to join a
political campaign. After her team won the election, she joined the administration of the new official. During
that period, she allowed her membership in CFA Institute to lapse. Two years later, she returned to banking.
According to the Standards of Professional Conduct, Graham may resume using the CFA designation:
immediately upon her return by sending a dues payment to CFA Institute.
only after paying dues and filing her Professional Conduct Statement.
only after paying dues and passing CFA Institute's reinstatement exam.
Rationale
 immediately upon her return by sending a dues payment to CFA Institute.
Standard VII(B) stipulates that when a member allows their membership to lapse, they may not use the
CFA designation until they have resumed paying dues, filed their Professional Conduct Statement, and
completed the CFA Institute reinstatement procedures.
Rationale
 only after paying dues and filing her Professional Conduct Statement.
Rationale
 only after paying dues and passing CFA Institute's reinstatement exam.
Question 31
L1R02TB-AC055-1512
LOS: LOS-0040
Difficulty: medium
Lisa Koch, CFA, is the managing partner of an investment banking firm specializing in underwriting debt
instruments. Her firm has underwritten a mortgage-backed issue that is over-weighted with subprime loans.
Recent changes in the credit markets have significantly increased the risks of such issues, and Koch's firm
may suffer significant losses if it does not sell off the bonds. Koch meets with the directors of sales and
research to coordinate an effort to push the bonds to the firm's investment clients. As a result of the sales
strategies discussed with Koch, the director of research, Ken Jones, instructs his analysts to portray the issue
in the most attractive terms possible. Which of the following likely violated the Standards of Professional
Conduct?
Koch Jones
A. Yes No
B. No Yes
C. Yes Yes
Row A
Row B
Row C
Rationale
 Row A
Both Koch and Jones are conspiring to misrepresent the quality of the issue. Selling the bonds is not a
violation in and of itself. But, the risks must be properly disclosed and the issue should only be offered
to investors for whom it is suitable.
Rationale
 Row B
Rationale
 Row C
Question 32
L1R02TB-AC107-1512
LOS: LOS-0040
Difficulty: medium
Lisa Thyme is vice president of research at Global Equity Insights. One of her staff analysts, Chad King, has
been following Magic Tracks, a bicycle manufacturer involved in a major product liability lawsuit. King
prepares a flash memo stating that a “confidential source” informed him that the plaintiff has irrefutable
evidence that Magic's product was dangerously defective. With the trial scheduled to begin the next day,
Thyme immediately approves the memo for distribution to clients without further inquiry. Did Thyme violate
the Standards of Professional Conduct?
No.
Yes, by not waiting for the evidence to be presented at trial.
Yes, by not evaluating the source of the information.
Rationale
 No.
Without confirming the source of the information, Thyme is effectively authorizing a rumor to be
spread that might or might not prove to be accurate. She must identify the source in order to ascertain
credibility of the information and to determine whether the information qualifies as material and
nonpublic, in which case it may not be disseminated.
Rationale
 Yes, by not waiting for the evidence to be presented at trial.
Rationale
 Yes, by not evaluating the source of the information.
Question 33
L1R02TB-AC117-1512
LOS: LOS-0030
Difficulty: medium
Nicole Plott is a hedge fund manager specializing in biotechnology companies. She subscribes to a service
that describes itself as an expert network. The service provides information about what biotech firms are
working on, what pharmaceutical companies are looking for, and technical developments in the industry.
Plott has taken a large position in Beta Miracle Cures (BMC) whose latest cancer drug is in final trials with the
federal drug agency. Plott calls her contact at the expert network, Charles Tucker, to get his opinion and is
told, “… the federal agency did not approve the drug, but BMC is appealing for more time. Get out now
before they announce it. The new drug is dead.” With respect to the Standards of Professional Conduct,
Plott's best course of action is to:
sell all her shares in BMC as advised by Tucker.
hold all her shares until the federal agency announces its findings.
make further inquiry into the source of the information provided by Tucker.
Rationale
 sell all her shares in BMC as advised by Tucker.
Plott must be careful in utilizing the services of expert networks. If the information Tucker provided is
an opinion based on expert conjecture, it does not likely violate Standard II(A). If, however, the source
is someone directly involved in the drug trials, the regulatory agency, or management of the company,
trading on the information is likely a violation.
Rationale
 hold all her shares until the federal agency announces its findings.
Rationale
 make further inquiry into the source of the information provided by Tucker.
Question 34
L1R02TB-AC045-1512
LOS: LOS-0030
Difficulty: medium
Kevin Chou is a research analyst with Global Partners. The research department consists of fifteen analysts
and supervisors. After issuing a strong buy rating on Alpha Corp, Chou purchased a significant number of
shares in Alpha for his personal account. Several weeks later he is asked to write a follow-up report for
Alpha. According to the Standards of Professional Conduct, Chou's best course of action is to:
Disclose his ownership to his employer and write an unqualified report.
Ask that another analyst be assigned to write the report.
Refuse to write the report due to a beneficial ownership conflict.
Rationale
 Disclose his ownership to his employer and write an unqualified report.
The Standard recommends that the best way to deal with conflicts is to avoid them. Given that his
initial report was written without a conflict and another staff analyst could write the new report, Chou's
best course of action is to request to be recused from writing it.
Rationale
 Ask that another analyst be assigned to write the report.
Rationale
 Refuse to write the report due to a beneficial ownership conflict.
Question 35
L1R02TB-AC113-1512
LOS: LOS-0030
Difficulty: medium
Ricardo Vaughn is a portfolio manager for Brilliant Asset Management (BAM). One of his accounts is owned
by his parents. Vaughn's sister is named as a beneficiary on the account, but Vaughn is not. BAM has an
opportunity to participate in an oversubscribed IPO that is appropriate for his parent's portfolio. According
to the Standards of Professional Conduct, Vaughn's best course of action is to:
allocate shares to his parent's account only after other client accounts.
allocate shares to his parent's account concurrently with other client accounts.
allocate no shares to his parent's account to make them available to other clients.
Rationale
 allocate shares to his parent's account only after other client accounts.
The Standard defines beneficial interest as accounts owned by the member, his or her spouse,
children, and immediate family members residing with him or her. Family client accounts are any that
are owned by family relatives that do not meet the preceding characteristics. Family client accounts
should be neither advantaged nor disadvantaged because of the familial relationship. Therefore,
Vaughn's parent's account should be allocated concurrently with the rest of his clients.
Rationale
 allocate shares to his parent's account concurrently with other client accounts.
Rationale
 allocate no shares to his parent's account to make them available to other clients.
Question 36
L1ETR02-LIC002-1510
LOS: LOS-0040
Difficulty: medium
Which of the following is least likely to be an example of market manipulation according to the Code and
Standards?
Taking advantage of market inefficiencies to make profits on arbitrage strategies.
Agreeing to issue stock in an IPO to market participants if they commit they will generate
turnover in the stock subsequent to listing.
Purchasing leading stocks in an index just prior to the expiry date of futures contracts on the
index in order to make a profit on a long position in the index futures contract.
Rationale
Market manipulation is artificially creating stock market prices or volumes. Arbitrage strategies are not
a form of manipulation, since they are taking advantage of pricing inefficiencies existing in the market,
and are a legitimate practice.
Question 37
L1R02TB-AC060-1512
LOS: LOS-0030
Difficulty: medium
Pedro Ochoa prepares the performance reports for Sociedad del Mundo (SM). The firm recently lost a major
client who took its portfolio to another firm after poor performance. SM's executive manager replaced the
portfolio manager responsible for the underperformance and asked Martinez to remove the terminated
portfolio from its composite for reporting purposes. According to the Standards of Professional Conduct,
Ochoa's best course of action is to:
refuse to remove the terminated portfolio from the composite.
remove the terminated portfolio from the composite as instructed.
move the terminated portfolio to another composite as a compromise.
Rationale
 refuse to remove the terminated portfolio from the composite.
Members may be pressured to compromise their independence and objectivity from within their
organizations. Standard I(B) mandates that they resist these influences. Removing the terminated
portfolio would misrepresent the actual historic performance of the firm. Fairness and complete
disclosure demands that composites include all their constituent portfolio's track records.
Furthermore, shifting portfolios between composites distorts this record by altering their performance
after the fact.
Rationale
 remove the terminated portfolio from the composite as instructed.
after the fact.
Rationale
 move the terminated portfolio to another composite as a compromise.
after the fact.
Question 38
L1R02TB-AC080-1512
LOS: LOS-0030
Difficulty: medium
Pepper Tibbs is a portfolio manager with Albacor Asset Management. One of her wealthy clients, Walter
Parks, offers to pay Tibbs a bonus if his portfolio outperforms the S&P 500 index return by more than five
percent in any given year. According to the Standards of Professional Conduct, Tibbs may accept the offer if
she obtains written consent from:
Albacor All Her Clients
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
Receiving a bonus payment from a client can create a conflict of interest by encouraging preferential
treatment. Members are not prohibited from accepting bonus incentives from clients but must first
obtain written consent from their supervisors.
Rationale
 Row B
Rationale
 Row C
Question 39
L1R02TB-AC090-1512
LOS: LOS-0040
Difficulty: medium
Maria Gomez, CFA, is the marketing director for Regal Asset Managers (RAM). She is reviewing a promotional
brochure for an upcoming conference and exhibition. The brochure highlights the fact that all four of the
firm's portfolio managers are charterholders who passed the three exams in succession on their first
attempts. It goes on to imply that this achievement will ensure RAM's funds will perform in the top of their
peer groups. Is the brochure compliant with the Standards of Professional Conduct?
Yes.
No, it may not make reference to the fact that RAM's managers passed on the first attempt.
No, because it implies that its CFA charterholders will achieve superior investment returns.
Rationale
 Yes.
Standard VII(B) allows members to make statements of fact as to their participation in the CFA Program
but prohibits implying that investors can expect superior investment performance by virtue of the CFA
designation. The implication that passing the exams on the first attempt somehow makes one charter
more valuable than another is also a violation of this Standard.
Rationale
 No, it may not make reference to the fact that RAM's managers passed on the first attempt.
Rationale
 No, because it implies that its CFA charterholders will achieve superior investment returns.
Question 40
L1ET-TBPI04-1503
LOS: LOS-0040
Difficulty: hard
Barino Financial Services Inc., an investment consulting firm, makes investment recommendations through
various business publications. Sam Patrick, Barino's chief investment analyst, was working on a report in
which he included analysis developed by Bryan Corp., another consulting firm, and used a model developed
by Syed Pasha, an employee of Barino Financial Services Inc. Sam did not give credit to both Bryan Corp. and
Syed for the report. Sam has violated:
Standard I(C), as he did not give credit to Bryan Corp.
Standard I(D), as he did not give credit to both Bryan Corp. and Syed.
Standard I(C), as he did not give credit to both Bryan Corp. and Syed.
Rationale
Sam has violated Standard I(C) pertaining to plagiarism, as he did not give credit to Bryan Corp. Sam
need not give credit to Syed's work, as Syed is an employee of Barino Financial Services Inc.
Question 41
L1ET-PQ0204-1410
LOS: LOS-0050
Difficulty: medium
Which of the following policies most closely adheres to the recommended procedures for compliance under
Standard I(B): Independence and Objectivity regarding gifts?
Analysts should reject all gifts from clients and related parties.
Analysts should disclose gifts from clients to their employer and receive only modest gifts
from related parties.
Analysts should disclose gifts from clients to their employer and reject all gifts from related
parties.
Rationale
Standard I(B): Independence and Objectivity recommends that gifts from clients be disclosed to
employers and that gifts from related parties be limited. Standard I(B) does not preclude customary,
ordinary business-related entertainment as long as its purpose is not to influence or reward members
or candidates. Firms should consider a strict value limit for acceptable gifts that is based on the local or
regional customs and should address whether the limit is per gift or an aggregate annual value.
Question 42
L1R02TB-AC092-1512
LOS: LOS-0040
Difficulty: medium
Paula Nye, CFA, is an investment banker in the corporate finance division of a larger brokerage firm. As part
of her sales presentation to Omega Consolidated seeking to underwrite their next securities issue, she
provides assurance that her firm's research department will provide full coverage of the company. Has Nye
violated the Standards of Professional Conduct by making such a pledge?
Yes, provided that the research reflects favorably on the company.
No, provided that the research is unbiased and reflects the analyst's true opinion.
No, provided that the research presents only factual information.
Rationale
 Yes, provided that the research reflects favorably on the company.
Nye may assure a company that it will provide coverage for the new issue, but she cannot guarantee
that the research will reflect positively on the company.
Rationale
 No, provided that the research is unbiased and reflects the analyst's true opinion.
Rationale
 No, provided that the research presents only factual information.
Question 43
L1R02TB-AC064-1512
LOS: LOS-0040
Difficulty: medium
Joanne Pang is part of a team that publishes research via a company blog. Access to the website is restricted
to subscribed users who pay for the team's recommendations. Pang also maintains a well-followed personal
blog apart from the team's website that mixes family news, reviews, and other opinions. Her personal blog is
not password-protected and is broadly accessible by any search engine. Pang often provides additional
commentary about the team's recommendations on her personal blog, especially when her opinion is
dissenting. Do Pang's posts to her personal blog violate the Standards of Professional Conduct?
No.
Yes, she should remove her name if she disagrees with team recommendations.
Yes, because she is misappropriating her firm's resources for personal benefit.
Rationale
 No.
Standard IV(A) was violated when Pang disclosed confidential information through her personal blog.
Her firm's blog is subscriber-based, while her personal blog is open-access. Furthermore, she has used
company research to prepare commentary on her personal blog. Finally, the firm's clients might not be
aware of Pang's personal blog, which provides additional information that they might want to know,
and her personal blog readers do not have access to the subscriber recommendation. They have no
means of comparing the two in order to make an informed judgment as to which is supported.
Rationale
 Yes, she should remove her name if she disagrees with team recommendations.
Rationale
 Yes, because she is misappropriating her firm's resources for personal benefit.
Question 44
L1R02TB-AC082-1512
LOS: LOS-0040
Difficulty: medium
Pam Jenell is a research analyst specializing in the highly fragmented business services industry. She
promised her supervisor that a comprehensive report would be completed in two weeks. Her firm uses a
complex statistical model to forecast sales. Because her department is understaffed and the forecast model
is labor-intensive, she models the three largest firms and forecasts the remaining firms' sales based on their
market caps relative to the largest firms. Later, she models all of the firms and sends out revised
recommendations. Did Jenell violate the Standards of Professional Conduct in preparing her report?
No.
Yes, she should have used the subject firms' management estimates.
Yes, she should have only included those firms that she could model.
Rationale
 No.
The release of incomplete analysis would constitute a violation of the Standard, particularly if the
report did not explain the preliminary nature of the results.
Rationale
 Yes, she should have used the subject firms' management estimates.
Rationale
 Yes, she should have only included those firms that she could model.
Question 45
L1ET-PQ0202-1410
LOS: LOS-0030
Difficulty: medium
Charles Baker uses Internet social media platforms to communicate with clients. He resides in a country with
no securities laws or regulations that address social media, and his clients are located in a country with less
strict securities laws and regulations regarding the use of social media than the Code and Standards. Baker
should adhere to:
the Code and Standards
the securities laws and regulations of the location of his client
the securities laws and regulations of his residence
Rationale
Members and candidates who practice in multiple jurisdictions may be subject to varied securities laws
and regulations. If applicable law is stricter than the requirements of the Code and Standards,
members and candidates must adhere to applicable law; otherwise, they must adhere to the Code and
Standards.
Question 46
L1R02TB-AC054-1512
LOS: LOS-0030
Difficulty: medium
Pedro Martinez is an analyst covering the communications industry. He visited the headquarters of Clam
Shell Cellular where the CEO demonstrated the key features of the company's sleek new cell phone design.
When asked about sales forecasts, the CEO would only state that “we're pleased with our initial sales
numbers.” Martinez also visited several retailers where he found that the phones were selling well and, in
some cases, on backorder. On a shopping trip to the local mall, he noticed quite a few teenagers with the
new Clam Shell phones. After performing fundamental analysis, Martinez decides that Clam Shell's next
quarter earnings will likely beat consensus estimates. Based on this information, can Martinez recommend
the stock as a “buy”?
No.
Yes, based on the mosaic theory.
Yes, based on the CEO's comments.
Rationale
 No.
The mosaic theory describes the accumulation of immaterial, nonpublic information to form a picture
of the potential of an investment. It is not predicated on any individual material fact or discovery that
was sourced from an insider.
Rationale
 Yes, based on the mosaic theory.
Rationale
 Yes, based on the CEO's comments.
Question 47
L1R02TB-AC077-1512
LOS: LOS-0040
Difficulty: medium
Patrick Shallet is an advisor to university endowments in assessing capital expenditures. One of the
universities he advises is considering a construction project to build a new biology lab. Part of Shallet's
analysis includes detailed plans for the land development and construction costs. At a dinner party, a
wealthy friend, Nancy Wang, mentions that she would like to make a donation to a university if she could
receive naming rights on a campus structure. Shallet shows Wang the cost estimates for the new biology lab
and suggests that she contact the university's board of directors regarding a donation. Did Shallet violate
the Standard of Professional Conduct?
Yes.
No, because he acted in his client's best interest.
No, because endowments are nonprofit entities.
Rationale
 Yes.
Shallet may not disclose financial details of the project to prospects without the consent of the
university. Although his intentions are good, his actions violate the Standard.
Rationale
 No, because he acted in his client's best interest.
Rationale
 No, because endowments are nonprofit entities.
Question 48
L1R03TB-BW001-1612
LOS: LOS-0030
Difficulty: easy
John Alley, CFA, routinely performs background checks on the job applicants with respect to their character
and past violation of laws. Alley has:
Violated the Code of Ethics.
Complied with Standard I (A).
Complied with Standard I (D).
Rationale
 Violated the Code of Ethics.
The first choice is incorrect. Background check is encouraged.
Rationale
 Complied with Standard I (A).
The second choice is incorrect. It is under Standard I (D) Misconduct, not Standard I (A) Knowledge of
the Law.
Rationale
 Complied with Standard I (D).
The third choice is correct. Background checks are encouraged for new hires to prevent general
misconduct under Standard I (D).
Question 49
L1R02TB-AC043-1512
LOS: LOS-0040
Difficulty: medium
Stephanie Boss is preparing a presentation of her firm's socially conscious equity composite (SCE) to
prospective clients. After reviewing the performance records of each portfolio in the composite, she notes
that two portfolios were terminated last year because of client redemptions following poor performance.
Boss includes those portfolios in the SCE performance history. She also found that several stocks eligible to
SCE's portfolios were found in portfolios contained in the firm's equity growth composite (EG). Since those
portfolios had above average returns and contained some stocks that would be eligible for inclusion, Boss
added them to the SCE composite performance record for her presentation. Did Boss violate the Standards
of Professional Conduct?
No.
Yes, by including terminated portfolios in the SCE composite's record.
Yes, by manipulating portfolios included in the SCE composite.
Rationale
 No.
The Standard requires that performance presentation be accurate and complete. Adding portfolios to
the SCE composite that were not part of the composite before the measurement period is a
misrepresentation of its performance.
Rationale
 Yes, by including terminated portfolios in the SCE composite's record.
Rationale
 Yes, by manipulating portfolios included in the SCE composite.
Question 50
L1R02TB-AC086-1512
LOS: LOS-0030
Difficulty: medium
Sydney Wicks is a fixed-income analyst with Consistent Capital. A colleague introduced him to commodity-
linked bonds as a means to enhance returns. Believing that his firm would not be interested in these
securities, he buys several for his personal account. Some months later, Wicks writes a report recommending
that his firm consider commodity-linked bonds for its clients and includes the issue he owns in a list of
potential investments. According to the Standards of Professional Conduct, Wicks must:
Disclose his beneficial ownership of the issue in the report.
Liquidate his positions prior to making any recommendations.
List his holdings in the next quarterly investment disclosure document.
Rationale
 Disclose his beneficial ownership of the issue in the report.
Wicks' ownership of bonds he includes in his recommendation creates the appearance of a conflict, at
the very least. Therefore, he must disclose his ownership interest in the report.
Rationale
 Liquidate his positions prior to making any recommendations.
Rationale
 List his holdings in the next quarterly investment disclosure document.
Question 51
L1ET-PQ0205-1410
LOS: LOS-0030
Difficulty: medium
Jim Wonder reads a study in a financial journal regarding the valuation of global equity markets, and wishes
to use information in the study in his own research. In order to avoid violating Standard I(C):
Misrepresentation, Wonder should attribute the information used in his report to
The financial journal
The original author of the study
Both the financial journal and the original author of the study
Rationale
According to Standard I(C): Misrepresentation, best practice would be either to obtain the complete
study from its original author and cite only that author or to use the information provided by the
financial journal and cite both sources.
Question 52
L1ET-TBB207-1412
LOS: LOS-0030
Difficulty: medium
Joanne works at the Waco Texas Trust Company and observes several things she knows are in violation of
both state law and CFA Standards. Under the Standards of Professional Conduct, what is she not required to
do?
Not participate in the violations.
Disassociate herself from the violations.
Report the violations.
Rationale
Joanne is not required to report the violation to the authorities or CFA Institute under the Standards of
Professional Conduct.
Question 53
L1R03TB-BW009-1612
LOS: LOS-0040
Difficulty: hard
Charles Marvel, CFA, is a research analyst covering Ruby Mining Inc., a gold mining company in Africa. Ruby's
major producing mine is located in a remote part of Congo, reachable in 12 hours by car from the nearest
airport. However, Ruby has a corporate helicopter that the company executive normally uses. Marvel
contacts Ruby's management to gather information on the company, and Ruby's CFO, Lily Redfox, invites
Marvel to visit its mine in Congo with her. Redfox offers to send the corporate helicopter to pick up Marvel
from the nearest airport and to fly him back in the evening. Marvel estimates that it would require three days
for him to complete the visit using commercial travel. If Marvel accepts Redfox's offer and makes the trip to
Ruby's mine in Congo using a corporate helicopter, Marvel
Is in violation of the Standards unless he discloses the use of the corporate helicopter in his
report on Ruby.
Is in violation of the Standards unless he reimburses Ruby for the use of the corporate
helicopter.
Is not in violation of the Code and Standards.
Rationale
 Is in violation of the Standards unless he discloses the use of the corporate helicopter in his
report on Ruby.
The first choice is incorrect. Disclosing the use of the corporate helicopter is not required.
Rationale
 Is in violation of the Standards unless he reimburses Ruby for the use of the corporate
helicopter.
The second choice is incorrect. Reimbursing the use of the corporate helicopter is not necessary.
Alhough it is not encouraged, reasonable travel cost covered by the company is allowed under
Standard I (B).
Rationale
 Is not in violation of the Code and Standards.
The third choice is correct. Standard I (B) states the responsibility of CFA Institute members to maintain
independence and objectivity so that their clients will have the benefit of their work and opinions
unaffected by any potential conflict of interest or other circumstance adversely affecting their
judgment. In this case, since the travel by car is so time consuming and the company CFO is going with
him, the ride on the corporate helicopter is reasonable as long as Marvel can maintain his objectivity.
Question 54
L1R02TB-AC058-1512
LOS: LOS-0050
Difficulty: medium
Jessica Brinson is the newly hired compliance officer at Alpha Investments. The firm has no formal
compliance system in place. As a first step in designing a compliance program at the firm, the Standards of
Professional Conduct recommended compliance procedure is to:
Establish a zero-tolerance policy for violating the CFA Standards of Professional Conduct.
Encourage executive management to develop a firm-wide code of ethics.
Report any prior violations to the CFA Professional Conduct Program.
Rationale
 Establish a zero-tolerance policy for violating the CFA Standards of Professional Conduct.
As a first step, members should encourage their employers to develop or adopt a firm-wide code of
ethics to serve as guiding principles for their compliance and general business practices. Members are
not required to promote the CFA Standards of Conduct specifically, but may recommend them as a
basis for their firm's ethical guidelines and procedures.
Rationale
 Encourage executive management to develop a firm-wide code of ethics.
Rationale
 Report any prior violations to the CFA Professional Conduct Program.
Question 55
L1R02TB-AC110-1512
LOS: LOS-0040
Difficulty: medium
Kevin Wang is a portfolio manager at A-Plus Advisors. He makes asset allocation decisions based on third-
party economic reports and the investment policy statements of each client. A-Plus maintains client records
by scanning documents into an electronic database and has a policy to purge records after five years. Wang
is diligent in ensuring that client investment policy statements are scanned but relies on third-party vendors
to archive economic reports. Did Wang violate the Standards of Professional Conduct with respect to:
Client Records? Economic Reports?
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
The Standard requires that Wang maintain his own records in support of his investment decisions. By
relying on the vendors to retain the economic reports, he has failed to meet his obligations under the
Standard. Storing client records in electronic forms is acceptable under the Standard. Only in the
absence of explicit company policies does the Standard recommend that records be retained for seven
years.
Rationale
 Row B
years.
Rationale
 Row C
years.
Question 56
L1R02TB-AC042-1512
LOS: LOS-0040
Difficulty: medium
Susan Jenkins is a portfolio manager for the Jenkins Large-Cap Value Fund. The fund's mandate states that
it will invest in large-cap, low P/E stocks with solid fundamentals. Jenkins feels that value stocks are
currently out of favor with the market and changes the fund's asset mix to include 30% growth stocks and
20% small-cap stocks. Over the next quarter, the fund's performance improves. Did Jenkins violate the
Yes.
No, because she improved the fund's performance.
No, because the deviation from the mandate is temporary.
Rationale
 Yes.
The Standard requires that asset managers adhere to their stated mandates. If Jenkins wants to
change the fund's stated focus, she must first advise her clients of the change so that they might make
an informed judgment as to whether the fund still suits their needs.
Rationale
 No, because she improved the fund's performance.
Rationale
 No, because the deviation from the mandate is temporary.
Question 57
L1R02TB-AC049-1512
LOS: LOS-0040
Difficulty: medium
Nancy Kraus is a Level III candidate. At the end of the morning session of the exam, the proctor announced
that the exam is over and all writing should immediately cease. Kraus had only just begun the final question
when her pen ran out of ink and she had to continue writing in pencil as quickly as she could. A nearby
proctor reminded her that time has been called and she should stop writing but had not yet collected Kraus'
answer booklet. Kraus continued writing until the booklet was collected. Did Kraus violate the Standards of
Professional Conduct?
No.
Yes, by writing an essay in pencil.
Yes, by writing past time was called.
Rationale
 No.
The exam center rules require that candidate follow the instructions of the proctors and to cease
writing in their exam booklets when time is called. By writing past time, Kraus took an unfair advantage
over other candidates who followed the rules.
Rationale
 Yes, by writing an essay in pencil.
Rationale
 Yes, by writing past time was called.
Question 58
L1R02TB-AC089-1512
LOS: LOS-0040
Difficulty: medium
Rita Ross serves as a member of the CFA Institute Council of Examiners and participates in a preview of the
CFA exam to be administered the following month. She is also a university professor with several students
planning to sit for the upcoming exam. One of her students is having difficulty memorizing a complex
formula, which unbeknownst to the student, will not appear on the exam. Ross advises the candidate that a
perfect score is not required to pass and that her time would be better spent on other areas of the
curriculum. Did Ross violate the Standards of Professional Conduct with her advice?
No.
Yes, because she gave an unfair advantage to her student.
Yes, because she is privy to the contents of the upcoming exam.
Rationale
 No.
The advice that Ross gave to her student was not particular to the content of the exam and, therefore,
did not endanger its integrity.
Rationale
 Yes, because she gave an unfair advantage to her student.
Rationale
 Yes, because she is privy to the contents of the upcoming exam.
Question 59
L1R02TB-AC094-1512
LOS: LOS-0040
Difficulty: medium
Sarah Write, CFA, is an independent equity research analyst operating an investment advisory website that
provides stock recommendations and reports. In addition to unsolicited research reports, Write also writes
issuer-paid reports for a flat fee. Although the issuer-paid reports do not disclose the contractual
relationship between Write and the subject company, her website user agreement includes the following
statement. “Certain research may be performed at the request of the issuer.” Did Write violate the Standards
of Professional Conduct?
Yes.
No, because she disclosed issuer-paid research in the user agreement.
No, because the Standards do not apply to Internet websites.
Rationale
 Yes.
The Standards do not prohibit issuer-paid reporting. However, providing such services creates a
potential conflict of interest. Analysts must take steps to preserve their independence and objectivity
by only accepting a flat fee. The relationship between the analyst and the issuer must be fully disclosed
in the report so that the reader may make an informed judgment as to its objectivity.
Rationale
 No, because she disclosed issuer-paid research in the user agreement.
Rationale
 No, because the Standards do not apply to Internet websites.
Question 60
L1R02TB-AC084-1512
LOS: LOS-0040
Difficulty: medium
Rodney Webber is a technology analyst with DAT Research. After accepting a position with one of DAT's
competitors, he realizes that he cannot take records of his past work to his new firm. While cleaning out his
old office, Webber empties the file cabinet containing those records into a waste bin for shredding. Did
Webber violate the Standards of Professional Conduct?
Yes.
No, because he did not take the records with him.
No, because his past work is no longer relevant.
Rationale
 Yes.
The records of Webber's past work belong to DAT Research. While it is a violation of the Standard for
him to take them, it is also a violation to destroy them without DAT's permission.
Rationale
 No, because he did not take the records with him.
Rationale
 No, because his past work is no longer relevant.
Question 61
L1R02TB-AC081-1512
LOS: LOS-0040
Difficulty: medium
Peter Griffin is a supervisory analyst in the research department at a brokerage firm. He is responsible for
reviewing subordinate analysts' reports prior to distribution to clients. Griffin maintains a weekly list of
companies with pending reports along with each analyst's proposed recommendation, which he posts on a
bulletin board outside his office. Unbeknownst to Griffin, employees from other departments became aware
of this list and have been trading both personal and client accounts based on the information contained on
the list. Did Griffin violate the Standards of Professional Conduct?
Yes.
No, because he is not responsible for employees he does not supervise.
No, because he is unaware of the trading activities of the employees.
Rationale
 Yes.
The Standard requires managers to take reasonable efforts to prevent and detect violations of
company policies, governing laws, and the Standards of Professional Conduct. Posting pending
recommendations outside his office is an obviously unsecured way to manage sensitive information.
Griffin should have anticipated that the information could be used by unauthorized persons.
Rationale
 No, because he is not responsible for employees he does not supervise.
Rationale
 No, because he is unaware of the trading activities of the employees.
Question 62
L1R03TB-BW008-1612
LOS: LOS-0050
Difficulty: medium
Which of the following is a violation of Standard I (D) Misconduct?
A member's investment recommendation on a few stocks has been wrong, and it has caused
clients' losses.
A member negotiates with his employer for a salary increase based on a job offer by a rival
firm.
An intoxicated CFA Level I candidate is removed from a restaurant for disturbing other
customers.
Rationale
 A member's investment recommendation on a few stocks has been wrong, and it has caused
clients' losses.
The first choice is incorrect. If the member's recommendation was made with a reasonable and
adequate basis, he would not violate any standards by being wrong.
Rationale
 A member negotiates with his employer for a salary increase based on a job offer by a rival
firm.
The second choice is incorrect. Requesting a salary increase does not affect his loyalty to the employer
as long as the member did not follow the Standard IV Duties to Employers.
Rationale
 An intoxicated CFA Level I candidate is removed from a restaurant for disturbing other
customers.
The third choice is correct. Public intoxication and disturbing other customers are considered activities
that reflect adversely on a member's professional reputation, integrity, or competence and therefore
violate Standard I (D) Misconduct.
Question 63
L1R02TB-AC093-1512
LOS: LOS-0030
Difficulty: medium
Leo Tang, CFA, is an independent research analyst that has been hired by Delta DotCom to produce a report
that the firm hopes will generate interest in its upcoming IPO. The firm offers Tang a flat fee to be paid when
he begins the project, plus an opportunity to participate in the IPO, and a small allotment of stock options.
According to the Standards of Professional Conduct, Tang should:
accept the fee, but decline the stock options and participation in the IPO.
accept the fee and the stock options, but decline participation in the IPO.
accept the stock options, but decline the fee and participation in the IPO.
Rationale
 accept the fee, but decline the stock options and participation in the IPO.
Conducting research paid by the subject firm is not a violation of the Standards. However, steps must
be taken to ensure the independence and objectivity of the report. The best practice is to accept flat
fee compensation without any conditions on the recommendations or analysis.
Rationale
 accept the fee and the stock options, but decline participation in the IPO.
Rationale
 accept the stock options, but decline the fee and participation in the IPO.
Question 64
L1R02TB-AC097-1512
LOS: LOS-0040
Difficulty: medium
Wendel Ross is an automotive analyst for a large brokerage firm. While having dinner at a fancy restaurant,
he recognized the chairman, CEO, and CFO of a major auto manufacturer seated at the next table. The
executives appeared to be celebrating, and Ross overheard the CFO quip that their new model's sales far
exceeded expectations. The CEO, Mark Riggins, remarked that the consensus earnings estimate is far too low
and that he expects this quarter to be the biggest surprise in the company's history. The next morning, Ross
made a substantial trade to acquire the automaker's shares. Did Ross violate the Standards of Professional
Conduct?
Yes.
No, because he owed no fiduciary duty to the automaker.
No, because he did not solicit the information.
Rationale
 Yes.
The Standard prohibits trading on material, nonpublic information regardless of how it was obtained.
Rationale
 No, because he owed no fiduciary duty to the automaker.
Rationale
 No, because he did not solicit the information.
Question 65
L1R02TB-AC116-1512
LOS: LOS-0040
Difficulty: medium
Kevin Ruhl is a technology-savvy broker who has embraced social media as a means of communicating with
clients and prospects. What started out as updates on personnel changes, special events, and articles of
interest has drifted toward solicitations for business and promotion of specific investments. The designated
regulatory agency for brokerage firms issued a new rule effective before Ruhl shifted his usage patterns that
strictly limit sales and marketing to investors via social media. The new rules were not well-publicized in the
major media and financial press. Ruhl's recent activities:
do not violate the Standards because the rule change has not been well-publicized.
violate the Standards because he is expected to be an expert in compliance.
violate the Standards because he is expected to inquire about those regulations prior to use.
Rationale
 do not violate the Standards because the rule change has not been well-publicized.
If Ruhl is going to use new technology in his business, there is an expectation that he will seek out
advice as to what the rules governing that technology might be and to stay abreast of changes to those
rules as the technology evolves. When technology is new, the rules governing it can change rapidly.
Standard I(A) implies that it is the member's responsibility to be particularly sensitive to staying
informed about them.
Rationale
 violate the Standards because he is expected to be an expert in compliance.
Rationale
 violate the Standards because he is expected to inquire about those regulations prior to use.
Question 66
L1ET-TBB217-1412
LOS: LOS-0030
Difficulty: medium
Steve Michael, CFA is having lunch with one of his friends at a local restaurant and overhears someone
talking about a pending merger for Pharmotech stock. Michael walks over to this person because he follows
this stock as well and knows nothing of a merger, only to find out it is the company's CEO making these
statements. Which of the following Standards of Professional Conduct applies to this situation?
Standard II(A)
Standard IV(A)
Standard V(A)
Rationale
Standard II(A) covers the ethical guidelines for disclosing material nonpublic information.
Question 67
L1ET-TBPI70-1503
LOS: LOS-0040
LOS: LOS-0050
Difficulty: hard
Chris Fernandez has been the leading analyst at Bright Consultancy Inc. Chris's boss, Sam Patrick, is very
pleased with Chris's performance, so he approved Chris's trip to Switzerland for research work on a pharma
company that was sponsored by the client. Chris accepts the offer gladly and completes his report. During
his visit he learns about a new drug the company is planning to launch within two years, and he publishes
this in his report before its official announcement is made. Which of the following is most accurate?
Chris has violated Standards I(B) and II(A), whereas Sam has violated standards related to
duties to employer.
Chris has violated Standard I(B), whereas Sam has not violated any standards.
Chris has violated Standards I(B) and II(A), whereas Sam has violated the standards related to
professionalism.
Rationale
Chris has violated Standard I(B) related to independence and objectivity by accepting the client-
sponsored trip that could possibly affect his research. He has also violated Standard II(A) by using
material nonpublic information about the launch of a new drug. Sam has violated standards related to
duties to employer by not being a vigilant supervisor, as he approved Chris's trip and his report.
Question 68
L1R02TB-AC105-1512
LOS: LOS-0040
Difficulty: medium
Allison Kinley is an analyst with Insight Research Associations (IRA). Kinley wants to start her own research
firm and is planning to leave IRA. She meets with her supervisor to discuss her resignation, but no
documentation of the meeting is produced. In anticipation of her departure, she copies several of the reports
that she authored for IRA and downloads a forecasting spreadsheet that she and a colleague at IRA had
developed. Did Kinley violate the Standards of Professional Conduct by:
Copying Reports? Downloading Spreadsheets?
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
The reports and spreadsheets that Kinley produced as an employee at IRA belong to the firm. If she
wishes to take them, she must first get her supervisor's consent. Kinley may recreate the reports and
spreadsheets from memory after departing the firm.
Rationale
 Row B
Rationale
 Row C
Question 69
L1ET-TBPI33-1503
LOS: LOS-0040
LOS: LOS-0050
Difficulty: hard
Floren Advisory Inc. issues marketing materials to its clients stating that it has a highly qualified research
team who are Chartered Financial Analysts (CFAs) and were educated at prestigious institutions. Currently,
most of its research members are not CFAs or educated at prestigious institutions, as many of the
researchers have left the firm. Which of the following actions will least likely result in a violation of
standards?
Floren need not disclose the qualifications of the research team to the prospective clients, as
the respective researchers are ex-employees of the firm.
Floren should disclose the qualifications of the research team to the prospective clients after
they invest with the firm.
Floren should disclose the qualification of the research team to the prospective clients before
they invest with the firm.
Rationale
Floren Advisory will violate Standard I(C) related to misrepresentation if it does not disclose the
qualifications of the research team to the prospective clients before they invest with the firm.
Question 70
L1R02TB-AC095-1512
LOS: LOS-0030
Difficulty: medium
Rafi Binder is an oil industry analyst at a brokerage firm. He recently read an article in the Wall Street Journal
describing a research study that analyzed global oil reserves. Binder thinks this study would provide insight
into the long-term movement of oil prices and wants to quote the study in a research report he is preparing.
Using the Journal article to identify the author as Dr. Rangoon of State University, Binder obtained a copy of
the original research study and used several excerpts in his oil industry report. In citing the source of the
excerpts, Binder must credit:
Wall Street Journal The Original Study
A. Yes No
B. No Yes
C. Yes Yes
Row A
Row B
Row C
Rationale
 Row A
Binder must give credit to the original author of the study. Simply because he first learned of the study
in the Wall Street Journal does not require him to cite it as a source.
Rationale
 Row B
Rationale
 Row C
Question 71
L1R02TB-AC071-1512
LOS: LOS-0040
Difficulty: medium
Paula Kester is the controller for a small manufacturing company, Gizmo Mfg., which trades on the pink
sheets. One of the firm's competitors approached Gizmo's CEO with an offer to purchase the company at a
substantial premium to its current market price. Kester mentioned in confidence to her sister, Marie, that she
is concerned about losing her job after the takeover. Marie shared those concerns with Becker, her husband
and a stockbroker, who began accumulating shares of Gizmo stock for himself and advising certain clients to
do the same. Did Kester or Becker violate the Standards of Professional Conduct?
Kester Becker
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
The Standard prohibits members from trading or encouraging others to trade on material, nonpublic
information. The information about the potential acquisition is both material and nonpublic. However,
Kester did not share the information with her sister with the intent to encourage her to trade, only to
express concern over her employment situation. Nor was it reasonable to foresee that it would be
shared with anyone else. Becker knew or should have known that the offer was nonpublic, making his
actions a violation of the Standard.
Rationale
 Row B
Rationale
 Row C
Question 72
L1R02TB-AC073-1512
LOS: LOS-0030
Difficulty: medium
Susan Jackson manages the pension fund for Elgin Manufacturing. Elgin's management is concerned about
the rising pension expense of the underfunded plan. The company's CFO suggests that Jackson add riskier
assets to the portfolio in the hopes of increasing the return and reducing the firm's pension expense. Based
solely on this request, should Jackson increase the risk profile of the plan assets?
Yes.
No, because short-term volatility is bad for pension plans.
No, because her fiduciary duty is owed to the plan beneficiaries.
Rationale
 Yes.
Members must know their fiduciary duties and to whom they are owed. As plan manager, Jackson
owes a fiduciary duty to the plan beneficiaries (employees) and not the plan sponsor (Elgin). Increasing
the plan's risk profile might benefit Elgin in the short-term through lower pension expense, but it might
also risk the plan's long-term soundness to the detriment of the beneficiaries by exacerbating the
underfunded status.
Rationale
 No, because short-term volatility is bad for pension plans.
underfunded status.
Rationale
 No, because her fiduciary duty is owed to the plan beneficiaries.
underfunded status.
Question 73
L1R02TB-AC109-1512
LOS: LOS-0040
Difficulty: medium
Mary Kline is a technology analyst appearing on an investing television show. During an interview with the
show's host, Kline makes the following statements.
Statement 1: “Online advertising revenue will grow at 30 percent for the foreseeable future, which
means the earnings multiples of this sector are way too low.”
Statement 2: “Traditional players, like Microsoft, are likely to continue to acquire Internet companies.
If that plays out, the entire sector could get an additional boost in prices.”
Taken in isolation, does either of these statements violate the Standards of Professional Conduct?
Statement 1 Statement 2
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
The Standard requires members to clearly distinguish fact from opinion. Statement 1 claims that
advertising will grow and multiples are too low, which are opinions. However, they are stated as
unqualified facts. Statement 2 proposes that traditional players are likely to continue acquisitions and
this activity might cause prices to rise. The use of contingent statements implies that these are
opinions.
Rationale
 Row B
opinions.
Rationale
 Row C
opinions.
Question 74
L1ETR02-LIC011-1510
LOS: LOS-0030
Difficulty: medium
The fixed-income corporate finance department of Golden Brothers, an investment banking firm, has
decided to compete for the advisory and underwriting bond offering of Kia Telcom, a “hot”
telecommunications company. The firm's equity brokerage unit is about to publish a “sell” recommendation
on Kia Telcom due to an unexpected announcement of cost overruns. The head of fixed-income investment
banking has asked the head of the equity brokerage unit to change the recommendation from “sell” to “buy”
before distributing the research report to clients. According to the Code and Standards, the best course of
action for the equity brokerage unit is to:
Place Kia Telcom on a restricted list and publish only factual information about the company.
Assign a more senior analyst to decide if the stock deserves a higher rating for the sake of
objectivity since less senior analysts may err in judgment.
Increase the rating by no more than one increment (in this case, to a “hold” recommendation)
since little harm is done by being a bit more positive, while the firm's overall interest is served.
Rationale
In this case, any action to accommodate the interest of the investment banking department that may
compromise the independence and objectivity of the brokerage research efforts can violate Standard
I(B) and the Code of Ethics.
Question 75
L1ET-PQ0206-1410
LOS: LOS-0040
Difficulty: medium
All of the following are considered acts of plagiarism under Standard I(C): Misrepresentation except:
Verbally repeating a quote of a leading industry expert in an online webcast without
attribution
A firm using work completed by analysts who subsequently left the firm without attributing
the work to the analysts
An analyst reissuing work solely under his or her name that was initially completed by
analysts who previously worked at the firm
Rationale
Standard I(C): Misrepresentation applies to verbal statements and those made on Internet platforms.
Work completed by employees is the property of the firm and the firm retains the right to continue
using the work completed after a member or candidate has left the organization. The firm may issue
future reports without providing attribution to the prior analysts. A member or candidate cannot,
however, reissue a previously released report solely under his or her name.
Question 76
L1R02TB-AC098-1512
LOS: LOS-0040
Difficulty: medium
Sandy Dixon is a portfolio manager for a major manufacturer's pension fund. Two years ago she began
accumulating shares in AccuTech based on favorable recommendations from several analysts. After
completing the fund's large position, she advised several friends and family members to also buy shares.
Based on more recent reports provided by third-party analysts, Dixon decides to sell the fund's entire
holding in AccuTech very quickly. Realizing that the large block sale would likely have a detrimental effect on
the stock price and because the smaller holdings are unlikely to impact the price, she advises her friends and
family to liquidate their positions ahead of the fund's imminent sale. Did Dixon's recommendations violate
the Standards of Professional Conduct with respect to the:
Buy Sell
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
In the first instance, Dixon purchased the entire allotment of shares for the fund and then
recommended it to others. Any impact from her fund's trading into the position would have already
been reflected in the price of the shares. In the second instance, Dixon advises others to exit the stock
ahead of the fund's trades. This is tantamount to front-running where her friends and family will
benefit from exiting their positions before the price impact of the fund's trades are reflected. However,
the fund will likely receive a lower average price for its shares because of the price impact from the
other trades.
Rationale
 Row B
other trades.
Rationale
 Row C
other trades.
Question 77
L1R02TB-AC079-1512
LOS: LOS-0040
Difficulty: medium
Oscar Vansant is a portfolio manager with Starstruck Asset Managers (SAM). After being recruited by a
competing firm, he resigns without a non-competition agreement. Upon beginning work at his new firm,
Vansant solicits business from his former employer's clients using the telephone numbers he can recall and
on-line business directories. Did Vansant violate the Standards of Professional Conduct?
No.
Yes, because all client contact information belongs to SAM.
Yes, because recollection stems from his employment at SAM.
Rationale
 No.
Upon exiting an employment relationship, members must adhere to any noncompetition agreements.
In the absence of one, members must refrain from taking any data, materials, contact lists, or
proprietary methods from their former employer without first getting permission. However, the
member's skills and memory are his own. Therefore, rebuilding, reconstructing, or seeking information
through other means are not violations of the Standard.
Rationale
 Yes, because all client contact information belongs to SAM.
Rationale
 Yes, because recollection stems from his employment at SAM.
Question 78
L1ET-PQ0201-1410
LOS: LOS-0030
Difficulty: medium
Tom Gerten is a research analyst who has reasons to believe that ongoing employer activities are in violation
of CFA Institute Standards of Professional Conduct. Gerten's initial response should be to:
Report his suspicions to the relevant regulatory body
Report his suspicions to his supervisor or compliance department
Resign his position at the firm in order to dissociate from the activity
Rationale
Standard I(A): Knowledge of the Law recommends that members and candidates take the following
intermediate steps to dissociate from ethical violations of others when direct discussions with the
person or persons committing the violation are unsuccessful. The first step should be to attempt to
stop the behavior by bringing it to the attention of the employer through a supervisor or the firm's
compliance department. If this attempt is unsuccessful, then members and candidates have a
responsibility to step away and dissociate from the activity. Resignation of their position should be
considered as a last resort.
Question 79
L1ETR02-LIC004-1510
LOS: LOS-0040
Difficulty: medium
According to the Standards of Professional Conduct, when writing material for circulation to the public:
Members may copy or use charts or graphs without stating the sources and members may
orally, for example, in a group meeting, without acknowledgment, use excerpts from articles
or reports prepared by others.
Members may not copy or use charts or graphs without stating the sources, but members may
orally, for example, in a group meeting, without acknowledgment, use excerpts from articles
or reports prepared by others.
Members may not copy or use charts or graphs without stating the sources and members may
not orally, for example, in a group meeting, without acknowledgment, use excerpts from
articles or reports prepared by others.
Rationale
Standard I(C) prohibits plagiarism, whether it is a written or oral form of communication of another's
work. Other parties' research (charts, graphs, articles, reports, etc.) may be quoted, but the research
must be attributed to the original author.
Question 80
L1ET-PQ0208-1410
LOS: LOS-0050
Difficulty: medium
Which of the following statements clearly conflicts with the recommended procedures for compliance with
Standard I(D): Misconduct?
Firms should develop a code of ethics that makes it clear that personal behavior that reflects
poorly on the individual, the institution, or the industry will not be tolerated.
Firms should not attempt to list potential violations and sanctions due to the difficult nature
of capturing the wide variety of misconduct possible at modern financial institutions.
Firms should check the references of individuals to ensure they are of good character and not
ineligible to work in the industry due to past misdemeanors.
Rationale
Standard I(D) recommends that firms disseminate to all employees a list of potential violations and
associated disciplinary sanctions, up to and including dismissal from the firm.
Question 81
L1ETR02-LIC007-1510
LOS: LOS-0040
Difficulty: medium
Kevin Dudman, CFA, has just been offered an exciting new position with Walton Asset Management and
decides that he will resign from his current position with Trust Asset Management. Before he resigns, he
decides to ensure that he can use some of the skills and materials he has developed at Trust Asset
Management. He is least likely to violate the Code and Standards if he takes:
Internal contact information on Trust Asset Management's major clients.
Stock market analysis prepared by Dudman when he was working at Trust Asset Management.
Experience in pricing unlisted securities, which he gained while attending training courses
that were paid for by Trust Asset Management.
Rationale
Client contact details should not be taken from his employer, although he is not prohibited from
collecting client information from outside sources. Models and research that he worked on when
employed by Trust Asset Management belong to Trust Asset Management (unless there is a specific
arrangement that states otherwise). However, skills and experience gained at Trust Asset Management
can be used in his new job, so the third choice is the correct answer.
Question 82
L1ET-TBPI36-1503
LOS: LOS-0040
LOS: LOS-0050
Difficulty: hard
Telthion Corp. is planning to raise funds by issuing bonds in China. Craig Drucker, CFO of Telthion Corp.,
contacts Chin Yang, the manager of a rating agency in China, to rate the bond. Chin informs Craig that the
bond will be given a rating of BBB, a less favorable rating, as Telthion's financial position is not strong. Craig
offers a deal to Chin, informing him of some of the accounting assumptions to meet the financial
requirements for a better rating and agreeing to pay a higher commission to Chin. Which of the following
actions of Chin will not violate the standards?
Chin accepts the deal based on current financial statements and offers an AAA rating.
Chin accepts the deal based on current financial statements and offers a BBB rating.
Chin accepts the deal based on current financial statements and negotiates for an AAA rating.
Rationale
Chin should accept the deal based on current financial statements and give a rating that reflects the
actual status of the company. Otherwise, his opinion will not be independent and will mislead the
market. He will be violating Standard I(B) related to independence and objectivity.
Question 83
L1R02TB-AC061-1512
LOS: LOS-0040
Difficulty: medium
Richard Pyncus is the sales manager for Longman Asset Management (LAM), which manages a family of
mutual funds. One fund, Rainbow Long-Only I (aka Rainbow I), recently broadened its mandate to allow for
the use of leverage. Although he knew some were out of date, Pyncus distributed “summary sheets” to his
salesmen on all LAM's funds, including Rainbow I. The sheet for Rainbow I listed its lack of leverage among
its characteristics. Did Pyncus violate the Standards of Professional Conduct?
Yes.
No, because the salesmen are expected to advise clients about the change.
No, as long as the next printing of the summary sheets includes updated information.
Rationale
 Yes.
Standard I(C) is violated when Pyncus provides information for dissemination to clients that
misrepresented the characteristics of LAM's funds. Misstating the use of leverage in Rainbow I neglects
to alert clients to the increased risk of holding this fund. At the very least, Pyncus must point the
discrepancy out to his salesmen and advise them to explain the change, as well as its significance, to
clients and prospects before allowing them to invest in Rainbow I.
Rationale
 No, because the salesmen are expected to advise clients about the change.
Rationale
 No, as long as the next printing of the summary sheets includes updated information.
Question 84
L1ET-TBPI06-1503
LOS: LOS-0040
Difficulty: hard
An analyst, William Duff, at Reed Consultancy Inc.—a metallurgical research firm—plans to visit a mining site
owned by Auro Minerals Inc. The mining site is inaccessible through commercial transportation, so Auro
management offered William the use of the corporate jet for transportation. Which of the following
statements is most accurate about William's decision?
Statement I: William cannot accept the offer, as he will violate Standard I(B) related to independence
and objectivity.
Statement II: If William pays for the transportation, he will violate Standard I(B) related to
independence and objectivity.
Statement III: William can accept the offer, as this is the only means of transportation to the site; he
will not violate Standard I(B) related to independence and objectivity.
Statement I.
Statement II.
Statement III.
Rationale
William can accept the offer as this is the only means of transportation to the site. Also, he can accept if
his firm is paying for the transportation; he will not violate Standard I(B) related to independence and
objectivity.
Question 85
L1ET-TBX112-1502
LOS: LOS-0040
Difficulty: medium
Jack Thomas, an investment advisor in the United States, has clients in an Asian country where the securities
laws are less strict than U.S. laws. Assuming U.S. laws are stricter than the Code and Standards, Thomas
should conduct his business according to:
the laws in the Asian county.
the Code and Standards.
U.S. laws.
Rationale
Jack should conduct his business according to U.S. laws. According to Standard I(A) pertaining to
knowledge of law, members and candidates should always adhere to the strictest rules that are
applicable to the business activities.
Question 86
L1R03TB-BW002-1612
LOS: LOS-0050
Difficulty: easy
Employees need not report to their employers the receipt of _____ as a gift from clients.
A set of golf clubs
A tote bag with the client's logo
A one-week Caribbean cruise
Rationale
 A set of golf clubs
The first choice is incorrect. It may impact the employees' independency and objectivity.
Rationale
 A tote bag with the client's logo
The second choice is correct. Token items are allowed as long as it does not affect members'
independency and objectivity under Standard I(B).
Rationale
 A one-week Caribbean cruise
The third choice is incorrect. It may impact the employees' independency and objectivity.
Question 87
L1R02TB-AC040-1512
LOS: LOS-0030
Difficulty: medium
James Brungo is a portfolio manager with Harvest Advisors. He has one large client portfolio and several
small client accounts. Advantage Brokers offers to provide commission-free trades for his large client
account if he places all trades from the smaller accounts through them. Brungo believes that this will
enhance the returns for his large client, ensuring he retains it and possibly attracts more large clients.
Advantage has higher than average transaction fees and does not provide research services. May Brungo
enter this arrangement with Advantage?
Yes.
No, because Advantage does not provide research.
No, because it is unfair to the smaller clients.
Rationale
 Yes.
Brungo cannot enter an arrangement that disadvantages certain clients to the benefit of others. To do
so is effectively a transfer of wealth from one group to another.
Rationale
 No, because Advantage does not provide research.
Rationale
 No, because it is unfair to the smaller clients.
Question 88
L1R02TB-AC104-1512
LOS: LOS-0040
Difficulty: medium
Lyndon Price is a financial planner advising private wealth clients. One of his clients, Shaun Mulligan, is a
retired technology entrepreneur with an interest in social causes supporting education. Price sits on the
board of a charitable foundation dedicated to providing computers to underprivileged high school students.
As part of the foundation's fund raising efforts, Price compiles a list of names of potential donors, including
Mulligan's, to the outreach chairperson. Did Price violate the Standards of Professional Conduct?
No.
Yes, unless he first obtains permission from Mulligan.
Yes, even if he first obtains permission from Mulligan.
Rationale
 No.
Price may not disclose any client information to an outside party without first getting his consent. By
disseminating lists of potential donors from his clients' records without their consent, he is violating
the Confidentiality Standard.
Rationale
 Yes, unless he first obtains permission from Mulligan.
Rationale
 Yes, even if he first obtains permission from Mulligan.
Question 89
L1ET-TBPI31-1503
LOS: LOS-0040
LOS: LOS-0050
Difficulty: hard
Ted Lee, an investment manager, discovered that his client Jake Brown was involved in drug activity in the
locality, which is a serious illegal activity according to the local law. Which of the following is the best
recommended action for Ted that will least likely result in violation of the standards?
Ted informs the legal counsel department of the company about his client's illegal activity
and dissociates with Jake.
Ted ignores the fact about Jake, as it does not affect his professional ethics.
Ted discusses the issue with his manager, and both decide to continue doing business with
Jake, as he is a very important client.
Rationale
As per Standard I(A), members and candidates must understand and comply with all applicable laws,
rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional
Conduct) of any government, regulatory organization, licensing agency, or professional association
governing their professional activities. In this case, Jake's illegal activity does not have any effect on his
professional activities.
Question 90
L1R02TB-AC070-1512
LOS: LOS-0040
Difficulty: medium
Bryan Haver, CFA, is a salesman at Asset Allocation Services. He frequently takes clients and prospects to
lunch where he often consumes several drinks, becoming intoxicated. His assistant handles his calls and
most other duties on days when Haver has one of these lunch meetings with clients, while Haver naps on the
couch in his office. Is Haver in violation of the Standards of Professional Conduct?
Yes.
No, because entertaining clients is part of his job as a salesman.
No, because his assistant handles his duties while he naps.
Rationale
 Yes.
The Standards require that members exhibit professionalism and competence in all their activities.
Frequent intoxication, particularly with clients, reflects poorly on the member, the industry, and the
CFA charter.
Rationale
 No, because entertaining clients is part of his job as a salesman.
CFA charter.
Rationale
 No, because his assistant handles his duties while he naps.
CFA charter.
Question 91
L1R02TB-AC120-1512
LOS: LOS-0040
Difficulty: medium
Jan Watson is a retired portfolio manager. As a retiree, he stopped paying dues to CFA Institute and has not
filed his Professional Conduct Statement. He recently accepted a volunteer position as treasurer of his
condominium association. The directory of association officers lists him as “Jan Watson, CFA (retired).” Does
Watson's use of the CFA designation violate the Standards of Professional Conduct?
Yes.
No, because retired members are not required to pay dues or file conduct statements.
No, because he is not using the designation within the context of the investment industry.
Rationale
Standard VII(B) does not make special provisions for retired members who do not pay dues or file a
Professional Conduct Statment. CFA Institute does offer reduced dues for members who classify
themselves as retired. Only after following the appropriate procedures and receiving notice from CFA
Institute that their status has changed may Watson resume using the designation. Furthermore,
altering the designation with “(retired)” is a violation of this standard.
Question 92
L1ET-TBB218-1412
LOS: LOS-0040
Difficulty: medium
Steve uses the mosaic theory to find alpha opportunities in equity markets. He regularly talks to company
management, reads research reports, watches television, and attends conferences, among other activities.
On one occasion a client asked Steve to see all the underlying research supporting his mosaic theory for an
equity recommendation, and Steve gave a verbal description of the research. Which Standard of
Professional Conduct is Steve violating?
Suitability III(C)
Responsibilities of Supervisors IV(C)
Record Retention V(C)
Rationale
Steve violated Standard V(C) because he has failed to keep appropriate records relating to his use of
the mosaic theory. Providing verbal descriptions of the research process is insufficient.
Question 93
L1ET-TBB210-1412
LOS: LOS-0050
Difficulty: medium
Laura is concerned there are potentially serious violations of the CFA Standards of Professional Conduct
taking place at her firm amongst members of senior management. She is unsure what to do and needs
advice. From whom should she seek counsel?
Chief Compliance Officer.
CFA Institute.
An Attorney.
Rationale
If Laura did not believe members of senior management were involved in the potential violations, she
would seek the advice of her chief compliance officer. However, in this instance her best course of
action is to seek the counsel of an attorney.
Question 94
L1R02TB-AC115-1512
LOS: LOS-0040
Difficulty: medium
Peter Jenkins is a Level II candidate. He was having particular difficulty remembering a formula from the
curriculum. A colleague suggested a mnemonic (word association) that might help jog his memory. Knowing
that formula sheets are not permitted in the exam center, he instead wrote the mnemonic on his hand and
used it to recall the formula for a question. Did Jenkins violate the Standards of Professional Conduct?
No.
Yes, because he failed to follow the spirit of the exam center rules.
Yes, because he plagiarized his colleague's mnemonic.
Rationale
 No.
Candidates may not bring any study aides into the exam center. Writing a memory aid on his hand gave
him an unfair advantage over other candidates who followed the exam center rules. Therefore, Jenkins
is in violation of the Standard.
Rationale
 Yes, because he failed to follow the spirit of the exam center rules.
Rationale
 Yes, because he plagiarized his colleague's mnemonic.
Question 95
L1ET-TBPI11-1503
LOS: LOS-0040
Difficulty: medium
Henry William, an investment advisor at Richard Corp., was sent for a seminar by his firm. He was eligible to
claim $5,000 for his travel expenses, but he incurred only $2,000 as his expenses. He submitted a few taxi
bills that were incurred for his personal purposes to claim the entire per diem for the trip. Which of the
following is most accurate of Henry's action?
Henry has violated Standard I(C) pertaining to misrepresentation, as he presented fake bills.
Henry has not violated Standard I(D) pertaining to misconduct, as his action is not concerned
with professional ethics.
Henry has violated Standard I(D) pertaining to misconduct, as his action reflects poorly on his
personal integrity as a professional.
Rationale
Henry has violated Standard I(D) pertaining to misconduct as his action reflects poorly on his personal
integrity as a professional.
Question 96
L1R02TB-AC065-1512
LOS: LOS-0040
Difficulty: medium
Mary Wagner has been a vice president at a commercial bank for the past three years. Before her current job,
she was working as a derivatives trader at an investment company. As a trader, she was a member of CFA
Institute but since joining the bank she let her membership lapse. A brochure prepared for her division at the
bank lists her name without the CFA designation but states that she had been a charterholder in the past.
Does the brochure violate the Standards of Professional Conduct?
Yes.
No, reference to her past membership is permissible under the Standards.
No, use of the designation is independent from maintaining membership.
Rationale
 Yes.
According to Standard VII(B) members may make reference to past membership in CFA Institute,
including their status as charterholders, as statements of fact. However, they are prohibited from
continuing to use the designation next to their name or to make reference to themselves as
charterholders unless their membership is reinstated.
Rationale
 No, reference to her past membership is permissible under the Standards.
Rationale
 No, use of the designation is independent from maintaining membership.
Question 97
L1R02TB-AC088-1512
LOS: LOS-0030
Difficulty: medium
Sandy Lane is an investment advisor specializing in individual retirement accounts. Mark Pico is the general
partner at a regional brokerage firm. In exchange for client referrals, Lane agrees to place all her trades
through Pico's firm. When a prospective client calls Lane based on Pico's recommendation, Lane must
disclose the terms of the referral arrangement:
upon request.
before executing any trades.
before signing the client to a service agreement.
Rationale
 upon request.
Rationale
 before executing any trades.
Rationale
 before signing the client to a service agreement.
Question 98
L1ETR02-LIC014-1510
LOS: LOS-0050
Difficulty: medium
Which one of the following requirements is least likely to help to ensure the establishment of an information
barrier (firewall)?
Physically separate departments and their files.
Monitor employees working for more than one department at any one time.
Limit proprietary trading when a firm has access to material nonpublic information.
Rationale
Firewalls are intended to block the dissemination of material nonpublic information. Ideally,
employees should work for one only department at any one time, so the second choice is the best
answer.
Question 99
L1ETR02-LIC001-1510
LOS: LOS-0040
Difficulty: medium
Adrian Johns has just been awarded a CFA charter following his successful completion of the CFA Program.
Which of the following statements made by Johns is an inappropriate reference to the CFA program and
designation?
As a CFA charterholder, I am committed to maintaining high ethical standards of conduct.
As I passed the CFA examinations in three consecutive years, I am highly qualified to manage
client funds.
I believe the CFA program provides the highest qualification in the international investment
management industry.
Rationale
Statements that are factual with respect to passing the exams are acceptable, but to claim superiority
in doing so is unacceptable. Statements that emphasize the rigor of the CFA program or its
commitment to ethical standards are permitted.
Question 100
L1R02TB-AC102-1512
LOS: LOS-0030
Difficulty: medium
Shelly Swain is a money manager dealing with private wealth clients. Her client, Thomas Wells, is averse to
investing in international securities, which he considers too risky. Swain is aware of the diversification
benefits of adding international equities to domestic-only portfolios. Wells is scheduled to meet with Swain
to review his investment policy statement (IPS). Swain's best course of action is to:
add international equities to the portfolio prior to the meeting.
insist that Wells remove the constraint on her asset management.
educate Wells about the diversification benefits and alter the IPS.
Rationale
 add international equities to the portfolio prior to the meeting.
While managers should make investment decisions from a portfolio perspective, they must also follow
the directives and mandates imposed by the client. However, part of the manager's duty is to educate
the client about diversification and the benefits of adding low correlation assets to his portfolio. Swain
may only add the international exposure after convincing Wells to adjust the IPS.
Rationale
 insist that Wells remove the constraint on her asset management.
Rationale
 educate Wells about the diversification benefits and alter the IPS.
Question 101
L1ET-TBB208-1412
LOS: LOS-0030
Difficulty: medium
George is an emerging markets equity manager who lives in the United States but does all of his business in
Venezuela with individual clients, a country with less strict securities laws. Which set of guidelines should
George follow in dealing with his clients?
United States Law.
Venezuelan Law.
CFA Standard of Professional Conduct.
Rationale
Because George's clients live in Venezuela and their laws are less strict, he must follow the CFA
Standards of Professional Conduct.
Question 102
L1R03TB-BW006-1612
LOS: LOS-0050
Difficulty: medium
Matthew Dawkins, CFA, is a trader of a brokerage firm. He wants to improve his knowledge on laws, rules,
and regulations applicable to his professional activities. According to the CFA Institute Standards of
Professional Conduct, the following are recommended compliance procedures, except:
To follow past practices within his firm.
To review the firm's written compliance procedures on a regular basis.
To be updated about changes in applicable laws, rules, and regulations by attending technical
seminars.
Rationale
 To follow past practices within his firm.
The first choice is correct. Following past practices within the firm is not a recommended compliance
procedure under Standard I (A) Knowledge of the Law because the past practice may not be in
compliance with the latest applicable laws, rules, and regulations.
Rationale
 To review the firm's written compliance procedures on a regular basis.
The second choice is incorrect. Per Standard I (A), members should review the firm's written
compliance procedures on a regular basis to ensure that the procedures reflect current law and
provide adequate guidance to employees about what is permissible conduct under the law and/or the
Code and Standards.
Rationale
 To be updated about changes in applicable laws, rules, and regulations by attending technical
seminars.
The third choice is incorrect. Members should be kept informed about any changes in applicable laws,
rules, and regulations, and attending technical seminars is a good way to stay current.
Question 103
L1R02TB-AC067-1512
LOS: LOS-0030
Difficulty: medium
Arbor Timber Company invited a group of analysts to tour its new lumber mill and meet with firm executives.
Because the location is fairly remote, Arbor will provide transportation to the site on a chartered flight and
provide lodging at a local ski resort. After the meetings, the analysts are invited to stay for the weekend to
enjoy skiing and other activities at the resort paid by Arbor. According to the Standards of Professional
Conduct, which of the following may be accepted by the analysts?
Chartered Flight Weekend Activities
A. Yes No
B. No Yes
C. Yes Yes
Row A
Row B
Row C
Rationale
 Row A
Whenever possible, members should pay for their own transportation and lodging. However, under
certain circumstances, like accessing the remote locations described here, members may accept such
hospitality. However, enjoying a weekend of recreation could give the appearance of infringing on
one's objectivity at the very least. Therefore, any weekend activities, including lodging should be
declined.
Rationale
 Row B
declined.
Rationale
 Row C
declined.
Question 104
L1R03TB-BW007-1612
LOS: LOS-0050
Difficulty: medium
Nicky Odair, CFA, is the investment manager of MTR Capital in Japan, specializing in high-tech equity
investments. He places trades for the fund with Global Brokerage, which has invited Odair to attend their
high-tech investment conference in Germany and offered to pay for Odair's airfare, meals, and
accommodations for the trip. What should Odair do to comply with the Code and Standards?
He may attend but he must disclose the arrangement to MTR's clients and prospects.
He may attend only if his employer gives consent.
He may attend at his or his employer's expenses.
Rationale
 He may attend but he must disclose the arrangement to MTR's clients and prospects.
The first choice is incorrect. Even with the disclosure to his clients, Odair should not accept the offer
because it will affect his independence.
Rationale
 He may attend only if his employer gives consent.
The second choice is incorrect. Even with his employer's consent, Odair should not accept the offer
because it will affect his independence.
Rationale
 He may attend at his or his employer's expenses.
The third choice is correct. Under Standard I (B), members must not accept any gift, benefit,
compensation, or consideration that reasonably could be expected to compromise their own or
another's independence and objectivity. As the offer by Global Brokerage may influence Odair's
objectivity in selecting the right brokerage firm for the clients, he should decline to accept the offer.
Question 105
L1R02TB-AC111-1512
LOS: LOS-0030
Difficulty: medium
Royal Insight is a money management firm handling institutional portfolios. Royal recently landed a contract
with Mega Bank to provide investment advisory and portfolio management services. Ken Paine, a research
analyst at Royal, currently has a hold recommendation on Mega's stock. Further research and improving
economic conditions have caused Paine to consider upgrading his recommendation to buy. According to the
Standards of Professional Conduct, Paine must:
maintain the hold rating for the duration of the contract.
provide only factual information about Mega Bank.
issue a buy rating with disclosure of the client relationship.
Rationale
 maintain the hold rating for the duration of the contract.
The Standard recognizes that conflicts are sometimes unavoidable and, therefore, requires that they
be disclosed.
Rationale
 provide only factual information about Mega Bank.
be disclosed.
Rationale
 issue a buy rating with disclosure of the client relationship.
be disclosed.
Question 106
L1R02TB-AC039-1512
LOS: LOS-0040
Difficulty: medium
Kevin Kraft is a money manager with Quadrangle Investments. His neighbor, Wendy Sloan, works in the
printing unit of a market research firm. Sloan emails copies of the research reports of two influential analysts
in her firm to Kraft one day prior to their distribution to clients. Kraft uses the reports to trade client
accounts, but does not trade his personal account. Did Kraft violate the Standards of Professional Conduct?
Yes.
No, because the report is distributed one day later.
No, because he owes no fiduciary duty to the research firm.
Rationale
 Yes.
The Standard prohibits trading on material, nonpublic information. Trading client accounts does not
insulate Kraft from the requirements of this Standard. Kraft must wait for the information to be made
public, including a reasonable time for the information to be digested, prior to trading in the securities.
Rationale
 No, because the report is distributed one day later.
Rationale
 No, because he owes no fiduciary duty to the research firm.
Question 107
L1ET-TBB209-1412
LOS: LOS-0050
Difficulty: medium
A charterholder believes there are extremely serious violations taking place at her firm. According to the CFA
Standards of Professional Conduct would the charterholder necessarily be required to resign their position?
Yes.
No.
Maybe.
Rationale
Just knowing serious violations are taking place does not necessarily require someone to resign their
position. The charterholder should however report the violations to a supervisor and depending on the
severity of the situation, may be required to resign.
Question 108
L1ET-TBPI37-1503
LOS: LOS-0040
LOS: LOS-0050
Difficulty: hard
Steve Blair, the marketing head of Rento Advisory Inc., was having a discussion with David Williams, the fund
manager, about the presentation of investment performance to clients. Steve was afraid that clients may not
be happy with the current performance of the investments. Steve asked David to include a few high-
performance composites that were terminated previously to show improved results. David refused to agree
with Steve and did not alter the presentation. Which of the following is most accurate?
David performed his duties to his employer.
David maintained confidentiality at work.
David maintained his independence at work.
Rationale
David has maintained his independence at work by not giving in to interdepartmental pressure. He has
complied with Standard I(B) related to independence and objectivity.
Question 109
L1R02TB-AC076-1512
LOS: LOS-0040
Difficulty: medium
Leslie Prist is the marketing director for Xion Investments. Xion manages a variety of open- and closed-end
mutual funds. A brochure Prist sent to prospective investors stated, “Our funds have beaten their benchmark
indices by an average of five percentage points over the last ten years.” Which of the following practices
would violate the Standards of Professional Conduct?
Failing to list the funds' benchmarks in the brochure.
Using a geometric mean instead of an arithmetic mean.
Changing fund benchmarks on an ex post basis.
Rationale
 Failing to list the funds' benchmarks in the brochure.
The Standards do not require compliance with the Global Investment Performance Standards (GIPS).
However, performance presentation must be clear, accurate, and complete. Changing the fund's
benchmark after the fact would be a misrepresentation of its performance. Benchmarks must be stated
in advance of the performance period and should only be changed if the fund's investment mandate or
strategy changes in a way that renders the old benchmark obsolete.
Rationale
 Using a geometric mean instead of an arithmetic mean.
Rationale
 Changing fund benchmarks on an ex post basis.
Question 110
L1R03TB-BW010-1612
LOS: LOS-0040
Difficulty: hard
When Justin Chua, CFA, was hired as a portfolio manager by One World Bank, a global investment bank, he
was required to sign an employment contract that includes a noncompete clause, prohibiting him from
working in the same industry for five years after leaving the bank. One year following his appointment, Chua
was laid off due to downsizing. After a three-month job search, he received an offer for the same position by
another investment bank in a country where noncompete clauses are considered a violation of human rights
and hence illegal. According to the CFA Institute Code of Ethics, Chua should:
Accept the job offer since the noncompete clause is not enforceable in that country.
Not accept the job offer because it is a violation of Standard I(D) Misconduct.
Accept the job offer because Chua did not resign voluntarily and the noncompete clause is
unfair to him.
Rationale
 Accept the job offer since the noncompete clause is not enforceable in that country.
The first choice is incorrect.
Rationale
 Not accept the job offer because it is a violation of Standard I(D) Misconduct.
The second choice is correct. Under Statement I(D), members must not engage in any professional
conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their
professional reputation, integrity, or competence. Though the noncompete clause is illegal in the
country for the new position and may be unfair to him, Chua should still adhere to the commitment he
made to his former employer and, therefore, should not accept the job offer.
Rationale
 Accept the job offer because Chua did not resign voluntarily and the noncompete clause is
unfair to him.
The third choice is incorrect.
Question 111
L1ET-PQ0207-1410
LOS: LOS-0040
Difficulty: medium
Which of the following actions is most likely to be considered a violation of Standard I(D): Misconduct?
A portfolio manager conducting an extramarital relationship with a member of his office
A portfolio manager not expending the necessary effort to due diligence securities that are
added to client portfolios
A risk manager filing for personal bankruptcy
Rationale
Standard I(D) addresses all conduct that reflects poorly on the professional integrity, good reputation,
or competence of members and candidates. Any act that involves lying, cheating, stealing, or other
dishonest conduct is a violation of this standard if the offense reflects adversely on a member's or
candidate's professional activities. Although CFA Institute discourages any sort of unethical behavior
by members and candidates, the Code and Standards are primarily aimed at conduct and actions
related to a member's or candidate's professional life, hence the extramarital affair is not likely to be
considered a violation. A portfolio manager not expending the necessary effort on running a client
portfolio is likely to call into question the relationship of trust, hence it would qualify as misconduct
under the standard. Personal bankruptcy does not necessarily indicate misconduct unless the
bankruptcy involved some sort of professional fraud or deceit.
Question 112
L1R02TB-AC047-1512
LOS: LOS-0030
Difficulty: medium
Pedro Ramirez is a portfolio manager at Iberian Advisors, a small asset management firm with $250 million
under management. Iberian provides services exclusively to individual private wealth clients. Ramirez has
been approached by the board of Baldwin State University to serve as a member of its endowment
investment committee, a $2 billion pool of assets. Because it is an unpaid position, Ramirez does not believe
notification to his employer is required. According to the Standards of Professional Conduct, Ramirez must:
decline the position with the endowment due to potential conflicts of interest.
discuss the position and duties with his employer prior to accepting the new role.
list the position in his employer's next annual disclosure notification document.
Rationale
 decline the position with the endowment due to potential conflicts of interest.
By participating in the endowment's board, Ramirez could be subjected to conflicts arising out of the
positions held by the endowment and his private clients. He could also come into possession of
material nonpublic information. Therefore, he must discuss the position with his employer before
accepting.
Rationale
 discuss the position and duties with his employer prior to accepting the new role.
accepting.
Rationale
 list the position in his employer's next annual disclosure notification document.
accepting.
Question 113
L1ET-TBB220-1412
LOS: LOS-0030
Difficulty: medium
Joe is in charge of a very large equity management firm that does a significant amount of trading with soft-
dollar commissions. At the end of the year, what percent of the soft-dollar commissions is he allowed to pay
out in annual bonuses to his employees?
0%.
Up to 10%.
Up to 25%.
Rationale
Joe is not allowed to pay out any annual compensation bonuses to employees with soft-dollar
commissions. Instead, all proceeds from these activities must go to the purchase of goods and services
that directly benefit the client.
Question 114
L1ETR02-LIC035-1510
LOS: LOS-0040
Difficulty: medium
Which of the following is a statement of a member's duty under the Code and Standards?
In the absence of a specific applicable law and other rules and regulations, the Code and
Standards govern the member's actions.
When the applicable local law, rules, and regulations do not adequately cover the use of
material nonpublic information, a member is free to take advantage of the loophole.
When there is a conflict between the Code and Standards and local law, rules, and
regulations, a member can use their discretion when deciding which rules or Standards to
comply with.
Rationale
The rule of thumb is that if an applicable law is stricter than the requirements of the Code and
Standards, members must adhere to the law; otherwise, they must adhere to the Code and Standards.
This relates to Standard I(A): Knowledge of the Law.
Question 115
L1R02TB-AC085-1512
LOS: LOS-0030
Difficulty: medium
Hoffman Neffer is a large brokerage firm that offers investment banking services. The firm has participated in
the IPO and secondary offerings of Ryper Industries. Liz Clayton works in Hoffman's research department
and is preparing a report on Ryper. Her spouse owns shares in Ryper in a retirement account. In the research
report, Clayton must disclose:
Hoffman's Investment Banking Deals Her Beneficial Stock Ownership
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
Clayton has two conflicts of interest. First is the investment banking relationship between her firm and
Ryper. Second is the beneficial ownership of stock, which is defined as shares owned by her, her
spouse, a family member living with her, or a trust in which she has a beneficial interest. Both conflicts
must be disclosed in the report.
Rationale
 Row B
Rationale
 Row C
Question 116
L1ETR02-LIC019-1510
LOS: LOS-0040
Difficulty: medium
Marco Maggio, CFA, is scheduled to visit the corporate headquarters of Venus Industries. Maggio expects to
use the information obtained there to complete his research report on Venus stock. The location of Venus
Industries is within a 15-minute drive of a prestigious golf course. On arrival at the Venus premises, Maggio
learns that Venus is offering Maggio an extension of his stay that weekend and invites him for a day of golf
with all expenses paid. Venus Industries also offers to pay for all the expenses for the trip, including the cost
of meals, hotel room, and air transportation back to Venus Industries. Which of the following actions would
be the best course for Maggio to take under the Code and Standards?
Pay for all travel expenses, including costs of meals and incidental items and politely reject
the golf outing offer.
Reject the golf outing offer but accept the reimbursement of the travel expenses since they
are legitimate business-related expenses.
Accept the expenses-paid trip and disclose the value of the trip in the report, but it is at
Maggio's discretion to take the golf outing offer without disclosing it, as it occurs outside
working hours.
Rationale
Maggio risks violating Standard I(B): Independence and Objectivity because accepting any significant
gift may impede his independence and objectivity. He should pay, whenever possible, for his own
travel expenses and not accept the golf outing.
Question 117
L1R02TB-AC074-1512
LOS: LOS-0040
Difficulty: medium
Anna Bolsky is a well-known biotech analyst with Solid Analytics. As a speaker at a professional society
luncheon, she was asked about her opinion of Protoplasm Bio. She responded by saying, “Its recent drug
trials have disappointed and there's not much left in the pipeline. I'll be downgrading my rating on the stock
in my report next week. You can check that out for details.” Several of the attendees are institutional clients
of Solid Analytics. Did Bolsky violate the Standards of Professional Conduct announcing the downgrade or
the impending report?
Downgrade Report
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
Bolsky violated the Standard by disclosing the change in her recommendation to a select group of
clients who may then act upon it before her other clients. Advising that the report itself is about to be
released is not a violation because the content of the report will be available to all once it is released.
Rationale
 Row B
Rationale
 Row C
Question 118
L1ET-TBPI12-1503
LOS: LOS-0040
Difficulty: medium
Which of the following is most likely to be material information?
Statement I: Trailins Inc. is appointing a new CEO.

Statement II: Trailins Inc. is filing for a bankruptcy.
Statement III: Trailins Inc. has lost a legal dispute.
Statements I, II, and III.

Statements I and III only.
Statements II and III only.
Rationale
All the statements will most likely have an immediate impact on a company's stock price.
Question 119
L1R02TB-AC091-1512
LOS: LOS-0030
Difficulty: medium
Rogelio Pocasangre is a broker and has been assigned to sell a bond issue for Americon Corp. The issue was
underwritten by Tex Investments, which assumed all legal liability for the issue. After speaking with one of
the investment bankers at Tex, Pocasangre is told that Americon utilizes special purpose entities to move
much of its debt off its balance sheet. The prospectus makes no mention of its use of this off-sheet financing
technique. Pocasangre meets with his supervisor to express his discomfort with promoting the debt issue
without disclosing the practice, which he suspects may violate securities laws. The supervisor tries to ease
his concerns by pointing out that any liability rests with Tex and not Pocasangre. According to the Standards
of Professional Conduct, Pocasangre's most immediate course of action is to:
continue to sell the issue after confirming liability rests with Tex.
report the potential breach of law to the governing regulatory agency.
refuse to participate and ask to be reassigned to another issue.
Rationale
 continue to sell the issue after confirming liability rests with Tex.
Pocasangre has an ethical duty not to misrepresent and to fully disclose relevant information to clients
and prospects. If he feels that the firm's actions are contrary to the spirit of the Standards, his first
course of action is to disassociate from the activity by requesting reassignment. The reaction of his
supervisor might require further action on Pocasangre's part up to and including resigning from the
firm.
Rationale
 report the potential breach of law to the governing regulatory agency.
firm.
Rationale
 refuse to participate and ask to be reassigned to another issue.
firm.
Question 120
L1R02TB-AC057-1512
LOS: LOS-0040
Difficulty: medium
Donald Monk is an investment banker working on a secondary offering for Dynamic Engineering. On a visit to
Monk's office, Patricia Wright, Dynamic's CFO, is given a tour of the office. During the tour, Monk and Wright
openly discuss the pending offering and its expected performance based on higher projected earnings over
the next three quarters. This information is overheard by several brokers as the sell-side offices are toured.
The salesmen begin recommending the stock to clients based on what they overheard. Did Monk or the
salesmen violate the Standards of Professional Conduct?
Monk Salesmen
A. Yes Yes
B. Yes No
C. No Yes
Row A
Row B
Row C
Rationale
 Row A
Monk violated the Standard by encouraging others to trade in the stock through his careless
management of the sensitive information. By openly discussing the pending offering, he effectively
encouraged others to trade on the information. The salesmen should not have traded on material,
nonpublic information regardless of how it was obtained.
Rationale
 Row B
Rationale
 Row C
Question 121
L1R03TB-BW003-1612
LOS: LOS-0030
Difficulty: medium
In accordance with Standard I (A) of the CFA Institute Standards of Professional Conduct, members shall not
knowingly participate or assist in any violations of laws, rules, or regulations. A member:
Must report all legal violations to the proper regulatory authorities.
Is required to leave the firm when he is aware of any violation.
Is not responsible for violations by others when he/she is or reasonably expected to be
unaware of the facts resulting in the violation.
Rationale
 Must report all legal violations to the proper regulatory authorities.
The first choice is incorrect. CFA Institute does not require members to report the violation to the
authorities, but the applicable law might.
Rationale
 Is required to leave the firm when he is aware of any violation.
The second choice is incorrect. The member is required to disassociate or separate from the activities,
but it doesn't mean leaving the firm.
Rationale
 Is not responsible for violations by others when he/she is or reasonably expected to be
unaware of the facts resulting in the violation.
The third choice is correct. A member is not responsible for the violation if he/she is not aware of all the
facts giving rise to the violations. However, if members suspect someone is planning or engaging in
illegal activities, the member should:
Determine the legality of the activities.

Consult your supervisor and legal counsel.
Take appropriate action.
Disassociate, attempt to persuade the perpetrator to stop.
Question 122
L1R02TB-AC050-1512
LOS: LOS-0030
Difficulty: medium
The Wealth Advisors firm (WA) complies with GIPS and recently acquired the accounts of a bankrupt money
manager Pristine Management (PM). Which of the following portfolios would least likely be included in one
of WA's composites?
A portfolio managed by a sub-advisor hired by PM with two years left on her contract.
A real estate portfolio that WA has closed to new investors and intends to divest over the next
two years.
The wrap fee accounts that WA intends to add to its existing clients.
Rationale
 A portfolio managed by a sub-advisor hired by PM with two years left on her contract.
GIPS require that all discretionary, fee-paying accounts be included in at least one composite.
Discretionary means that the investment decisions are made by WA. Since the sub-advisor manages the
portfolio, and the sub-advisor was chosen by PM, it does not qualify as a WA's discretionary account.
Sub-advisor-managed accounts may be included if the sub-advisor was vetted and selected by WA.
Rationale
 A real estate portfolio that WA has closed to new investors and intends to divest over the next
two years.
Rationale
 The wrap fee accounts that WA intends to add to its existing clients.
Question 123
L1R02TB-AC106-1512
LOS: LOS-0030
Difficulty: medium
Ricardo Plum is a portfolio manager at a money management firm. He also serves on the board of a private
hospital where his wife is a physician. The position includes a small compensation package. In notifying his
employer of his participation on the board, which of the following is Plum least likely to disclose?
The duration of his service and the average monthly time required.
The fact that his wife is also a physician at the same hospital.
The amount of compensation he receives for his service.
Rationale
 The duration of his service and the average monthly time required.
The fact that his wife is a physician at the hospital does not appear relevant to the facts and would not
likely contribute to any conflict of interest with Plum's money management employment.
Rationale
 The fact that his wife is also a physician at the same hospital.
Rationale
 The amount of compensation he receives for his service.
Question 124
L1ET-TBB206-1412
LOS: LOS-0030
Difficulty: medium
US Trust Management Company operates in Oregon and follows state regulations instead of the CFA
Standards of Professional Conduct on many occasions throughout the year. What does this imply about the
strictness of Oregon state securities law?
Less strict.
Comparable.
More strict.
Rationale
The only time a charterholder can deviate from the Standards of Professional Conduct is when local
regulations are stricter.
Question 125
L1R03TB-BW005-1612
LOS: LOS-0040
Difficulty: medium
Sharm Cu, CFA, filed a personal bankruptcy 10 years ago when she was a college student because of an
uninsured car accident. She never disclosed her personal bankruptcy to any of her clients. Did Cu violate any
CFA Institute Standards of Professional Conduct?
No
Standard I (C) Misrepresentation
Standard I (D) Misconduct
Rationale
 No
The first choice is correct. Personal bankruptcy that does not involve fraudulent or deceitful business
conduct is not a violation of Standard I (D).
Rationale
 Standard I (C) Misrepresentation
The second choice is incorrect.
Rationale
 Standard I (D) Misconduct
The third choice is incorrect.
Question 126
L1R02TB-AC118-1512
LOS: LOS-0030
Difficulty: medium
Raj Gupta works for a clearing firm, executing trades for online brokers. His direct supervisor is Rhonda
Perkins. Each has made the following statements with respect to fiduciary duties and the Standards of
Professional Conduct.
Gupta: “The Standards create a fiduciary duty between me and our clients.”
Perkins: “The Standards require that you act in the clients' best interests by seeking best execution
and adhering to the trade parameters they set.”
Which of the statements are accurate?
Gupta Perkins
A. No Yes
B. Yes No
C. Yes Yes
Row A
Row B
Row C
Rationale
 Row A
The Standards do not impose a fiduciary duty on members to all their clients. They do require that
members place their clients' interests ahead of their own within the scope of the services provided. For
Gupta, Standard III(A) requires him only to perform his function to execute trades as instructed by
clients without extending it to a broader fiduciary duty.
Rationale
 Row B
Rationale
 Row C
Question 127
L1R02TB-AC059-1512
LOS: LOS-0030
Difficulty: medium
Maxine Wong is the director of business development at Brilliant Asset Managers (BAM). She is working hard
to win a contract as the alternative asset manager for a large university endowment. The president of the
university explains that a significant piece of legislation is pending in the legislature that would benefit
students and faculty. He suggests a donation to the political action campaign in support of the proposed law
would improve BAM's chances of winning the bid. According to the Standards of Professional Conduct,
Wong's best course of action is to:
make only a small donation to the campaign, provided that she agrees with the cause.
decline to make any donation, citing the Standards of Professional Conduct prohibition.
withdraw BAM's bid for the contract, citing the Standards of Professional Conduct.
Rationale
 make only a small donation to the campaign, provided that she agrees with the cause.
While Standard I(B) does not require that BAM withdraw from the bidding process, they do not permit
Wong to make a donation (personally or via the firm) even if she agrees with the legislation because of
the appearance of a conflict of interest.
Rationale
 decline to make any donation, citing the Standards of Professional Conduct prohibition.
Rationale
 withdraw BAM's bid for the contract, citing the Standards of Professional Conduct.
Question 128
L1R02TB-AC053-1512
LOS: LOS-0040
Difficulty: medium
Anita Schultz, CFA, is the managing director of Echo Investments. The firm's website includes biographical
information about the firm's principals, including Schultz. The descriptions were actually written by the
firm's marketing coordinator, Lucas Feldman, based on interviews with each director. Schultz's bio includes
a reference to her as a PhD in economics. Although she did serve as adjunct faculty at a university, she never
completed her dissertation to qualify for a doctoral degree. Does this discrepancy constitute a violation of
the Standards of Professional Conduct by:
Feldman Schultz
A. Yes No
B. No Yes
C. Yes Yes
Row A
Row B
Row C
Rationale
 Row A
Feldman did not violate the Standards because the misstatement was unintentional, and he may
reasonably rely on information provided by Schultz. Schultz, however, is expected to explain her
background and credentials without misrepresentation. Furthermore, Schultz would be expected to
review the publication and correct any inaccuracies. Not doing so constitutes a violation of the
Standards.
Rationale
 Row B
Standards.
Rationale
 Row C
Standards.
Question 129
L1R02TB-AC083-1512
LOS: LOS-0040
Difficulty: medium
Black Box Advisors has developed a valuation model that combines fundamental analysis with technical
trading indicators to rank stocks. Back-testing of the model shows promise for above average returns. The
firm sets up a subscription website that publishes a weekly list of buy and sell recommendations. The
advertising section of the website provides the results of simulated portfolios, but describes the source of
recommendations only as “a proprietary analytical process.” Has the owner of Black Box violated the
No.
Yes, she must provide a general description of the investment approach.
Yes, she must disclose the proprietary algorithms used in the model.
Rationale
 No.
The Standard requires members to communicate the basic methods or theoretical approach used to
produce their recommendations so that clients and prospects can judge their credibility.
Rationale
 Yes, she must provide a general description of the investment approach.
Rationale
 Yes, she must disclose the proprietary algorithms used in the model.
Question 130
L1R02TB-AC048-1512
LOS: LOS-0030
Difficulty: medium
Peter Candor is the head of the trading desk at Better Brokerage. During a weekly meeting with the firm's
research analysts he learns of several strong buy recommendations that will be issued to the sales team and
clients on the following day. According to the Standards of Professional Conduct, Candor should accumulate
shares for the firm:
immediately after the meeting.
concurrently with the release of the reports.
only after clients have had a chance to act on the reports.
Rationale
 immediately after the meeting.
The Standard requires that members delay acting on updated recommendations until the information
is disseminated to clients. Realizing that clients need time to read and formulate their actions, it also
requires that clients be given a reasonable amount of time to act on the information.
Rationale
 concurrently with the release of the reports.
Rationale
 only after clients have had a chance to act on the reports.
Question 131
L1ET-TBPI02-1503
LOS: LOS-0040
LOS: LOS-0050
Difficulty: hard
Jonathan Mathew, an investment analyst and an animal rights activist, joined a procession in New York for
which he was detained by the police. Based on the information, which of the following statements is most
accurate about the code of ethics and standards of professional conduct?
Jonathan has not violated any standards.
Jonathan has violated Standard I(D) related to misconduct.
Jonathan has violated Standard I(A) related to knowledge of law.
Rationale
Jonathan has not violated any standards, as his involvement in procession does not affect his
professional integrity and CFA institute does not prevent candidates or members from expressing views
on personal beliefs.
Question 132
L1R02TB-AC101-1512
LOS: LOS-0040
Difficulty: medium
Bravo Asset Managers handles a variety of institutional, private accounts, and hedge funds. The firm has a
policy of allocating block trades and oversubscribed issues by order of priority. The best priced transactions
are first allocated to the appropriate hedge fund, then institutional accounts, and lastly private accounts. As
a result, the hedge funds usually outperform other accounts, even when they invest in the same assets at the
same time. Bravo's new account documentation spells out this policy and requires the signatory to accept
the terms in writing. Does this policy violate the Standards of Professional Conduct with respect to fair
dealing?
Yes.
No, because the policy is disclosed and accepted by account holders.
No, because the policy is applied consistently to all trades.
Rationale
 Yes.
The Standard does not allow managers to favor certain clients over others with respect to allocating
trades. All shares should be allocated among client accounts at the average price. The Standards do
not allow managers to subject clients to patently unfair policies even if the clients consent.
Rationale
 No, because the policy is disclosed and accepted by account holders.
Rationale
 No, because the policy is applied consistently to all trades.
Question 133
L1ET-TBB219-1412
LOS: LOS-0030
Difficulty: medium
Sarah determines that members of her research team have come across material nonpublic information
according to Standard II(A) of the Code and Standards. Which of the following actions is she not required to
do?
Encourage the dissemination of the information.
Report to appropriate supervisory authorities.
Disseminate the information herself.
Rationale
Per Standard II(A) of the Code and Standards, Sarah is not required to disseminate the information
herself.
Question 134
L1R02TB-AC069-1512
LOS: LOS-0040
Difficulty: medium
Karl Lender, CFA, is a money manager for high net worth individuals. In addition to portfolio management
services, Lender also distributes an investment newsletter to all his clients. The newsletter is based on
several proprietary research services that Lender purchases from brokerage firms. Lender summarizes the
proprietary reports, adds his own commentary, and distributes the newsletter as solely his own work. Has
Lender violated the Standards of Professional Conduct?
No.
Yes, by distributing third-party research to his clients.
Yes, by presenting the newsletter as his own work.
Rationale
 No.
Lender is effectively taking credit for the work of others. Summarizing third-party research does not
necessarily violate the Standards, but the sources of those summaries must be cited and never
presented as his own work.
Rationale
 Yes, by distributing third-party research to his clients.
Rationale
 Yes, by presenting the newsletter as his own work.

R03.1 Standard I Professionalism - Answers

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R03.1 Standard I Professionalism - Answers

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Question 1

Statements II, III, and IV.

Statement I: Trailins Inc. is appointing a new CEO.

Statements I, II, and III.

Determine the legality of the activities.

Which of the statements are accurate?

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