Level I R02 Code of Ethics and

Standards of Professional
Conduct
Test Code: L1 R02 CESP Q-Bank 2020
Number of questions: 28

Question Q-Code: L1-ES-CESP-001 LOS a Section 2

1 Who among the following is responsible for the enforcement of Code and Standards ?

A) The Disciplinary Review Committee.

B) The Professional Conduct Program.
C) The Professional Conduct Program in conjunction with the Disciplinary Review Committee.

Answer C) The Professional Conduct Program in conjunction with the Disciplinary Review Committee.

Explanation C is correct. The Professional Conduct Program, in conjunction with the Disciplinary Review Committee, is
responsible for the enforcement of the Code and Standards. All CFA Institute members and candidates enrolled in
the CFA program are required to comply with the Code and Standards.

* The DRC is a volunteer committee of CFA charterholders who serve on panels to review conduct and partner with
professional conduct staff to establish and review professional conduct policies.

* The CFA Institute Bylaws and Rules of Procedure for Professional Conduct form the basic structure for enforcing
the Code and Standards.

Section 2. LO.a.

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

2 Who is required to comply with the Code and Standards?

A) Only CFA Institute members.

B) Anyone working in the investment industry reporting to CFA Institute members.
C) All CFA Institute members and candidates enrolled in the CFA program.

Answer C) All CFA Institute members and candidates enrolled in the CFA program.

Explanation C is correct. All CFA Institute members and candidates enrolled in the CFA program are required to comply with the
Code and Standards. Section 2. LO.a.

Question Q-Code: L1-ES-CESP-003 LOS a Section 2

3 A CFA Institute candidate enrolled for the Level II program has a popular Facebook page under a pseudonym. He
posts exam-style questions to his page every day that has taken the number of likes from 50 to over 3,000 in less
than four months. After the exam, the candidate expresses his displeasure over the topics that were not tested. As
a first step, this act would most likely result in:

A) a professional conduct inquiry.

B) suspension of the candidate’s membership and further participation in the CFA program.
C) the candidate being referred to a panel composed of DRC members.

Answer A) a professional conduct inquiry.

Explanation A is correct. A professional conduct inquiry will be initiated to detect disclosure of confidential exam information

Professional Conduct inquiries can be prompted by several reasons:

* Self-disclosure: On the annual Professional Conduct Statement, members disclose if they have been a subject of
civil litigation or criminal investigation.

* Written complaints: The PCP staff may receive written complaints.

 * Evidence of misconduct: The PCP staff may come across violations through media or any public source.

* Report by a CFA exam proctor: If a candidate violated any rules on exam day and is reported by the proctor.

* CFA Institute may conduct analysis of scores and exam materials after the exam, as well as monitor online and
social media to detect disclosure of confidential exam information.

After an inquiry is initiated, the professional conduct team conducts an investigation. If the professional conduct
staff believes a violation of the Code and Standards has occurred, they propose sanctions which can include: public
censure, suspension of membership and use of the CFA designation, and revocation of the CFA charter.
Candidates may be suspended or prohibited from further participation in the CFA program.

The member or candidate has the opportunity to accept or reject any charges and the proposed sanctions. If the
member/candidate accepts the violation, then the sanctions will be imposed. If the member/candidate does not
accept the charges or the proposed sanctions, the matter is referred to the DRC, which reviews materials and
presentations from professional conduct staff and from the member or candidate. The panel’s task is to determine
whether a violation of the Code and Standards or testing policies has occurred and, if so, what sanction should be
imposed. Section 2. LO.a.

Question Q-Code: L1-ES-CESP-004 LOS a Section 2

4 The Professional Conduct division of the CFA Institute is responsible for enforcing testing policies for:

A) The CIPM Program only.

B) The CFA Program only.
C) The CFA Institute education programs and the CIPM program.

Answer C) The CFA Institute education programs and the CIPM program.

Explanation C is correct. The Professional Conduct division of the CFA Institute is responsible for enforcing testing policies for
the CFA Institute education programs and the CIPM program. The Professional Conduct division is also responsible
for enforcing testing policies of other CFA Institute education programs as well as the professional conduct of
Certificate in Investment Performance Measurement (CIPM) certificants.Section 2. LO.a.

Question Q-Code: L1-ES-CESP-005 LOS a Section 2

5 Who maintains oversight and responsibility for the Professional Conduct Program?

A) The Disciplinary Review Committee.

B) The CFA Institute Board of Governors.
C) The Disciplinary Review Committee and the CFA Institute Board of Governors.

Answer B) The CFA Institute Board of Governors.

Explanation B is correct. The CFA Institute Board of Governors maintains oversight and responsibility for the Professional
Conduct Program, which, in conjunction with the Disciplinary Review Committee (DRC), is responsible for
enforcement of the Code and Standards. The DRC is a volunteer committee of CFA charterholders who serve on
panels to review conduct and partner with Professional Conduct staff to establish and review professional conduct
policies. Section 2. LO.a.

Question Q-Code: L1-ES-CESP-006 LOS a Section 2

6 A proctor files a report about a candidate who sat for the Level III exam, who he believes was looking sideways
multiple times during the exam and did not stop writing when asked to. A professional conduct inquiry is initiated.
What is the course of action the Professional Conduct staff investigating the matter is most likely to take as soon
as the inquiry is initiated?

A) Ask the member or candidate for a written explanation.

B) Impose sanctions on the candidate.
C) The investigating panel believes the offense is not serious and concludes without asking for a written
explanation, and does not impose a disciplinary sanction.

Answer A) Ask the member or candidate for a written explanation.

Explanation A is correct. Statement C is incorrect because continuing to write after the final call is an offense taken seriously
and it is likely that an investigation will be carried out by the Professional Conduct staff. Statement B is incorrect
because first, investigations will be carried out. If the professional conduct staff believes a violation of the Code and
Standards has occurred, they propose sanctions. Section 2. LO.a.

Question Q-Code: L1-ES-CESP-007 LOS a Section 2

7 Which of the following is not the result of a sanction imposed by CFA Institute?

A) Public censure.
B) Revocation of the CFA charter.
C) Termination of employment if the firm claims compliance with the Code and Standards.

Answer C) Termination of employment if the firm claims compliance with the Code and Standards.

Explanation C is correct. Sanctions include public censure, suspension of membership, use of the CFA designation, and
revocation of the CFA charter. Candidates may be suspended or prohibited from further participation in the CFA
program. Section 2. LO.a.

Question Q-Code: L1-ES-CESP-008 LOS b Section 3

8 According to the CFA Institute Code of Ethics, which one of the following is incorrect? Members and Candidates
must:

A) Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients,
prospective clients, employers, employees and other participants in the global capital markets.
B) Place the integrity of the investment profession and the interests of clients at par with their own interests.
C) Use reasonable care and exercise independent professional judgment when conducting investment analysis,
making investment recommendations, taking investment actions and engaging in other professional activities.

Answer B) Place the integrity of the investment profession and the interests of clients at par with their own interests.

Explanation B is correct. According to the CFA Code of Ethics: “Place the integrity of the investment profession and the
interests of clients above their own personal interests” and not at par with their own interests. Statement A and C
are correct. Section 3. LO.b.

Question Q-Code: L1-ES-CESP-009 LOS b Section 3

9 According to the CFA Institute Code of Ethics, which of the following statements is correct? Members and
Candidates must:

A) Act with honesty, efficiency, thoroughness, and in an ethical manner with the public, clients, prospective clients,
employers, employees and other participants in the global capital markets.
B) Refrain from encouraging others to act in a professional and ethical manner that will reflect credit on the
employer and the profession.
C) Promote the integrity and viability of the global capital markets for the ultimate benefit of society.

Answer C) Promote the integrity and viability of the global capital markets for the ultimate benefit of society.

Explanation C is correct. A is incorrect because the Code of Ethics talks about integrity, competence, diligence, and respect. B
is incorrect because members and candidates must not only practice themselves but also encourage others to
practice in a professional and ethical manner that will reflect credit on themselves and the profession. Section 3.
LO.b.

Question Q-Code: L1-ES-CESP-010 LOS b Section 3

10 According to the CFA Institute Code of Ethics, which of the following statements is least likely correct? Members
and Candidates must:

A) place the integrity of the investment profession and the interest of clients above their own personal interests.
B) maintain and improve their professional competence and strive to create a competitive environment for other
investment professionals.
C) use reasonable care and exercise independent professional judgment when conducting investment analysis,
 making investment recommendations, taking investment actions, and engaging in other professional activities.

Answer B) maintain and improve their professional competence and strive to create a competitive environment for other
investment professionals.

Explanation B is correct. The Code of Ethics does not talk about creating a competitive environment. The focus is on
maintaining and improving the professional competency of self and others in the profession. Members and
Candidates must maintain and improve their professional competence and strive to maintain and improve the
competence of other investment professionals. Section 3. LO.b.

Question Q-Code: L1-ES-CESP-014 LOS b Section 3

11 According to the CFA Institute Code of Ethics, which of the following statements is correct? Members and
Candidates must:

A) promote the integrity and efficiency of the global capital markets for the ultimate benefit of society.
B) promote the integrity and efficiency of the global capital markets for the ultimate benefit of investors.
C) promote the integrity and viability of the global capital markets for the ultimate benefit of society.

Answer C) promote the integrity and viability of the global capital markets for the ultimate benefit of society.

Explanation C is correct. Members and Candidates must promote the integrity and viability of the global capital markets for the
ultimate benefit of society. Section 3. LO.b.

Question Q-Code: L1-ES-CESP-015 LOS b Section 3

12 According to the CFA Institute Code of Ethics, which of the following statements is correct? Members and
Candidates must:

A) Use independence and exercise discretion when conducting investment analysis, making investment
recommendations, taking investment actions, and engaging in other professional activities.
B) Use reasonable care and exercise independent professional judgment when conducting investment analysis,
making investment recommendations, taking investment actions, and engaging in other professional activities.
C) Use independence and objectivity when conducting investment analysis, making investment recommendations,
taking investment actions, and engaging in other professional activities.

Answer B) Use reasonable care and exercise independent professional judgment when conducting investment analysis,
making investment recommendations, taking investment actions, and engaging in other professional activities.

Explanation B is correct. Members of the CFA Institute (including CFA charterholders) and candidates for the CFA designation
(“Members and candidates”) must use reasonable care and exercise independent professional judgment when
conducting investment analysis, making investment recommendations, taking investment actions, and engaging in
other professional activities.

Section 3. LO.b.

Question Q-Code: L1-ES-CESP-011 LOS b Section 4

13 Which of the following is not a Standard of Professional Conduct ?

A) Efficiency of capital markets.

B) Professionalism.
C) Duties to clients.

Answer A) Efficiency of capital markets.

Explanation A is correct. It is Integrity of Capital Markets, not Efficiency of Capital Markets. The seven Standards of Professional
Conduct are as follows:

I.Professionalism

II. Integrity of Capital Markets

III. Duties to Clients

IV. Duties to Employers

 V. Investment analysis, Recommendations, and Actions

VI. Conflicts of Interest

VII. Responsibilities as a CFA Institute Member, or CFA Candidate

Section 4. LO.b.

Question Q-Code: L1-ES-CESP-012 LOS b Section 4

14 Which one of the following is a Standard of Professional Conduct ?

A) Duties to Capital Markets.

B) Equity Analysis, Recommendations, and Actions.
C) Conflicts of Interest.

Answer C) Conflicts of Interest.

Explanation C is correct. B is incorrect because it is Investment Analysis, Recommendations, and Actions. A is incorrect
because it is Duties to Clients and Duties to Employers.

The seven Standards of Professional Conduct are as follows:

I. Professionalism

II. Integrity of Capital Markets

III. Duties to Clients

IV. Duties to Employers

V. Investment analysis, Recommendations, and Actions

VI. Conflicts of Interest

VII. Responsibilities as a CFA Institute Member, or CFA Candidate

Section 4. LO.b.

Question Q-Code: L1-ES-CESP-013 LOS b Section 4

15 Which one among the following is not a Standard of Professional Conduct ?

A) Duties to Employers.
B) Responsibilities as a CFA Institute Member or CFA Candidate.
C) Communication with Employers.

Answer C) Communication with Employers.

Explanation C is correct. Communication with clients and prospective clients is a substandard under Investment Analysis,
Recommendations, and Actions.

The seven Standards of Professional Conduct are as follows:

I. Professionalism

II. Integrity of Capital Markets

III. Duties to Clients

IV. Duties to Employers

V. Investment analysis, Recommendations, and Actions

VI. Conflicts of Interest

VII. Responsibilities as a CFA Institute Member, or CFA Candidate Section 4. LO.b.

Question Q-Code: L1-ES-CESP-016 LOS c Section 4

16 The Standards of Practice Handbook is most likely to require a member to disclose which of the following to clients
and prospective clients ?

A) Guidelines of CFA Institute Standards of Professional Conduct.

 B) The important limitations and risks of the investment process.
C) A one-time investment loss that occurred after disclosure of certain risks of investment.

Answer B) The important limitations and risks of the investment process.

Explanation B is correct. According to Standard V(B) Communication with Clients and Prospective Clients members should
inform their clients about significant limitations and risks associated with the investment process.

I. Investment Analysis, Recommendations, and Actions

A. Diligence and Reasonable Basis

Members and Candidates must:

1. Exercise diligence, independence, and thoroughness in analyzing investments, making investment

recommendations, and taking investment actions.

2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment
analysis, recommendation, or action.

A. Communication with Clients and Prospective Clients

Members and Candidates must:

1. Disclose to clients and prospective clients the basic format and general principles of the investment processes
they use to analyze investments, select securities, and construct portfolios and must promptly disclose any
changes that might materially affect those processes.

2. Disclose to clients and prospective clients significant limitations and risks associated with the
investment process.

3. Use reasonable judgment in identifying which factors are important to their investment analyses,
recommendations, or actions and include those factors in communications with clients and prospective clients.

4. Distinguish between fact and opinion in the presentation of investment analysis and recommendations.

A. Record Retention

Members and Candidates must develop and maintain appropriate records to support their investment analyses,
recommendations, actions, and other investment-related communications with clients and prospective clients.

Section 4. LO.c.

Question Q-Code: L1-ES-CESP-017 LOS c Section 4

17 According to the Standards of Practice Handbook, which of the following statements about Performance
Presentation is most accurate? The Standard related to performance presentation requires members and
candidates:

A) to ensure that the investment performance information is fair, accurate, and complete.
B) to deal fairly and objectively with all clients when providing investment analysis, making investment
recommendations, or taking investment action.
C) to avoid misrepresenting past performance to clients and prospective clients.

Answer A) to ensure that the investment performance information is fair, accurate, and complete.

Explanation A is correct. Refer to Standard III(D) Performance Presentation, which states that when communicating investment
performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate,
and complete. Statement B refers to Standard III (B) Fair Dealing, which states that Members and Candidates must
deal fairly and objectively with all clients when providing investment analysis, making investment recommendations,
taking investment action, or engaging in other professional activities. Statement C refers to Misrepresentation,
which states that Members and Candidates must not knowingly make any misrepresentations relating to
investment analysis, recommendations, actions, or other professional activities. Section 4. LO.c.

Question Q-Code: L1-ES-CESP-019 LOS c Section 4

18 According to the Standards of Practice Handbook, members are most likely required to disclose to their clients:

A) ownership of stock in companies they recommend to clients.

 B) information on the Professional Conduct Statement.
C) the screening steps used to select stocks.

Answer A) ownership of stock in companies they recommend to clients.

Explanation A is correct. Refer to Standard VI(A) Disclosure of Conflicts.

Standard VI: Conflicts of Interest à A) Disclosure of Conflicts: Members and Candidates must make full
and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or
interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must
ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant
information effectively. Section 4. LO.c.

Question Q-Code: L1-ES-CESP-020 LOS c Section 4

19 According to the Standards of Practice Handbook, a member has to protect the interests of his firm, refraining
from any conduct that would deprive it of profit, or his skills and ability. If the member fails, he violates the CFA
Institute Standards of Professional Conduct related to:

A) duties to Clients.
B) loyalty.
C) responsibilities of Supervisors.

Answer B) loyalty.

Explanation B is correct. Refer to Standard IV(A) Loyalty. In matters related to their employment, Members and Candidates
must act for the benefit of their employer and not deprive their employer of the advantage of their skills and
abilities, divulge confidential information, or otherwise cause harm to their employer. A is incorrect because Duties
to clients is the main standard which have sub-standards 1) Loyalty, 2) Additional Compensation Arrangements, 3)
Responsibilities of Supervisors. According to Responsibilities of Supervisors, Members and Candidates must make
reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws,
rules, regulations, and the Code and Standards.

Section 4. LO.c.

Question Q-Code: L1-ES-CESP-021 LOS c Section 4

20 Which of the following statements is most accurate according to the Standards of Practice Handbook? Members
and Candidates must:

A) deal fairly and objectively with all the fee-paying clients when providing investment recommendations, taking
investment action, or engaging in other professional activities.
B) ensure that anyone under their supervision complies only with the Code and Standards.
C) not accept gifts, benefits or compensation if it creates a conflict with their employer’s interest unless they obtain
a written consent from all parties involved.

Answer C) not accept gifts, benefits or compensation if it creates a conflict with their employer’s interest unless they obtain
a written consent from all parties involved.

Explanation C is correct. As per Standard IV (C) Additional Compensation Arrangements, Members and Candidates must not
accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to
create a conflict of interest with their employer’s interest unless they obtain written consent from all parties
involved. A is incorrect because as per Standard III (B) Fair Dealing, Members and Candidates must deal fairly and
objectively with all clients (not just fee-paying clients) when providing investment analysis, making investment
recommendations, taking investment action, or engaging in other professional activities. B is incorrect because as
per Standard IV (C) Responsibilities of Supervisors, Members and Candidates must make reasonable efforts to
ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and
the Code and Standards they must comply with applicable laws, not just domestic laws. Section 4. LO.c.

Question Q-Code: L1-ES-CESP-022 LOS c Section 4

21 A failure to reveal information about a client involved in illegal activities is most likely a violation of:
 A) preservation of confidentiality.
B) loyalty, prudence and care.
C) disclosure of conflicts.

Answer A) preservation of confidentiality.

Explanation A is correct. Members and Candidates must reveal information when required by the law, or when the client is
involved in illegal activities. This is Standard III (E), Preservation of Confidentiality: Members and Candidates must
keep information about current, former, and prospective clients confidential unless:

1. The information concerns illegal activities on the part of the client or prospective client,
2. Disclosure is required by law, or
3. The client or prospective client permits disclosure of the information.

Standard III (A) Loyalty, prudence, and care: Members and Candidates have a duty of loyalty to their clients and
must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of
their clients and place their clients’ interests before their employer’s or their own interests.

Standard VI (A) Disclosure of Conflicts: Members and Candidates must make full and fair disclosure of all matters
that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to
their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are
prominent, are delivered in plain language, and communicate the relevant information effectively. Section 4. LO.c.

Question Q-Code: L1-ES-CESP-023 LOS c Section 4

22 Which of the following statements is most accurate according to the Standards of Practice Handbook? Members
and Candidates:

A) who possess nonmaterial nonpublic information that could affect the value of an investment must not act or
cause others to act on the information.
B) who possess material nonpublic information that could affect the value of an investment must not act or cause
others to act on the information.
C) who possess nonmaterial public information that could affect the value of an investment must not act or cause
others to act on the information.

Answer B) who possess material nonpublic information that could affect the value of an investment must not act or cause
others to act on the information.

Explanation B is correct. Refer to Standard II(A) Material Nonpublic Information: Members and Candidates who possess
material nonpublic information that could affect the value of an investment must not act or cause others to act
on the information. Section 4. LO.c.

Question Q-Code: L1-ES-CESP-024 LOS c Section 4

23 Which of the following statements is most accurate according to the Standards of Practice Handbook? Members
and Candidates:

A) may engage in practices to boost the liquidity of an illiquid stock.

B) must not engage in practices to artificially inflate trading volume.
C) are not prohibited from creating rumor campaigns on blogs and social media outlets with the intent of pumping
prices.

Answer B) must not engage in practices to artificially inflate trading volume.

Explanation B is correct. Refer to Standard II(B) Market Manipulation. Members and Candidates must not engage in practices
that distort prices or artificially inflate trading volume with the intent to mislead market participants. Section 4. LO.c.

Question Q-Code: L1-ES-CESP-025 LOS c Section 4

24 Which Standard requires members and candidates responsible for managing a portfolio to a specific mandate,
strategy, or style, to make investment recommendations or take investment actions that are consistent with the
stated objectives and constraints of the portfolio?

A) Standard III(C) Suitability.

B) Standard V(A) Diligence and Reasonable Basis.
 C) Standard III(A) Loyalty, Prudence and Care.

Answer A) Standard III(C) Suitability.

Explanation A is correct. Refer to Standard III(C) Suitability.

1. When Members and Candidates are in an advisory relationship with a client, they must:

a. Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives,
and financial constraints prior to making any investment recommendation or taking investment action and must
reassess and update this information regularly.

b. Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written
objectives, mandates, and constraints before making an investment recommendation or taking investment action.

c.Judge the suitability of investments in the context of the client’s total portfolio.

2.When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style,
they must make only investment recommendations or take only investment actions that are consistent with the
stated objectives and constraints of the portfolio.

B is incorrect. Standard V(A) Diligence and Reasonable Basis says that Members and Candidates must:

a. Exercise diligence, independence, and thoroughness in analyzing investments, making investment

recommendations, and taking investment actions.

b. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment
analysis, recommendation, or action.

C is incorrect. Standard III(A) Loyalty, Prudence and Care says that Members and Candidates have a duty of loyalty
to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must
act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.

Section 4. LO.c.

Question Q-Code: L1-ES-CESP-026 LOS c Section 4

25 Which of the following statements is most accurate according to the Standards of Practice Handbook? Members
and Candidates:

A) must keep information about current, former, and prospective clients confidential if it concerns illegal activities
on the part of the client or prospective client unless disclosure is required by the law.
B) must disclose information about current, former, and prospective clients confidential if it concerns illegal
activities on the part of the client or prospective client irrespective of whether disclosure is required by the law.
C) must keep information about current, former, and prospective clients confidential if it concerns illegal activities
on the part of the client or prospective client unless clients or prospective clients permit disclosure.

Answer B) must disclose information about current, former, and prospective clients confidential if it concerns illegal
activities on the part of the client or prospective client irrespective of whether disclosure is required by the law.

Explanation B is correct. Refer to Standard III(E) Preservation of Confidentiality. Members and Candidates must keep
information about current, former, and prospective clients confidential unless:

1. The information concerns illegal activities on the part of the client or prospective client,

2. Disclosure is required by law, or

3.The client or prospective client permits disclosure of the information.

Section 4. LO.c.

Question Q-Code: L1-ES-CESP-027 LOS c Section 4

26 Which Standard relates to distinguishing between fact and opinion in the presentation of investment analysis and
recommendations?

A) Standard V(C) Record Retention.

B) Standard V(A) Diligence and Reasonable Basis.
C) Standard V(B) Communication with Clients and Prospective Clients.
Answer C) Standard V(B) Communication with Clients and Prospective Clients.

Explanation C is correct. Refer to Standard V(B) Communication with Clients and Prospective Clients.

Members and Candidates must:

1. Disclose to clients and prospective clients the basic format and general principles of the investment processes
they use to analyze investments, select securities, and construct portfolios and must promptly disclose any
changes that might materially affect those processes.

2. Disclose to clients and prospective clients significant limitations and risks associated with the investment
process.

3. Use reasonable judgment in identifying which factors are important to their investment analyses,
recommendations, or actions and include those factors in communications with clients and prospective clients.

4. Distinguish between fact and opinion in the presentation of investment analysis and
recommendations.

Standard V(C) Record Retention: Members and Candidates must develop and maintain appropriate records to
support their investment analyses, recommendations, actions, and other investment-related communications with
clients and prospective clients.

Standard V(A) Diligence and Reasonable Basis: Members and Candidates must:

1. Exercise diligence, independence, and thoroughness in analyzing investments, making investment

recommendations, and taking investment actions.

2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment
analysis, recommendation, or action.

Section 4. LO.c.

Question Q-Code: L1-ES-CESP-028 LOS c Section 4

27 A member gets verbal consent from his employer before accepting a 7-day vacation for him and his family at his
client’s private villa in southern Spain, including travel in a private jet as it is in a remote location. This was in
appreciation for the outstanding performance of his client’s portfolio. Did the member violate any Standard?

A) No.
B) Yes, Standard IV(A) Loyalty.
C) Yes, Standard IV(B) Additional Compensation Arrangements.

Answer C) Yes, Standard IV(B) Additional Compensation Arrangements.

Explanation C is correct. The member failed to obtain written consent and a gift such as is this might potentially create a conflict
of interest. Standard IV(B) Additional Compensation Arrangements says that “Members and Candidates must not
accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to
create a conflict of interest with their employer’s interest unless they obtain written consent from all parties
involved”. Standard IV(A) Loyalty says that “In matters related to their employment, Members and Candidates must
act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities,
divulge confidential information, or otherwise cause harm to their employer”. Section 4. LO.c.

Question Q-Code: L1-ES-CESP-029 LOS c Section 4

28 Which Standard requires Members and Candidates to disclose to their employer, clients, and prospective clients, as
appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation
of products or services?

A) Standard VI(C) Referral Fees.

B) Standard IV(B) Additional Compensation Arrangements.
C) Standard IV(A) Loyalty.

Answer A) Standard VI(C) Referral Fees.

Explanation A is correct. Refer to Standard VI(C) Referral Fees. Members and Candidates must disclose to their employer,
clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid
to others for the recommendation of products or services. Standard IV(B) Additional Compensation Arrangements
says that “Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes
with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they
obtain written consent from all parties involved”. Standard IV(A) Loyalty says that “In matters related to their
employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of
the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their
employer”. Section 4. LO.c.