Level I R01 Ethics and Trust in the

Investment Profession
Test Code: L1 R01 ETIP Q-Bank 2020
Number of questions: 14

Question Q-Code: L1-ES-ETIP-001 LOS a Section 6

1 Standards of conduct can be least likely described as:

A) a set of principles that define rules for acceptable and forbidden behavior.
B) minimal acceptable behavior expected of members of a community.
C) a set of principles that define the legal boundaries of a community.

Answer C) a set of principles that define the legal boundaries of a community.

Explanation C is correct. Standards of conduct can sometimes be different from what is stated in the law. Statements A and B
are accurate descriptions of standards of conduct. The Standards of conduct serve as benchmarks for the
minimally acceptable behavior of community members and can help clarify the code of ethics. Members can choose
behaviors that demonstrate even higher standards. Section 2 and 6. LO.a.

Question Q-Code: L1-ES-ETIP-002 LOS a Section 2

2 Which of the following statements is most likely correct ?

A) Ethics can be described as a set of moral principles that provide guidance for our behaviour
B) Ethical conduct is behaviour that balances one’s own interest with only the direct consequences of the
behaviour on others.
C) Professional associations adopt a code of ethics to protect their own professional community

Answer A) Ethics can be described as a set of moral principles that provide guidance for our behaviour

Explanation A is correct. Statement B is incorrect because ethical conduct is behaviour that balances one’s own interest with
the direct and indirect consequences of the behaviour on others. Ethics can be described as a set of moral
principles and rules of conduct that provide guidance for our behavior. Ethical principles define what is good,
acceptable behavior and what is forbidden or unacceptable behavior. Examples of ethical principles include honesty,
diligence, justice, being open about the costs involved in an investment, fairness, and respect for the rights of
others. Another definition of ethical conduct is behavior that balances one’s own interest with the direct and
indirect consequences of the behavior on others. Statement C is incorrect. Section 2. LO.a.

Question Q-Code: L1-ES-ETIP-022 LOS a Section 3

3 A profession can be best described as​:

A) work done to earn a livelihood in the short-term.

B) an occupational community that has specific education, expert knowledge, and a framework of practice and
behavior that underpins community trust, respect, and recognition.
C) a job to which one is well suited.

Answer B) an occupational community that has specific education, expert knowledge, and a framework of practice and
behavior that underpins community trust, respect, and recognition.

Explanation B is correct. A profession is an occupational community that has specific education, expert knowledge, and a
framework of practice and behavior that underpins community trust, respect, and recognition. Section 3. LO.a.

Question Q-Code: L1-ES-ETIP-004 LOS a Section 3

4 Which one of the following is a least likely reason for a profession to establish a code of ethics ?

A) A code of ethics serves as an aid in decision-making.

B) A code of ethics helps instil confidence among clients and prospective clients.
 C) A code of ethics helps ensure that members of the profession will follow the law.

Answer C) A code of ethics helps ensure that members of the profession will follow the law.

Explanation C is correct. The code of ethics cannot ensure that members of the profession will follow the law. Statements A and
B are true. In any given profession, the code of ethics openly communicates the established principles of the
profession and how its members are expected to behave. In addition to providing members with guidance for
decision making, a code of ethics may generate confidence among not only members of the profession but also
individuals who are not members of the profession, such as clients, prospective clients, and/or the general public.
The code of ethics informs and provides some assurance to the public that the profession’s members will use their
specialized skills and knowledge in service of others. Section 3. LO.a.

Question Q-Code: L1-ES-ETIP-006 LOS c Section 4

5 Which of the following is least likely a challenge faced by professionals to display ethical behaviour ?

A) People tend to believe they are more ethical than they actually are.
B) People tend to underestimate their own morality.
C) People tend to underestimate the impact of situational influences

Answer B) People tend to underestimate their own morality.

Explanation B is correct. Challenges faced by professionals to display ethical behaviour include:

1. Overestimating one’s morality: People believe they are more ethical than they actually are. This overconfidence in
themselves can sometimes lead to faulty decision-making. It is often seen that emotions cloud rational thinking,
prompting one to make decisions that may not be the most ethical choice.

2. Situational influences: These are external factors such as cultural, social, and environmental factors that
influence one’s thinking, behavior, and decision-making.

Section 4. LO.c

Question Q-Code: L1-ES-ETIP-007 LOS c Section 4

6 Which of the following statements is most likely correct?

A) Money and prestige prod people to act in their own self-interests and take actions that are less ethical.
B) Loyalty to employer and colleagues can only have a positive effect on one’s ethical behaviour.
C) Processes focused solely on compliance simplify decision making and help the larger cause.

Answer A) Money and prestige prod people to act in their own self-interests and take actions that are less ethical.

Explanation A is correct. Both money and prestige push people to act in their own self-interests and take actions that are less
ethical. The promise of a large financial bonus or a promotion, can impact people’s thinking ability and cause them
to act in their own short-term interests and ignore the long-term consequences of their actions. Statement B is
incorrect because loyalty can have both positive and negative effects towards one’s behaviour. For instance, some
colleagues may encourage you to behave more ethically and enroll in the CFA Program to advance your career. On
the other hand, colleagues who do not adhere to the Code and Standards may encourage you to simply act in
accordance with the local law, even though it may fall short of ethical conduct. Statement C is incorrect because
processes focused solely on compliance oversimplify decision making and that does not necessarily help the larger
cause. Section 4. LO.c.

Question Q-Code: L1-ES-ETIP-023 LOS d Section 4

7 Which of the following is least likely a benefit of trust in the investment management industry?

A) Better capital allocation.

B) Lower transaction costs.
C) Superior returns.

Answer C) Superior returns.

Explanation C is correct. Trust is the investment management industry does not necessarily result in superior returns. Both A
 and B are benefits of trust in the investment management industry. In many developed economies, the investment
management profession affects many key aspects of the economy, including savings, retirement planning, and the
pricing and allocation of capital. In most countries, skilled evaluation of securities leads to more efficient capital
allocation and, combined with ethical corporate governance, can assist in attracting investment from international
investors. The investment management profession can deliver more value to society when higher levels of trust and
better capital allocation reduce transaction costs and help meet client objectives.

Section 4.1. LO.d.

Question Q-Code: L1-ES-ETIP-024 LOS e Section 4

8 Which of the following statement (s) is most likely correct?

A) The mission of CFA Institute is “to lead the investment profession globally, by promoting the highest standards
of ethics, education, and professional excellence for the ultimate benefit of investment profession”.
B) CFA Institute candidates and charterholders must meet the highest standards among those established by CFA
Institute regulators, or the employer.
C) Only CFA charterholders not the CFA Program candidates are required to adhere to the Code and Standards and
to sign annually a statement attesting to that continued adherence.

Answer B) CFA Institute candidates and charterholders must meet the highest standards among those established by CFA
Institute regulators, or the employer.

Explanation B is correct. CFA Institute candidates and charterholders must meet the highest standards among those
established by CFA Institute, regulators, or the employer.

A is incorrect. The mission of CFA Institute is “to lead the investment profession globally, by promoting the highest
standards of ethics, education, and professional excellence for the ultimate benefit of society.” C is incorrect. CFA
charterholders and CFA Program candidates are required to adhere to the Code and Standards and to sign annually
a statement attesting to that continued adherence. Section 4.2. LO.e.

Question Q-Code: L1-ES-ETIP-025 LOS e Section 3

9 Which of the following statement (s) is most likely one of the characteristics of professions that help establishing
trust?

A) Professions have high entry standards.

B) Professions are industry focused.
C) Professions provide a service to the investment management industry.

Answer A) Professions have high entry standards.

Explanation A is correct.

The following characteristics help establish confidence and credibility in professionals and their organizations.

a. Professions normalize practitioner behavior by developing professional codes and standards

b. Professions provide a service to society
c. Professions are client focused: The major objective of codes and standards is to ensure that professions always
act in the best interest of the client and exercise a reasonable level of care, skill, and diligence with regard
providing them service.
d. Professions have high entry standards
e. All members of a profession possess a body of expert knowledge.
f. Professions encourage and facilitate continuing education
g. Professions monitor professional conduct to maintain integrity and reputation of an industry.
h. Professions are collegial and respect the rights, dignity, and autonomy of others.
i. Professions are recognized oversight bodies
j. Professions encourage the engagement of members to develop expertise and ethics and to advance the
profession.

Section 3.1. LO.e.

Question Q-Code: L1-ES-ETIP-010 LOS e Section 6

10 Which of the following is most likely a good example of ethical conduct ?

A) Make appropriate choices even in the absence of clear laws.

B) Restrict one’s behaviour to what is legally acceptable.
 C) Make sensible decisions that minimize the risks to one’s employer only

Answer A) Make appropriate choices even in the absence of clear laws.

Explanation A is correct. Statement B is incorrect because ethical conduct requires a professional to go beyond what is legally
required. Statement C is incorrect because a professional should minimize the risks of all stakeholders such as the
employer, clients, family, and market participants.

Ethical conduct encourages us to:

* Go beyond what is legally required.

* Consider the impact on all stakeholders, i.e., clients, family, colleagues, employers, market participants, and so
forth—and minimize risks, including reputational risk.

* Make good choices, even in the absence of clear laws and regulations.

Section 6. LO.e.

Question Q-Code: L1-ES-ETIP-011 LOS e Section 6

11 Which of the following is least likely a reason for laws being insufficient to ensure ethical conduct among market
participants ?

A) Laws can be interpreted differently.

B) Laws are largely the same across jurisdictions.
C) Passing a law takes significant time.

Answer B) Laws are largely the same across jurisdictions.

Explanation B is correct. Laws can vary across jurisdictions. This may encourage questionable practice to move to places that
are less restrictive in nature. Statements A and C are valid reasons for why the law alone might be insufficient to
ensure ethical behaviour.

There are several reasons why laws are not sufficient to ensure ethical conduct among market participants, as
discussed below:

* Laws and regulations are often created in response to existing market practices. A new law might address an
existing ethical problem but create an opportunity for other unethical behavior in future.

* Laws can be interpreted differently. Market participants may choose to interpret the law to their advantage or
delay compliance where there is no punitive action.

* Laws can vary across jurisdictions. This may encourage questionable practice to move to places that are less
restrictive in nature.

Section 6. LO.e.

Question Q-Code: L1-ES-ETIP-012 LOS f Section 7

12 Which of the following statements about ethical decision framework is/are most likely
accurate?

* Statement 1: An ethical decision framework helps decision makers justify actions to stakeholders.

* Statement 2: Too many choices can at best lead to inaction.

* Statement 3: An ethical decision framework serves as a tool for investment professionals to choose the best
possible alternative.

A) Statement 1 and 3.
B) Statement 3 only.
C) Statement 1, 2 and 3.

Answer C) Statement 1, 2 and 3.

Explanation C is correct. All three statements regarding ethical decision frameworks are correct.

The ethical framework:

 * Helps in evaluating a situation from multiple perspectives after considering the larger picture in such a way that it
benefits stakeholders in the long term. Often, the impact of a decision or all aspects of a situation is not clear in the
short term and decisions taken in haste may harm stakeholders unintentionally.

* Helps decision makers justify actions to a broader group of stakeholders.

Section 7. LO.f.

Question Q-Code: L1-ES-ETIP-013 LOS f Section 7

13 Which of the following parties should an investment professional consider as stakeholders while making decisions in
an ethical manner?

A) Employer and clients only.

B) Clients and market participants only.
C) Employer, clients, family and market participants.

Answer C) Employer, clients, family and market participants.

Explanation C is correct. An investment professional should consider the risk to all stakeholders such as employer, clients,
family, and market participants while making decisions. Section 7. LO.f.

Question Q-Code: L1-ES-ETIP-014 LOS f Section 7

14 Which of the following would be a step in the consideration phase in an ethical decision making process ?

A) Assess the decision to see if it had the desired outcome.

B) Seek guidance to navigate through situational influences.
C) Assess any potential conflicts of interest.

Answer B) Seek guidance to navigate through situational influences.

Explanation B is correct. Statement A is a step once the decision is already made and Statement C is a step in the identification
phase of the ethical decision-making process.

Steps in the Ethical decision-making framework:

* Identification phase: Identify all the relevant facts. This includes information one has and what one would like to
have.

a. Identify relevant facts such as details of the employer, information on an IPO or a deal, rules and regulations of
the industry, etc.

b. Identify the stakeholders such as employer, market participants, clients, supervisor, investors, family, etc.

c. Identify relevant ethical principles for the situation. This may include loyalty to employer, clients’ interests taking
precedence before everything else, and maintaining the confidentiality of information.

d. Identify any potential conflicts of interest, or conflicts in your duties to employers/clients. Examples of potential
conflict of interest include duties to one client versus other clients of the firm, financial rewards linked to the
success of a deal versus duty to employer, and duty to supervisor versus the need to impress.

* Consideration phase: Seek guidance to navigate through situational influences and personal biases that may
affect decision-making.

* Decide and act: Make a decision and act.

* Reflect: Once the decision is made, assess the decision to see if it had the desired outcome. If not, then analyze
the reasons.

Section 7. LO.f.