L1 R03 GUID Q-Bank With Answers

Level I R03 Guidance for
Standards I–VII
Test Code: L1 R03 GUID Q-Bank 2020
Number of questions: 93
Question Q-Code: L1-ES-GUID-001
1 Cory Griffin, a Level II candidate, works as an investment advisor for Trust Mutual Fund. He specializes in
commodities and informs his clients that the energy prices are going to rise due to political turmoil in the Middle
East. He informs his broker at Xylan Mercantile to invest long in oil futures for him. Griffin should:
A) disclose his personal transaction.

B) manage his personal account separately.
C) refrain from any personal transaction as long as he is employed by Trust.
Answer A) disclose his personal transaction.
Explanation A is correct. Griffin should disclose this personal transaction otherwise it would be a violation of Standard VI(A)
Disclosure of Conflicts. According to 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, or employer. Members and Candidates must
ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant
information effectively.
2 Klaus Matthias, CFA, works at Meinhard Capital, an investment and brokerage firm where he supervises a team that
develops and markets fixed income funds to cater to different high net worth clients internationally. Recently, due
to the popularity of Islamic products he has asked his team to develop an Islamic Fund to market to his clients in
the Middle East. The team includes three individuals who are all candidates in the CFA Program. After some
research, they come up with a product that seems marketable to this specific niche. Before distribution of the fund,
Matthias is worried whether the Fund is suitable for all Islamic investors. Matthias should:
A) not launch the fund because it is not suitable for all Islamic investors.
B) launch the fund but clearly acknowledge areas where the fund may not be suitable for certain clients.
C) launch the fund because there will always be differences in cultural and religious laws around the world.
Answer B) launch the fund but clearly acknowledge areas where the fund may not be suitable for certain clients.
Explanation B is correct. Refer to Standards I(A) Knowledge of the Law and III(C) Suitability. Members and candidates should
understand that a single product cannot be suitable for all Islamic investors. The product seems to be marketable
to the specific niche. Hence, they should clearly acknowledge areas where the fund may not be suitable for certain
clients. The best way to deal with this situation is to clearly define which Islamic laws and regulations are being
followed in the creation of the product and the types of investors for whom this fund will be suitable.
Standard 1 (A) Knowledge of the Law: Members and Candidates must understand and comply with all applicable
laws, rules, and regulations of any government, regulatory organization, licensing agency, or professional
association governing their professional activities. In the event of conflict, Members and Candidates must comply
with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in
and must dissociate from any violation of such laws, rules, or regulations.
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.
3 Nargis Dilawez, CFA, works as an independent research analyst and also uses various online social media sites to
make announcements, recommendations and analysis of various securities. She is a resident of Country S where
there is no law against posting of comments and opinions, but since her views are read globally she is worried
about regulators in certain countries who impose restrictions and requirements on online communications.
According to the Standards, Dilawez should:
A) continue to post her comments since her resident country does not impose any regulatory restrictions.
B) discontinue immediately and wait for the restrictions to ease in the nonresident countries.
C) seek guidance from appropriate, knowledgeable, and reliable sources to diligently follow legal and regulatory
trends affecting her professional responsibilities.
Answer C) seek guidance from appropriate, knowledgeable, and reliable sources to diligently follow legal and regulatory
trends affecting her professional responsibilities.
Explanation C is correct. According to Standard I(A) Knowledge of the Law, Dilawez should adopt the stricter law. Standard 1
(A) Knowledge of the Law requires that “Members and Candidates must understand and comply with all applicable
laws, rules, and regulations of any government, regulatory organization, licensing agency, or professional
association governing their professional activities. In the event of conflict, Members and Candidates must comply
with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in
and must dissociate from any violation of such laws, rules, or regulations”.
4 Wynona Fritz works for Brady Brokerage as a fixed income analyst. She is also registered to take the Level III
examination. After analyzing both the qualitative and quantitative aspects of Saber Inc., Fritz concludes that the
company is not correctly rated by the credit rating agency and should be downgraded due to the leverage in its
capital structure. A senior manager from the investment banking department informs her that Saber Inc. has
chosen Brady Brokerage as one of the firms to underwrite and market their new bond issue. Fritz is concerned
that her report will cause the company to terminate their relationship with Brady and affect her employment.
According to the Standards, Fritz should:
A) dissociate from the report, the underwriting, and the client.

B) be independent and objective in her analysis based solely on the company’s fundamentals.
C) change her recommendation about the credit rating to remove the conflict.
Answer B) be independent and objective in her analysis based solely on the company’s fundamentals.
Explanation B is correct. Fritz should be independent and objective in her report. Alternatively, Brady Brokerage could place
Saber Inc. on a restricted list and issue only factual information, and no negative or positive opinion. According to
Standard I(B) Independence and Objectivity, ”Members and Candidates must use reasonable care and judgment to
achieve and maintain independence and objectivity in their professional activities. Members and Candidates must
not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to
compromise their own or another’s independence and objectivity.”
5 Jessica Morales works as an investment adviser for Chris Crosby, a middle-aged, risk averse investor. As per the
investment policy statement, Morales invests in low-risk, high-income equities for Crosby keeping in mind his
current needs and objectives. Recently Crosby’s mother passed away leaving him with a significant inheritance.
Morales continues to invest as before without any change in the investment strategy. According to the CFA
Institute Standards of Professional Conduct, Morales should:
A) stay abreast of changes in the client’s net worth and accordingly update the investment policy to reflect changes
in investment objectives.
B) consider the long term aspect of Morales’ investments and continue with the current strategy.
C) keep changing the asset allocations in line with market changes.
Answer A) stay abreast of changes in the client’s net worth and accordingly update the investment policy to reflect
changes in investment objectives.
Explanation A is correct. Refer to Standard III(C) Suitability. IPS is to be updated at least annually to reflect changes in market
expectations and circumstances of the client. Needs and circumstances of the clients can change at any time and
the investment recommendations/decisions must take note of this. Like in the scenario given, Crosby’s mother
passed away leaving him with a significant inheritance which may add to his total portfolio and increases the size of
his asset base. Morales should update the investment policy to reflect changes in investment objectives
accordingly.
According to Standard III (C) Suitability,
action.
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.
C is incorrect because it is not appropriate to keep changing the asset allocations in response to changes in market
conditions. We need to take into account the client’s IPS, objectives, constrains and changes in the circumstances
of the client.
6 Christie Tania, CFA, works as a fixed income manager for Mastermind Invest Capital. She finds an error in the
performance results of one of her accounts as the report is about to be released to the client. The correction of the
error will show an underperformance of the account compared to the selected benchmark. The client is not
satisfied with Mastermind and had previously indicated that the account will be terminated if it did not meet the
requisite returns. According to the CFA Institute Standards, Tania should:
A) not send the report and wait till account shows an improvement in results.
B) inform the appropriate individuals that the report needs to be updated before releasing it to the client.
C) not correct the error and send it.
Answer B) inform the appropriate individuals that the report needs to be updated before releasing it to the client.
Explanation B is correct. The client needs to be informed with the updated result of the underperformance of his account.
Withholding information is not in the best interest of the client. Otherwise, it will be a violation of Standard III(A)
Loyalty, prudence, and care. According to 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”. Like in the scenario given, Tania should release the report having updated / correct information
regarding client’s account despite the probability that it will hurt her employer’s interest as the client may terminate
the account with it due to underperformance.
7 Bernhard Investment and Brokerage Company, has recently changed its stock selection method based on
fundamental analysis to technical analysis. After testing it in-house under various scenarios, the new method
seems more appropriate to the investments done by Bernhard. Kurt Ludwig, CFA, a portfolio manager with
Bernhard feels that his clients will not understand the change and decides not to inform them. The most
appropriate action Ludwig should take to avoid a violation of the Code and Standards is:
A) to communicate the change of method to his clients and prospective clients.

B) to communicate to only those clients who have a previous knowledge of technical analysis.
C) not to inform of the change because it might lead the clients to challenge the new method of stock selection.
Answer A) to communicate the change of method to his clients and prospective clients.
Explanation A is correct. Ludwig must disclose to his clients the change in the process of selection. Refer to Standard V(B)
Communication with Clients and Prospective Clients. According to this Standard, 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.
8 Dave Daisuke, CFA, works in the corporate finance department of Advile Securities. He receives a non-cash
compensation for every referral he makes to the brokerage department. This arrangement is an accepted norm
within the company but the clients are not informed because no cash is given out within the firm for
interdepartmental referrals. According to the CFA Institute Standards, the most appropriate action to take for the
firm to avoid a violation is to:
A) adjust the non-cash compensation in the salaries of the personnel including Daisuke who are referring clients to
the brokerage department.
B) disclose to clients at the time of a referral, the referral arrangements within Advile’s departments.
C) stop the referral policy to remove any conflicts of interest.
Answer B) disclose to clients at the time of a referral, the referral arrangements within Advile’s departments.
Explanation B is correct. Disclosure to clients is important even if the referrals result in a noncash compensation. 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.
9 Lauren Crawley is enrolled to take the Level I exam. As he tries hard to remember a formula to complete a question,
he notices that the person in front of him gets up to drink water and a piece of paper slips from his pocket and falls
on Crawley’s table. In order to avoid a violation of the CFA Institute Standards of Professional Conduct, the least
appropriate action taken by Crawley is to:
A) remove it without looking at it and call the proctor.

B) immediately call the proctor to her table and have the paper removed.
C) look at the paper and then remove it before anyone else notices it.
Answer C) look at the paper and then remove it before anyone else notices it.
Explanation C is correct. Refer to Standard VII(A) Conduct as Participants in CFA Institute Programs. Members and Candidates
must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA
designation or the integrity, validity, or security of CFA Institute programs. The standard covers many aspects such
as cheating on any CFA Institute examinations, violating the testing policies, disclosing confidential exam
information to the public, and improperly using any association with the CFA Institute to further personal or
professional goals.
10 Anna Becker is employed by Jergen Investment Management Company (JIMC). Becker is a Level II candidate and is
the only CFA candidate employed by JIMC. Becker is given supervisory responsibilities of the compliance department
and asked to review the firm’s compliance policies and procedures, which she finds inadequate. She voices her
concerns during a meeting with the CEO, who tells her to submit her recommendations in a report but these will
not be implemented since the firm is undergoing a change in structure and no compliance changes will be
entertained till then. According to the Code and Standards, Becker should:
A) decline to accept supervisory responsibilities.

B) accept supervisory responsibilities and lay down the compliance policies and procedures for future.
C) wait till a new structure is implemented and then review the entire firm.
Answer A) decline to accept supervisory responsibilities.
Explanation A is correct. According to Standard IV(C) Responsibilities of Supervisors, a member or candidate should decline in
writing to accept supervisory responsibilities until reasonable compliance procedures are laid down by a firm for her
to assume and exercise responsibility.
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.
If the compliance procedures at a firm are inadequate, they must bring it to the attention of the firm’s senior
managers.
If the compliance procedures are inadequate or non-existent, then members and candidates should decline
supervisory responsibility.
11 Cory Crawford works as a fixed-income portfolio manager focusing on investment grade bonds at Doonesbury
Capital. His clients are primarily risk-averse, retired pensioners. Crawford’s firm has introduced a bonus system to
reward those portfolio managers who achieve a return higher than their respective benchmarks. Crawford, who is
also a Level I candidate, purchases certain high-yield bonds in order to increase the return of his portfolio. No
change in the objective or strategy has been suggested by Crawford. Crawford has least likely violated the
Standard related to:
A) Suitability.
B) Disclosure of Conflict.
C) Priority of Transactions.
Answer C) Priority of Transactions.
Explanation C is correct. Crawford doesn’t own the same securities as his clients therefore he least likely violates Standard VI(B)
Priority of Transactions. According to Standard VI(B) Priority of Transactions, investment transactions for clients
and employers must have priority over investment transactions in which a Member or Candidate is the beneficial
owner.
He violates Standard VI(A) Disclosure of Conflicts by failing to inform his clients of the change in his compensation
arrangement (i.e., a bonus system to reward those portfolio managers who achieve a return higher than their
respective benchmarks) with his employer which causes a conflict between his compensation and the clients’ IPS.
According to 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, or employer. Members and Candidates must ensure that such
disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.
He violated III(C) Suitability because he is managing a fixed-income portfolio focusing on investment grade bonds
and his clients are primarily risk-averse, retired pensioners. This implies that the high-yield bonds are not suitable
for his risk averse clients. According to Standard III (C) Suitability, 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”.
12 Rhonda Gates, CFA, works as a senior analyst covering basic materials and mining industry at Marcel
Investments. After a thorough and independent research, Gates concludes that the stock of Riley Mining is
overpriced and recommends selling it to take profits. She informs all the department heads of Marcel of her
findings. Thomas Toffler, head of trading, after being informed about Riley’s stock immediately places a sell order
on behalf of the firm and is able to trade aggressively. The next day Gates’ report is sent to all clients and the sales
force. Toffler least likely violated which of the following Standards ?
A) Loyalty, Prudence and Care.
B) Priority of Transactions.
C) Fair Dealing.
Answer C) Fair Dealing.
Explanation C is correct. The report was sent out to all clients at the same time; hence Standard III(B) Fair Dealing is not
violated. According to Standard III(B) Fair Dealing, 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.
Standard III(A) Loyalty, Prudence and Care has been violated because Toffler did not place his clients’ interests
before his employer’s interests. He placed a sell order on behalf of the firm before the report is sent to all the
clients. Standard III(A) Loyalty, Prudence and Care requires 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.
Standard VI(B) Priority of Transactions has been violated. This standard requires that “Investment transactions for
clients and employers must have priority over investment transactions in which a Member or Candidate is the
beneficial owner”. Toffler would have avoided the conflict by waiting until his clients had the opportunity to receive
and assimilate Gates’ report. To prevent front running (the practice of trading for one’s personal account before
client accounts), firms have blackout periods during which investment personnel cannot trade for their personal
accounts. This is to safeguard the interests of the clients. The policy on blackout and restricted periods varies from
firm to firm depending on their size. It can range from a total ban on trading to preventing the investment manager
from front running.
13 Ratti Sonali, a Level III candidate, works as a trader at Rupali Investments. While working on trades for high net-
worth clients, she notices a decline in the portfolio value due to certain investments made by the portfolio manager.
She informs her supervisor Ashok Rajan who tells her not to concern herself with the portfolio manager’s
performance. Sonali then speaks to the compliance officer who tells her that the high net worth client portfolio is
successful and the portfolio manager is very competent. The Standard least likely violated is:
A) Loyalty. prudence, and care.

B) Misrepresentation.
C) Responsibilities of Supervisors.
Answer B) Misrepresentation.
Explanation B is correct. Standards III(A) Loyalty, prucence, and care and IV(C) Responsibility of Supervisors have been violated
since both the supervisor and compliance officer did not investigate Sonali’s concerns. Standard IV (C)
Responsibility of Supervisors requires that 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. Standard I(C) Misrepresentation is not violated because the question does not provide enough
information to infer that amy misrepresentations relating to investment analysis or recommendations is made. As
per Standard I(C) Misrepresentation, Members and Candidates must not knowingly make any misrepresentations
relating to investment analysis, recommendations, actions, or other professional activities. A misrepresentation is
any untrue statement, or omission of fact, or any statement that is otherwise false or misleading.
14 Shehroze Parvan, CFA, manages a balanced fund at McCoy Securities. He recently joined the company after
working for ten years at Russell Securities. McCoy hired Parvan because of his proven track record at Russell. The
new advertising material that Parvan develops for the clients of McCoy carries his past performance which he
achieved at Russell as an endorsement of his knowledge and skills in investing. However, the performance results
at the end include a qualifier stating, “These results were achieved by Parvan at Russell Securities.” Has Parvan
violated any Standard?
A) Yes, relating to Misconduct.

B) Yes, relating to Performance Presentation.
C) No.
Answer C) No.
Explanation C is correct. No violation has occurred. It is acceptable to share past performance as long as a clear disclaimer is
provided that this performance was achieved at another firm. Standard III (D) Performance Presentation states that
when communicating investment performance information, members and candidates must make reasonable
efforts to ensure that it is fair, accurate, and complete. One should include disclosures that fully explain the
performance results being reported. The advertising material includes a qualifier stating, “These results were
achieved by Parvan at Russell Securities.” Hence, the investment performance information communicated to clients
is fair, accurate, and complete.
Standard I (D) Misconduct is not violated as the question does not provide enough information to infer that Parvan
shared past performance with an intention of deceit or fraud. Standard I (D) Misconduct requires that Members
and Candidates 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.
15 Ankit Aacharya, CFA, while making the marketing material for his firm Aakash Capital writes in the brochure,
“Aakash Capital is committed to achieving excellent performance for its clients. It hires the most eligible personnel in
the field of investment management. Most of the employees have either completed the CFA Program or are enrolled
as candidates in the CFA Program. As a CFA charterholder, I am the most qualified to manage client
investments.” Aacharya most likely violated the Standard with improper references to the:
A) CFA Designation.
B) CFA Program.
C) CFA Institute.
Answer A) CFA Designation.
Explanation A is correct. CFA Institute and CFA Designation were improperly referenced. Refer to Standard VII(B) Reference to
CFA Institute, the CFA Designation, and the CFA Program. When referring to CFA Institute, CFA Institute
membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates must not
misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA
designation, or candidacy in the CFA Program. Aacharya violated Standard VII(B) by stating “As a CFA
charterholder, I am the most qualified to manage client investments”.
16 Rasmussen Hadley, CFA, writes in an independent blog about the findings of his research on various companies. He
also works as an analyst with Brooklyn Brokers. He has written permission from his employer and appropriate
regulator to give his opinion about various securities in his blog. Hadley, however uses the pseudonym Sam Smith,
CFA, to hide his identity on the internet. Does Hadley violate the Standards?
A) No.
B) Yes, related to reference to CFA Designation.
C) Yes, related to loyalty.
Answer B) Yes, related to reference to CFA Designation.
Explanation B is correct. Hadley cannot use the CFA designation tagged to a pseudonym or online profile name used to hide his
identity. He is free to use a pseudonym but without the CFA designation. Refer to Standard VII(B) Reference to
CFA Institute, the CFA Designation, and the CFA Program. When referring to CFA Institute, CFA Institute
membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates must not
misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA
designation, or candidacy in the CFA Program.
Standard IV(A) Loyalty is not violated because he has written permission from his employer. This Standard requires
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”.
17 Sylvia Lancaster, a CFA candidate, is hired by Trevor Securities as a junior analyst. James Brokovich is the director
of research at Trevor and feels that Lancaster should cover equities in emerging markets because of their rapid
growth. Lancaster reads various brokerage reports on the subject and talks to other analysts of the
company. Brokovich also arranges for her to meet with an old friend, Bryan Lee, who is on the board of various
East Asian companies. Lancaster is then asked to submit a report on the companies in the consumer durables
industry of East Asia. Due to shortage of time, Lancaster finalizes her report based on her conversation with Lee
and the brokerage reports, and gives her “buy” recommendations on Malaysian stocks from the consumer
durables industry. Lancaster does not give reference of the brokerage reports as sources in her report. The
Standard least likely violated by Lancaster is:
A) Diligence and Reasonable Basis.

C) Conflicts of Interest.
Answer C) Conflicts of Interest.
Explanation C is correct. Lancaster has violated Standard I(C) Misrepresentation by not citing the brokerage reports as sources
and Standard V(A) Diligence and Reasonable Basis because of her lack of independent research in the preparation
of her report. As per Standard I(C) Misrepresentation, Members and Candidates must not knowingly make any
misrepresentations relating to investment analysis, recommendations, actions, or other professional activities. A
misrepresentation is any untrue statement, or omission of fact, or any statement that is otherwise false or
misleading. Members and Candidates must disclose the source of information used in their reports. According to
Standard V(A) Diligence and Reasonable Basis, Members and Candidates must exercise diligence, independence,
and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.
This implies that when using secondary or third-party research (research conducted by someone outside the
member’s firm) make reasonable efforts to ensure third-party research is sound.
18 Greg Vladislav, CFA, works for Anatoli Securities as a portfolio manager. One of his clients Boris Vladmir has left the
firm. Vladislav receives a request from a college friend who has recently started his money management firm to
share information and records of clients who have left Anatoli recently. Vladislav feels that it will not be
inappropriate to send him Vladmir’s records. Vladislav has most likely violated the Standard of:
A) Misconduct.
B) Loyalty.
C) Preservation of Confidentiality.
Answer C) Preservation of Confidentiality.
Explanation C is correct. Vladislav has violated Standard III(E) Preservation of Confidentiality because he has to maintain the
confidentiality of client information even if the person or entity is no longer a client.
According to Standard III(E) Preservation of Confidentiality, Members and Candidates must keep information about
current, former, and prospective clients confidential unless:
The information concerns illegal activities on the part of the client.

Disclosure is required by the law.
The client or prospective client permits disclosure of the information.
Standard I(D) Misconduct is not violated. According to Standard I(D) Misconduct, Members and Candidates 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.
Standard IV(A) Loyalty is not violated because he shared information of only that client who has left his firm. This
Standard requires 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”.
19 Lara Whitman, CFA, worked for Rapid Results Brokerage Company (RRBC) as a trader. She recently resigned her
position as a trader to join another competing investment and brokerage firm. Whitman did not sign any non-
compete agreement while at RRBC that would have prevented her from soliciting former clients. Whitman, however,
had saved her client list and records while working at RRBC, in her personal computer at home as a second copy.
She accesses this file to contact her former clients in her new job. The Standard most likely violated is:
A) Loyalty.
B) Duties to Clients.
C) Communications with Clients and Prospective Clients.
Answer A) Loyalty.
Explanation A is correct. Standard IV(A) Loyalty is most likely violated. A member cannot take records or work performed on
behalf of the firm in paper copy or electronically without permission to another firm. In this case she cannot use
the firm’s records of clients without the firm’s permission.
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.
Standard III Duties to Clients and standard V (B) Communication with Clients and Prospective Clients are not
violated here.
20 Julie Grosky, CFA, works for Harvest Mutual Fund where she manages a fixed income fund. In a hastily compiled
performance review, Grosky reports to her clients that her fund has exceeded the benchmark by 0.20%. Stuart
Brennan is a client of Harvest, who writes back to inform Grosky that the fund actually underperformed the
benchmark. Grosky incorrectly blames the error on a computer program newly implemented at Harvest. Grosky
least likely violated the Standard relating to:
A) Misrepresentation.
B) Misconduct.
C) Independence and Objectivity.
Answer C) Independence and Objectivity.
Explanation C is correct. Standard I(B) Independence and Objectivity is not violated. Standard I(B) Independence and Objectivity
involves members and candidates not accepting any gifts or benefits that could be expected to compromise their
independence and objectivity. Since no benefits were received Grosky has least likely violated I(B). Grosky most
likely violated the Standards I(C) Misrepresentation, and I(D) Misconduct because she knowingly misrepresents the
cause of the error. According to Standards I(C) Misrepresentation, Members and Candidates must not knowingly
make any misrepresentations relating to investment analysis, recommendations, actions, or other professional
activities. A misrepresentation is any untrue statement, or omission of fact, or any statement that is otherwise false
or misleading. According to Standard I(D) Misconduct, Members and Candidates 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.
21 Bryan Lee, CFA, works as a fund manager for Westlink Securities which historically has focused on US equities. Due
to his past experience, Lee is also knowledgeable about emerging markets. After discussing the matter with the
Chief Investment Officer (CIO) of Westlink, he decides to extend his fund’s investment universe to include equities
from emerging markets. The firm’s marketing and promotional literature is updated to reflect the change in
investment strategy. Has Lee violated any Standard ?
A) No.
B) Yes relating to Communications with Clients and Prospective Clients.
C) Yes, relating to Professionalism.
Answer B) Yes relating to Communications with Clients and Prospective Clients.
Explanation B is correct. Westlink and Lee’s current clients need to be informed along with the prospective clients, of the
change in the fund’s mandate since they might have objections concerning the Fund’s new allocations. Hence
Standard V(B) Communications with Clients and Prospective Clients is most likely violated. Significant risks and
limitations of the new investments should also be disclosed along with their impact on the fund as a whole.
Standard V (B) requires that Members and Candidates must 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.
C is incorrect because Standard I (A) Knowledge of the Law is not violated. It is a sub-standard of Standard I
Professionalism. There is not enough information provided in the question that implies that Westlink and Lee did not
comply with applicable laws, rules, and regulations of any government, regulatory organization etc. In fact, it is
informed that due to his past experience, Lee is also knowledgeable about emerging markets.
22 Siri Shekar, CFA, manages a balanced fund at Starlight Investments. She realizes that the fund’s holdings in the
stock of GYI Company are excessive, and selling the stock will not be easy since it is thinly traded. Shekar is also a
regular participant in various social media sites as well as internet chat rooms where she mentions that GYI is going
into expansion. The company has not yet announced any expansion plans. Shekar believes that this will build
interest in the stock and she will be able to get rid of some of her stock’s overweight position. Shekar least likely
violated the CFA Institute Standards of Professional Conduct related to:
A) Market Manipulation.
B) Material Nonpublic Information.
C) Diligence and Reasonable Basis.
Answer B) Material Nonpublic Information.
Explanation B is correct. Shekar has not violated Standard II (A) Material Nonpublic Information which states that 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.
A is incorrect. Shekar has violated Standard II (B) Market Manipulation because Shekar was trying to artificially
boost the price of the GYI’s stock in order to sell her holdings. Standard II (B) requires that Members and
Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to
mislead market participants. This is “Information-based manipulation” which refers to “Spreading false rumors to
induce trading by others. Shekar is telling on social media sites and internet chat rooms that GYI is going into
expansion, although the company has not yet announced any expansion plans. Shekar believes that this will build
interest in the stock and she will be able to get rid of some of her stock’s overweight position.
C is incorrect. Shekar has violated Standard V (A) Diligence and Reasonable Basis because there is no basis for her
statements in the social media sites.
23 Nick Nader, CFA, works as a trader for Trust Investment Bank. During lunch he receives a phone call from a
longtime friend Chris Sandler, who is a trader at SYI Securities. Sandler talks about various market rumors and tells
Nader about a software company which is going through merger talks with another company in the same industry.
Nader has a large purchase order from his portfolio manager for this stock. He searches various internet reports
and the software company’s website but finds no such news of the merger. Upon returning to his desk he places
the order aggressively and completes it by the next day before the company releases any information. Has Nader
violated any Standard?
A) No.
B) Yes, related to Material Nonpublic Information.
C) Yes, Independence and Objectivity.
Answer A) No.
Explanation A is correct. Nader did not violate any Standard. There are always rumors in the market, before an official release
by the company. Unless Nader knew that Sandler was in a business relationship with the merger companies, there
was no reason to suspect that he was receiving nonpublic material information. According 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. As per the Mosaic theory,
analysts are free to act on public and nonmaterial nonpublic information without risking violation.
C is incorrect because Nader has not violated Standard 1 (B) Independence and Objectivity because he has not
received any gifts, benefits or consideration to compromise his independence and objectivity. This standard
requires that Members and Candidates must use reasonable care and judgment to achieve and maintain
independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or
accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their
own or another’s independence and objectivity.
24 Shazi Agnimukha, a CFA candidate, writes in her blog after taking the Level II exam of the CFA program. She posts
that the derivatives part of the exam was very easy while the ethics questions were difficult and time consuming.
She further writes that a question from ethics was not properly structured and she was confused by the language.
Agnimukha further describes a question in the Fixed Income portion in detail and asks if anyone can explain it to
her. Agnimukha has most likely violated the Standard related to:
A) Conduct as Participants in the CFA Program.

B) Conflicts of Interest.
C) Professionalism.
Answer A) Conduct as Participants in the CFA Program.
Explanation A is correct. Agnimukha has violated the Standard VII(A) Conduct as Participants in the CFA Institute Programs by
sharing exam content, undermining the validity and integrity of the exam and CFA institute programs. This standard
covers many aspects such as cheating on any CFA Institute examinations, violating the testing policies, disclosing
confidential exam information to the public, and improperly using any association with the CFA Institute to further
personal or professional goals.
Standard VI: Conflicts of Interest is not violated as Agnimukha has no conlict with client / employer. This Standard
involves A) Diclosure of conflicts, that is, 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, or employer; B) priority of transaction, i.e., Investment transactions for clients and
employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner;
C) referral fees, i..e, 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 I: Professionalism is also not violated because there is no indication that Agnimukha has not complied with
all applicable laws, rules, and regulations or compromise his independence and objectivity, misrepresent any
information or engage in any professional conduct involving dishonesty, fraud, or deceit etc. Standard I:
Professionalism includes the following
A) Knowledge of the Law, i.e., Members and Candidates must understand and comply with all applicable laws, rules,
and regulations of any government, regulatory organization, licensing agency, or professional association
governing their professional activities;
B) Independence and Objectivity, which requires that Members and Candidates must use reasonable care and
judgment to achieve and maintain independence and objectivity in their professional activities;
C) Misrepresentation: Members and Candidates must not knowingly make any misrepresentations relating to
investment analysis, recommendations, actions, or other professional activities;
D) Misconduct: Members and Candidates 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.
25 Raul Devgan, CFA, is a portfolio manager for Khadri Investments. He manages a high growth equity fund known as
SmartMoney. Devgan reports the performance of SmartMoney in its quarterly newsletter and states, “SmartMoney
was able to surpass its benchmark, S&P BSE by 0.20%. However, this type of performance should not be expected
from the fund always.” Adrik Vanyusha is a client of Devgan and follows the performance of SmartMoney closely.
Upon receiving the newsletter, he immediately contacts Devgan and informs him that the fund never exceeded its
benchmark but in reality had underperformed. Devgan recalculates the results after the complaint, which confirm
Vanyusha’s claim. He sends Vanyusha the correct results and blames the discrepancy on typographical error.
Devgan least likely violates the Standard relating to:
A) Misconduct.
Answer C) Independence and Objectivity.
Explanation C is correct. The Standard relating to Standard I(B) Independence & Objectivity has not been violated because
Devgan has not received any gifts, benefits or consideration to compromise his independence and objectivity.
Standard I (D) Misconduct requires that Members and Candidates 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. 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. Devgan violated
this standard by blaming the discrepancy in performance results on typographical error rather than telling the
truth. Standard I (C) Misrepresentation is also violated. According to this standard, Members and Candidates must
not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other
professional activities. A misrepresentation is any untrue statement, or omission of fact, or any statement that is
otherwise false or misleading. Devgan violated this standard by not mentioning the true reason behind discrepancy.
26 Vladmir Seriozha, CFA, is fixed-income analyst at Rasputin Securities and describes the investment strategy of
securities in a report to the firm’s clients which is based on scenarios of certain declines in interest rates. The
report explains the interest rate model which shows the increase in securities’ valuations as rates decline. The
model does not capture the risks of investment if the rates rise. Seriozha informs all the existing clients about the
model's weakness in capturing the risks related to investments in case of an increase in interest rates, but all the
promotional material for new clients does not carry this disclosure. Seriozha has most likely violated the Standard
related to:
A) Communications with Clients and Prospective Clients.

B) Diligence and Reasonable Basis.
C) Duties to Clients.
Answer A) Communications with Clients and Prospective Clients.
Explanation A is correct. Standard V(B) Communication with Clients and Prospective Clients has been violated. Seriozha has not
run the downside risks and has not explained the limitations of his model with respect to a change in rates contrary
to the one he has reported. Members and Candidates must adequately disclose the market-related risks and
limitations contained in their investment products and recommendations especially in their investment process
Standard V (A) Diligence and Reasonable Basis is not violated as there is not enough information provided in the
question which may imply that Seriozha has not exercised due diligence in analyzing investments or making
recommendations to clients.
Standard III (C): Suitability is also not violated as Seriozha did not add any investments that were not suitable to her
existing clients.
27 Preet Khadri, CFA, works for Eminent Capital as an investment advisor. She meets with a college classmate at a
dinner who offers to pay Khadri a compensation for selling the stock of her company Zoratri Inc., to her clients.
Khadri does not mention this arrangement to her clients or employer, and sells the shares of Zoratri to her clients
where appropriate. Khadri has least likely violated the Standard related to:
A) Suitability.
B) Conflicts of Interest.
C) Additional Compensation Arrangement.
Answer A) Suitability.
Explanation A is correct. Khadri is in violation of Standard VI(A) Disclosure of Conflicts by failing to disclose to her clients that
she is receiving additional compensation for promoting and selling Zoratri’s shares. Khadri has also not informed
her employer of the additional benefits received for recommending Zoratri’s stock. Therefore, her employer cannot
evaluate her loyalty and objectivity. According to 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, or employer. Members and
Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the
relevant information effectively.
Khadri is also in violation of Standard IV (B) Additional Compensation Arrangements as she failed to disclose the
additional compensation arrangement to the employer. According to Standard IV (B) 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.
Standard III (C) Suitability is not violated as he sell the shares of Zoratri to her clients where appropriate. Standard
III (C) Suitability requires that
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.
28 TriStar Money Management wants to invest in emerging market on behalf of its high-net-worth clients and hires
Brent Emory, an independent consultant to solicit proposals from various advisers. Emory after considerable due
diligence provides a list of managers based on their successful performance in the emerging market, but promotes
Asian Tigers as the most competent. TriStar selects Asian Tigers as the new manager from Emory’s list and further
reviews the selected new manager to ensure that Asian Tigers is the appropriate investment manager for its clients.
During the review, TriStar discovers that Emory was being paid by Asian Tigers to promote their services. Even
though Emory was being paid by both parties, TriStar’s investigation proves that the recommendation was
objective and appropriate. Emory has least likely violated the Standard related to:
A) Referral Fees.
B) Priority of Transactions.
C) Additional Compensation Arrangements.
Answer B) Priority of Transactions.
Explanation B is correct. No violation of Standard VI(B) Priority of Transactions is committed by Emory as he has not executed
any transaction which could affect its clients in any way.
Emory has violated Standard VI (C) Referral Fees as he did not disclose that he was being paid by Asian Tigers to
promote their services. According 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.
Emory has violated Standard IV (B) Additional Compensation Arrangements as he has accepted a compensation
from Asian Tigers which might reasonably be expected to create a conflict of interest with Emory’s duty towards
TriStar Money Management. According to Standard IV (B) 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.
consent from all parties involved.
29 Ankit Tivari, CFA, is an investment adviser who works for Best Securities. He has two clients: Raveena Ahisma, a 55
year-old widow with two college going children, and Agneya Adya, a 35-year old journalist who works for a local
newspaper. Both her clients are employed and earn a substantial salary. Adya is very aggressive with his
investments and wants to invest in high risk securities for a higher return, whereas Ahisma wants to invest in low
risk, large cap securities to achieve a constant income for her children’s education. Tivari recommends investing a
quarter of their portfolios in derivatives that have a potential to earn high returns despite their volatility. Did Tivari
violate any Standard while choosing investments for his clients?
A) Yes, for both his clients.

B) Yes, only in Ahisma’s case.
C) Yes, only in Adya’s case.
Answer B) Yes, only in Ahisma’s case.
Explanation B is correct. Tivari has violated Standard III(C) Suitability by not identifying the risks and objectives of Ahisma and
selecting an aggressive investment for both clients which is only suitable for Adya, since the two clients have
different financial objectives and circumstances.
Under Standard III (C) Suitability, when members and candidates are in an advisory relationship with a client, they
must:
action.
Judge the suitability of investments in the context of the client’s total portfolio.
30 Catherine Czcibor, CFA, works as a portfolio manager for a local investment counseling firm. She is also a member
of her son’s school committee to help raise funding for a program for gifted children in music. Czcibor discusses
an arrangement with her supervisor in which she will donate a certain percentage of her fees from clients referred
to her by the school staff and parents. She gets a written approval from her firm. The school’s board also
approves Czcibor’s plan and agrees to announce it in their upcoming parent teacher meeting along with sending a
newsletter to all the parents and staff. When Czcibor starts getting the school referrals, she clearly discusses the
referral arrangement with her new clients and the distribution of her donation to the school. Has Czcibor violated
any CFA Institute Standards of Professional Conduct?
A) Yes, related to conflicts of interest.

B) Yes, related to additional compensation arrangements.
C) No.
Answer C) No.
Explanation C is correct. Czcibor has not violated Standard IV (B) Additional Compensation Arrangements and VI (C) Referral
Fees because she obtained permission from her employers, the school, and the clients.
According 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. According to Standard IV (B) Additional Compensation
Arrangements, Members and Candidates must not accept gifts, benefits, compensation, or consideration that
unless they obtain written consent from all parties involved.
Czcibor has not violated Standard VI (A) Disclosure of Conflicts because he has discussed referral arrangement
with her supervisor, her new clients, and School’s board. Under 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, or employer.
Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and
communicate the relevant information effectively.
31 Isaac Dobrogost, a candidate in the CFA Program, works as an investment advisor for Zenith Mutual Fund. He is
invited by one of his clients, Sahara Inc. (SI), a manufacturing company, to meet with the finance director along
with a few large stakeholders of SI. In the meeting Dobrogost finds out that the company is going through a lean
period and will announce a decrease in earnings in their next quarter financial results. Can Dobrogost use this
information to change the rating of the company from “buy” to “sell”?
A) No.
B) Yes, because this information is given directly by the company.
C) Yes because it has been disseminated to the other stakeholders as well.
Answer A) No.
Explanation A is correct. If the information is not publicly disseminated by the company and Dobrogost uses it, then it becomes
material nonpublic information, hence a violation of Standard II(A). A small group of stakeholders does not qualify
as the public. He cannot use the information.
According 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.
32 Izzy Zubeika, CFA, works for Topworth Mutual Fund and is a portfolio manager for an aggressive growth equity
fund. She is planning to sell a large portion of her investment to meet the medical costs of her ailing husband.
Zubeika wants to sell her stake in Royal Beverages, but her firm has recently upgraded the stock from “hold” to
“buy”. Nevertheless after receiving approval from her employer she informs her broker to conduct the trade. Has
Zubeika violated any CFA Institute Standards of Professional Conduct?
A) Yes related to Market Manipulation.

B) Yes, related to Priority of Transactions.
C) No.
Answer C) No.
Explanation C is correct. No violation has occurred because she has received approval from her employer.
A is incorrect because Zuveika has not violated Standard II (B) Market Manipulation as she did not make that
transaction with an intention to distort prices or artificially inflate trading volume with the intent to mislead market
participants. According to this standard, Members and Candidates must not engage in practices that distort prices
or artificially inflate trading volume with the intent to mislead market participants.
B is incorrect because Zuveika has not violated Standard VI(B) Priority of Transactions because she has received
approval from her employer and the clients do not seem to be disadvantaged by the trade. According to Standard
VI(B) Priority of Transactions, investment transactions for clients and employers must have priority over
investment transactions in which a Member or Candidate is the beneficial owner. Standard VI(B) Priority of
Transactions does not limit transactions of employees which are different from the current recommendations as
long as they do not disadvantage the current clients.
There is nothing unethical about managers, advisers, or mutual fund employees making money from personal
investments as long as they follow these three rules:
The client is not disadvantaged by the trade.

The investment professional does not benefit personally from trades undertaken for clients.
The investment professional complies with applicable regulatory requirements.
33 Su Ming Li, CFA, works as a portfolio manager for Peoples Investment Bank. She is asked to analyze certain East
Asian equities by her firm, for the purpose of purchasing them. Li talks to Peter Wang, a friend and one of the
owners of Dragon Brokerage and Investment Company. He informs her that the East Asian equities are doing very
well due to a boom in their respective economies. After thoroughly investigating these equities, she purchases them
for her accounts wherever they are suitable. Soon after she gets a call from Dragon to join the firm as a managing
partner. Li accepts the offer and resigns from her current job. The week before joining Dragon, she purchases
1500 shares of East Asian equities for her personal account. Once Li begins working at Dragon, she purchases a
large block of shares of East Asian equities and allocates them to accounts. Does Li’s purchase of shares for her
personal account violate the CFA Institute Standard of Professional Conduct ?
A) No, she bought the shares before beginning work at Dragon.

B) Yes, relating to Suitability.
C) Yes, relating to Priority of Transaction.
Answer C) Yes, relating to Priority of Transaction.
Explanation C is correct. Li may have violated the Standard relating to Priority of Transactions when purchasing the shares for
her account. She has accepted Dragon’s offer to join as managing partner, has discussed the shares with Wang,
and knows, or should know, that she will purchase them for at least some Dragon clients once she begins work at
Dragon. Her purchase ahead of Dragon clients might be front-running. Best practice would be to delay her private
account purchase until after she purchases for clients.
According to Standard VI(B) Priority of Transactions, investment transactions for clients and employers must have
priority over investment transactions in which a Member or Candidate is the beneficial owner. Members and
Candidates may undertake transactions in accounts for which they are a beneficial owner, only after their clients
and employers have had an adequate opportunity to act on a recommendation.
34 Kaori Kazuya and Albert Farnsworth are both candidates in the CFA Program. Kazuya is registered for the Level II
exam and Farnsworth has passed the Level III exam of the CFA program. Farnsworth is awaiting his CFA charter.
Kazuya works for Metro Investments and her business cards reads, “Kaori Kazuya, CFA Level II candidate”
whereas Farnsworth works as an analyst at Sarosky Wealth Management and does not put any CFA designation on
his business cards. But at the end of his reports, he does give a reference that, “Albert Farnsworth has passed all
three levels of the CFA Program and will be eligible for the CFA charter upon completion of the required work
experience.” Who most likely violated the Standards?
A) Both.
B) Kazuya has violated the Standards, but not Farnsworth.
C) Only Farnsworth violated the Standards.
Answer B) Kazuya has violated the Standards, but not Farnsworth.
Explanation B is correct. Kazuya violates Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA
Program, by using an improper designation on her business cards, i.e., CFA Level I. Farnsworth reference is proper
according to Standard VII (B) Reference to CFA Institute, the CFA Designation, and the CFA Program.
According to Standard VII (B) Reference to CFA Institute, CFA Designation, and CFA Program, when referring to
CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA program, Members and
Candidates must not misrepresent or exaggerate the meaning of or implications of membership in CFA Institute,
holding the CFA designation, or candidacy in the CFA program.
35 Kayla Donovan, CFA, works as a portfolio manager for MacBrady Securities & Co. Some of her wealthy and large
clients hold long positions on Swift Delivery, which is a courier service. After analyzing her own company’s research
reports and information available on various internet sites about Swift, as well as Swift’s company website she
concludes that the stock is expected to rise sharply on the back of strong quarter-end earnings about to be
released in an earnings report in a few days. She informs all MacBrady’s clients since some of them will be at a
distinct advantage once the quarter-end earnings are reported. Donovan also runs a popular blog as an
independent analyst for which she has approval from her employer, where she mentions her predictions about
various stocks including observations about Swift’s stock. She discloses to her clients about her blog which they
regularly visit. Has Donovan violated any CFA Institute Standards of Professional Conduct?
A) Yes, relating to Market Manipulation.

B) Yes, relating to Priority of Transactions.
C) No.
Answer C) No.
Explanation C is correct. Kayla Donovan has not violated any Standard. Donovan has not caused the price of Swift to move up
she has only given her opinion based on research. Further, she informed MacBrady’s clients prior to her internet
broadcast and has approval from her employer to run her blog.
A is incorrect because Kayla Donovan has not violated Standard II (B) Market Manipulation as she did not make any
transaction or spread any information / news, with an intention to distort prices or artificially inflate trading volume
with the intent to mislead market participants. According to this standard, Members and Candidates must not
engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market
participants.
B is incorrect because Kayla Donovan has not violated Standard VI(B) Priority of Transactions. According to
Standard VI(B) Priority of Transactions, investment transactions for clients and employers must have priority over
investment transactions in which a Member or Candidate is the beneficial owner.
36 Roza Hernandez is a trust officer for Rize Trust Co. Hernandez uses Ricardo Drez, a broker, for trust account
brokerage transactions. He gives Hernandez a lower price for her personal purchases than Hernandez’s trust
accounts. Hernandez is most likely violating the Standard related to:
A) Duty of Loyalty to Clients

B) Fair Dealing.
C) Suitability.
Answer A) Duty of Loyalty to Clients
Explanation A is correct. Hernandez is violating her duty of loyalty to her trust accounts by using Drez, because he gives her
favorable terms for her personal account. 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.
B is incorrect. Hernandez has not violated Standard III (B) Fair Dealing because this standard focuses on dealing
fairly and objectively with all clients when providing investment analysis, making investment recommendations,
taking investment action, or engaging in other professional activities. There is no such evidence that he is dealing
his client (i.e. Trust) unfairly in any manner.
C is also incorrect because Standard III (C) Suitability because this standard requires that Members and Candidates
must determine the suitability of an investment before taking action based on the clients’ circumstances and other
factors. There is not enough information in the question that indicates that Hernandez has made any unsuitable
investment action or any unsuitable investment recommendation to the Trust.
37 Robert Blake is on the board of directors of Rice Industries and receives free tickets at the end of each quarter for
his entire family to travel to any city of their choice in Europe for his services to the board. Blake does not disclose
this information to his employer since it is not a monetary compensation. Has Blake violated any CFA Institute
Standards of Professional Conduct?
A) No.
B) Yes, he has to inform his employer of the benefit he receives.
C) Yes, because he has bought stock of Rice for some of his clients where appropriate.
Answer B) Yes, he has to inform his employer of the benefit he receives.
Explanation B is correct. Blake has violated Standard IV(B) Additional Compensation Arrangements by failing to disclose to his
employer benefits received in exchange for his services on the board. Standard IV(B) Additional Compensation
Arrangements reauires 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”.
38 A group of CFA charterholders under the name Research CFA, present online research on several popular stocks.
Barry Marlow, a candidate in the CFA program, is an analyst at Drew Hedge Fund. He is under pressure by his firm
executives to present his research report and recommendations on certain stocks. Marlow reads the research
report by Research CFA and uses material in his report discussed in the online research. The least likely violation
under the CFA Institute Standards of Professional Conduct is:
A) Reference to CFA Institute, CFA Designation, and the CFA Program.

C) Disclosure of Conflicts.
Answer C) Disclosure of Conflicts.
Explanation C is correct. Research CFA has violated Standard VII(B) Reference to CFA Institute, the CFA Designation, and the
CFA Program by using CFA designation inappropriately. Standard VII (B) Reference to CFA Institute, CFA
Designation, and CFA Program requires that when referring to CFA Institute, CFA Institute membership, the CFA
designation, or candidacy in the CFA program, Members and Candidates must not misrepresent or exaggerate the
meaning of or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA
program. Research CFA has misrepresented the CFA designation / program by using CFA in the title of their online
group. CFA can be used by the CFA charterholders with their names but not in the title of online group of CFA
Charterholders. CFA charterholders are individuals who have earned this right by completing the CFA program and
have the required years of work experience.
Marlow violated Standard V(A) Diligence and reasonable basis by simply using material from the research report by
Research CFA rather than doing an indepth and thorough research and analysis. According to 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.
Marlow violated Standard V(A) because he reads the research report by Research CFA and used material in his
report discussed in the online research without excersing proper due diligence. When using secondary or third-
party research (research conducted by someone outside the member’s firm), Members and Candidates must make
reasonable efforts to ensure third-party research is sound.
Neither Research CFA nor Marlow violated the Standard VI (A) Disclosure of Conflicts. According to this standard,
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, or
employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain
language, and communicate the relevant information effectively.
39 Sara Petrowski, a CFA candidate, works as an analyst at Topline Brokers. She reads in the Financial Times a study
on the financial markets issued by Ace Research. She uses material from the study in her research report and gives
recommendations to her clients. Petrowski does not cite the newspaper as a source since it is merely a conduit of
the original information. Has Petrowski violated the CFA Institute Standards of Professional Conduct?
A) Yes, she has misrepresented the information.

B) No, the newspaper is not the original source.
C) Yes, duty to her clients.
Answer A) Yes, she has misrepresented the information.
Explanation A is correct. Petrowski has violated Standard I(C) Misrepresentation. She should get the complete study from its
original author Ace Research review it and acknowledge it in her report instead of simply plagiarizing the report.
Standard 1 (C) Misrepresentation requires that Members and Candidates must not knowingly make any
misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
Plagiarism is using the work of others without acknowledging or attributing the source of information. Members
and Candidates must disclose the source of information used in their reports.
B is incorrect because although newspaper is not the original source, Petrowski should obtain the complete study
from its original author and cite that author.
C in incorrect. He has not violated Standard III: Duties to Clients because using material from a research study and
not citing its source does not indicate that Petrowski did not act in the benefit of his clients or place employer’s or
own interests before his clients’ interests (Standard III (A) Loyalty, Prudence, and Care). It also does not indicate
that Petrowski did not deal fairly and objectively with all clients (Standard III (B) Fair Dealing). Petrowski acts also did
not indicate that he did not determine the suitability of an investment before taking action based on the clients’
circumstances and other factors (Standard III (C) Suitability). Similarly, he has not violated anything pertaining to
Performance Presentation (When communicating investment performance information, members and candidates
must make reasonable efforts to ensure that it is fair, accurate, and complete). Standard III (E) Preservation of
Confidentiality is also not violated as he has not disclosed anything confidential to his clients.
40 Janis David is the head of the research department at BAW, Inc. a brokerage firm. She has decided to change her
recommendation of the Cooper & Ginto Mines from sell to buy. She informs the other executives of the firm orally
before a report is prepared and sent to all customers. David’s actions are in line with the firm policy. Roger Little,
one of the junior analysts at BAW immediately buys Cooper & Ginto stock for himself and informs some of his
contacts who are also BAW's clients for whom it is appropriate. David has most likely violated the CFA Institute
Standards of Professional Conduct related to:
A) Responsibilities of Supervisors.
B) Additional Compensation Arrangements.
C) Loyalty.
Answer A) Responsibilities of Supervisors.
Explanation A is correct. David has violated Standard IV (C) Responsibilities of Supervisors by failing to supervise the actions of
those accountable to her. She did not set up procedures to prevent the dissemination of or trading on the
information. Standard IV (C) requires that 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. Members and Candidates must ensure that adequate compliance procedures are in place that cover all
possible violations.
B is incorrect. David has not violated Standard IV (B) Additional Compensation Arrangements as he did 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.
C is also incorrect because David has not violated Standard IV (A) Loyalty. This standard requires 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.
41 Syed Ali works for an investment bank and is involved in the underwriting of Apex Inc. The chief accountant of
Apex informs Ali that the information in the financial statements filed with the regulator by Ali overstate sales and
understate expenses. Ali seeks the advice of the legal counsel of the firm who states that it will be difficult for the
regulator to prove that Ali was involved in any wrongdoing. Ali has least likely violated the CFA Institute Standards of
Professional Conduct related to:
B) Misconduct.
C) Fair Dealing.
Explanation C is correct. Ali has not violated Standard III (B) Fair Dealing. This Standard requires 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.
Ali has clearly misrepresented some important information. By not being honest, he is also violating the standard
with regards to misconduct. Standard 1 (C) Misrepresentation states that “Members and Candidates must not
knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other
professional activities”. A misrepresentation is any untrue statement, or omission of fact, or any statement that is
otherwise false or misleading. Standard 1 (D) Misconduct states that “Members and Candidates 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”.
42 Hari Ram and his few colleagues are planning to leave Greysons Inc., a local investment bank, to form their private
consultancy. Ram has found out that one of his clients has undertaken a request for proposal to hire a new
investment adviser. The RFP has been sent to Greysons and all of its competitors but its submission period will end
before Ram’s and his colleagues’ resignations become effective. Nevertheless, Ram and the departing colleagues
decide to respond to the client’s request. They have most likely violated the CFA Institute Standards of Professional
Conduct relating to:
A) Loyalty.
B) Conflict of Interest.
C) Duties to Clients.
Answer A) Loyalty.
Explanation A is correct. By responding to the client’s RFP, the group of employees is competing directly with the employer,
hence Standard IV(A) Loyalty is violated. This standard requires 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 employ
* Assume you have submitted your resignation and decided to leave your employer. There is a one month notice
period. During this period:
You must continue to act in the best interests of your current employer.
You must not reveal trade secrets to your new employer.
You must not misuse client lists.
You must not solicit existing clients to shift their business to the new employer.
Once you have left your current employer and are being paid by the new employer, you may seek business
from old clients if you have not signed a non-compete agreement with the previous employer.
They have not violated Standard VI Conflicts of Interest because responding to the clients does not create any
conflict. Standard VI Conflicts of Interest includes
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, or employer. Members and Candidates must ensure that such disclosures are
prominent, are delivered in plain language, and communicate the relevant information effectively.
B. Priority of Transactions: Investment transactions for clients and employers must have priority over investment
transactions in which a Member or Candidate is the beneficial owner.
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.
By responding to the client’s RFP, Hari Ram and his colleagues have not violated Standard III Duties to Clients. This
standard involves Loyalty, prudence, and care, fair dealing, suitability,
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.
B. Fair Dealing: 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.
C. Suitability:
1. When Members and Candidates are in an advisory relationship with a client, they must:
action and must reassess and update this information regularly.
action.
1. 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.
A. Performance Presentation: When communicating investment performance information, Members and
Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.
B. 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.
43 Richard Swanson, an analyst at Azwitz Securities, covers the oil industry. He, along with other analysts, has just
visited Prell Refineries, an exploration and production company. Based on his own assessment and calculation of
the drilling on site, Swanson has concluded that the company has abundant oil reserves. This view is not shared by
the other analysts who have visited the site. Swanson writes in his research report that Prell is in fact sitting on vast
oil reserves and makes a buy recommendation. Has Swanson violated any of the CFA Institute Standards of
Professional Conduct?
A) No.
B) Yes, Communication with Client and Prospective Clients.
C) Yes, Diligence and Reasonable Basis.
Answer B) Yes, Communication with Client and Prospective Clients.
Explanation B is correct. Standard V(B) Communication with Client and Prospective Clients has been violated, because
Swanson’s assessment that the company has abundant oil reserves is an opinion not a fact. He did not distinguish
between opinion and fact.
Standard V (B) Communication with Clients and Prospective Clients requires that 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.
process.
recommendations, or actions, and include those factors in communication with clients and prospective clients.
4. Distinguish between fact and opinion in the presentation of investment analyses and
recommendations.
Swanson has not violated Standard V (A) Diligence and Reasonable Basis as his investment recommendation is
based on reseach and investigation as he visited Prell Refineries, made assessment and calculation of its oil
reserves. Standard V (A) Diligence and Reasonable Basis requires that Members and Candidates must:

44 Romana Zahoor works for a local brokerage firm and is a CFA candidate. She plans to issue a buy recommendation
for the stock of Basics. Before issuing the recommendation, she buys the stock for herself through her sister’s
account. Zahoor most likely violates the Standard of:
A) Priority of Transactions.
B) Fair Dealing.
C) Suitability.
Answer A) Priority of Transactions.

Explanation A is correct. Zahoor has violated Standard VI(B) Priority of Transactions by taking advantage of her knowledge of
the stock and buying it for herself rather than her client.
Standard VI (B) Priority of Transactions requires that Investment transactions for clients and employers must have
priority over investment transactions in which a Member or Candidate is the beneficial owner.
Guidance:
Avoiding potential conflicts: Conflicts between client’s interest and investment professional’s interest may occur.
There is nothing unethical about managers, advisers, or mutual fund employees making money from personal
investments as long as they follow these three rules:
The client is not disadvantaged by the trade.
The investment professional does not benefit personally from trades undertaken for clients.
The investment professional complies with applicable regulatory requirements.
Personal trading secondary to trading for clients: The order of executing trades is: clients, employers, and then
your personal account, or one in which you are the beneficial owner.
Impact on all accounts with beneficial ownership: Members and Candidates may undertake transactions in
accounts for which they are a beneficial owner, only after their clients and employers have had an adequate
opportunity to act on a recommendation.
Zahoor has not violated Standard III (B) Fair Dealing because buying shares in her account before issuing
recommendation to her clients is not related to fair dealing. According to Standard III (B) Fair Dealing, “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”. In other
words, all clients should be treated fairly and objectively and there should be no selective disclosure.
Zahoor has not violated Standard III (C) Suitability because buying shares in her account before issuing
recommendation to her clients does not imply that she made investment recommendation that was not consistent
with her clients’ or prospective client’s investment experience, risk and return objectives, and financial constraints.
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.
objectives, mandates, and constraints before making an investment recommendation or taking investment action.
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.
45 Eileen Connors is a chief trader for Ascot Investments, a money management firm. She has been told recently by
her most lucrative client Shelby Company that if the performance of its accounts did not improve they will be forced
to change their money managers. Connors has purchased certain securities a few days back, whose price has
gone up significantly. She has failed to allocate these trades due to her busy schedule. After the threat from Shelby,
she decides to allocate the profitable trades to Shelby’s account, while spreading the losing trades to other Ascot’s
accounts. Has Connors violated any Standard?
A) Yes, related to Fair Dealing.

B) No.
C) Yes, related to Diligence and Reasonable Basis.
Answer A) Yes, related to Fair Dealing.
Explanation A is correct. Connors has violated Standard III(B) Fair Dealing by failing to deal fairly with all her clients in taking
these investment actions. According to Standard III (B) Fair Dealing, “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”.
Connors has not violated Standard V (A) Diligence and Reasonable Basis because allocating the profitable trades to
Shelby’s account, while spreading the losing trades to other Ascot’s accounts does not imply that she did not
exercise due diligence in taking investment actions. Standard V (A) Diligence and Reasonable Basis requires that
Members and Candidates must:

46 Penelope Cox is employed by Jameason Investment, and provides investment advice to the trustees of SYU
University in order to recommend investments that would generate capital appreciation in endowment funds. Cox
has been given internal reports by the trustees that highlight the expansion of the university. Cox is approached by
Bradley Cooper, a local philanthropist who is considering a generous contribution to SYU and another university in
the area, but he would like to see the expansion plans of SYU before making the donation. Cox knows that he does
not want to speak to the trustees hence she gives a copy of the internal report to Cooper. Has Cox violated the
Code and Standards?
A) No.
B) Yes, preservation of confidentiality.
C) Yes, loyalty.
Answer B) Yes, preservation of confidentiality.
Explanation B is correct. Cox was given the internal reports by the trustees; because the information was confidential Cox
should have refused to divulge it to Cooper. Therefore by handing the internal reports to him Cox violates Standard
III(E) Preservation of Confidentiality.
According 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.

2. Disclosure is required by the law.
3. The client or prospective client permits disclosure of the information.
Cox has not violated Standard IV (A) Loyalty as giving a copy of internal report to Cooper does not imply that Cox
has acted against the benefit of Jameason Investment and trustees of SYU University. According 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.
47 Carla Simone, a CFA candidate and a research analyst, follows firms in the beverage industry. She has been
recommending the purchase of Citrus, because of its introduction of a popular new drink for athletes and exercise
enthusiasts. Simone’s husband has inherited from a relative, the stock of Citrus worth $3.5 million. Simone has
been asked to write a follow up report on Citrus. She writes the report and gives a strong buy recommendation.
The report does not mention her husband’s ownership of the stock. Has Simone violated the CFA Institute
Standards?
A) No.
B) Yes, disclosure of conflicts.
C) Yes, independence and objectivity.
Answer B) Yes, disclosure of conflicts.
Explanation B is correct. Simone must disclose her husband’s ownership of the stock to avoid violation of Standard VI(A)
Disclosure of Conflicts. According to Standard VI (A) Disclosure of Conflicts, Members and Candidates must make
information effectively.
Simone has not violated Standard 1 (B) Independence and Objectivity because notdisclosing her husband’s
ownership of the stock in the report does not imply that she did not maintain independence and objectivity.
Standard 1 (B) Independence and Objectivity requires that Members and Candidates must use reasonable care and
judgment to achieve and maintain independence and objectivity in their professional activities. Members and
Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could
be expected to compromise their own or another’s independence and objectivity.
48 Babar Ahmed is a trader at Cooper & Baines, a local brokerage firm. He trades frequently in the stock of Zelle,
despite the fact that Zelle is not on the recommended list of securities of Cooper. Ann Miller is the supervisor and
compliance officer of Ahmad. Part of her compensation is based on the trading revenues of Cooper. She notices
the large volume of trade of Zelle, but does not investigate it. Has Miller violated the CFA Institute Standards?
A) Yes, conflict of interests.

B) No.
C) Yes, responsibilities of supervisors.
Answer C) Yes, responsibilities of supervisors.
Explanation C is correct. Yes Miller violates Standard IV (C) Responsibilities of Supervisors, by not investigating the purchase of
the stock and her failure to supervise the trader’s activities. Standard IV (C) Responsibilities of Supervisors states
that “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”. Supervisors are
responsible for ensuring compliance procedures are implemented and that they are followed through periodic
review.
Trading of the stock of Zelle by Ahmad, despite the fact that Zelle is not on the recommended list of securities of
Cooper and Miller’s failure to supervise the trader’s activities do no indicate any conflict of interest situation that
may to impair their independence and objectivity or interfere with respective duties to their clients, prospective
clients, or employer. Hence, Standard VI Conflicts of Interest is not violated.
49 XYZ, an investment firm, manages pension plans of various large companies. XYZ mainly uses Greatson, Inc. for
most of its trading activity. This is because the CEOs of the two companies are close friends. Greatson is more
expensive than the other brokerage firms offering the same brokerage services. Its research and execution are
average compared to the other brokerage firms. But Greatson absorbs XYZ’s rent in exchange for the brokerage
business given to it by XYZ. Has XYZ violated any CFA Institute Standards of Professional Conduct?
A) Yes, relating to loyalty, prudence, and care.

B) No.
C) Yes, relating to misconduct.
Answer A) Yes, relating to loyalty, prudence, and care.
Explanation A is correct. Refer to Standard III(A) Loyalty, Prudence and Care. Standard III (A) Loyalty, Prudence, and Care
requires 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”. XYZ firm provides brokerage business to Greatson
despite the fact that Greatson is more expensive and its research and execution are average as compared to the
other brokerage firms just because the CEOs of the two companies are close friends and because Greatson
absorbs XYZ’s rent in exchange for the brokerage business given to it. Hence, XYZ is not working in the client’s
best interest.
XYZ has not violated Standard 1 (D) Misconduct because it did not do anything involving dishonesty, fraud, or
deceit. This standard requires that “Members and Candidates 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”.
50 Tracy Chapman works as a proctor for the administration of the CFA examination in her city. She reviews a copy of
the Level III exam on the evening prior to the exam and discloses information to two candidates who use it to
prepare for the exam. Chapman and the two candidates have least likely violated the CFA Institute Standards of
Professional Conduct, related to:
A) Conduct that compromises the integrity, validity or security of CFA Institute programs.
B) Suitability.
C) Attempt to circumvent security measures established by the CFA Institute.
Answer B) Suitability.
Explanation B is correct. Refer to
Standard VII (A) Conduct as Participants in CFA Institute Programs. Members and Candidates must not engage in
any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity,
validity, or security of CFA Institute programs.
The standard covers many aspects such as cheating on any CFA Institute examinations, violating the testing
policies, disclosing confidential exam information to the public, and improperly using any association with the
CFA Institute to further personal or professional goals.
Tracy Chapman violated this standard by disclosing the information to two candidates while the candidates violated
this standard by using it to prepare for the exam.
They have not violated Standard III (C) Suitability. According to this Standard,
a. Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives,
51 Christina Lucci, a CFA candidate, who is a portfolio manager of a growth mutual fund, maintains an account in her
sister’s name at several brokerage firms with which her fund’s clients also do business. Whenever an eagerly
awaited equity IPO is announced, she instructs the brokers to buy it for her sister’s account. Because such issues
are scarce, her clients are unable to receive any new shares. Lucci most likely violates the CFA Institute Standards
of Professional Conduct related to:
A) Priority of Transactions.
B) Disclosure of Conflicts.
Answer A) Priority of Transactions.
Explanation A is correct. Lucci has violated Standard VI (B) Priority of Transactions by buying eagerly awaited equity IPO shares
in her account before buying them for her clients. According to Standard VI (B) Priority of Transactions,
“investment transactions for clients and employers must have priority over investment transactions in which a
Member or Candidate is the beneficial owner”.
Standard VI (A) Disclosure of Conflicts is not violated because buying shares in her account before her clients does
not affect independence and objectivity of Lucci that needs to be disclosed. Standard VI (A) Disclosure of Conflicts
requires that “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, or employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in
plain language, and communicate the relevant information effectively”.
Lucci has not violated Standard IV (B) Additional Compensation Arrangements because there is no such thing which
indicates that she has any compensation arrangements with the broker. According to Standard IV (B) 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.
52 Stefan Ericsson, a CFA candidate is an analyst working for publicly traded companies to electronically promote their
stocks. He has also set up a website to market his research capabilities as an independent analyst. Ericsson posts a
buy recommendation on his website for each company that he has a contractual relationship with and fails to
disclose this in the research reports he issues or statements in the internet chat rooms. Ericsson least likely
B) Disclosure of Conflicts.
C) Fair Dealing.
Explanation C is correct. Ericsson has not violated Standard III (B) Fair Dealing as posting a buy recommendation on his website
for each company that he has a contractual relationship with and not disclosing this in the research reports he
issues or statements in the internet chat rooms does not imply that he is dealing unfairly or not objectively with all
the clients. This standard requires 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”.
Ericsson has violated Standard I(C) Misrepresentation. This standard requires that “Members and Candidates must
not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other
professional activities”. A misrepresentation is any untrue statement, or omission of fact, or any statement that is
otherwise false or misleading. Not discloing his contractual relationship with the companies on which he issues
investment recommendations is misrepresentation.
Ericsson has violated Standard VI (A) Disclosure of Conflicts by not discloing his contractual relationship with the
companies on which he issues investment recommendations. Standard VI (A) Disclosure of Conflicts requires that
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, or
employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain
language, and communicate the relevant information effectively.
53 Brendon Frazer, a CFA candidate, is an analyst with ITI, an investment and brokerage company. ITI requires him to
give a recommendation and research report every month on a different company. He is also enrolled in a university
where he takes night classes to earn an MBA. Frazer has informed his employer of his enrollment in the university.
Due to excessive workload he finds it difficult to complete his research report on a technology company on time. In
order to save time he develops his report based on a few articles he read recently about the company and gives his
‘buy’ recommendation. Frazer gives the reference of the articles in his report. Is Frazer’s report and
recommendation in compliance with the CFA Institute Standards of Practice?
A) No.
B) Yes, because he gives reference of the articles.
C) Yes, because the technology company is suitable for some clients of ITI.
Answer A) No.
Explanation A is correct. Brendon Frazer has violated Standard V(A) Diligence and Reasonable Basis as he did not prepare his
report by doing thorough analysis. He prepared his report based on a few articles he read recently about the
company and gives his ‘buy’ recommendation. According to this Standard, Members and Candidates must:

54 Nancy Keene recently left Kay Investments to join another competing firm. She left her former employer after 10
years without any non-compete agreement, and did not solicit any of her clients during the transition period. After
joining the new firm, she wants to contact her former clients because she developed close ties with them after
earning strong returns for their portfolios. Keene knows that many will follow her to the new employer. Is Keene in
violation of CFA Institute Standards of Professional Conduct?
A) Yes, because she cannot contact her former clients.

B) No, because she does not use any material from her former employer.
C) Yes, because of loyalty to her former employer.
Answer B) No, because she does not use any material from her former employer.
Explanation B is correct. Refer to Standard IV (A) Loyalty. This Standard 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”.
Guidance in case of leaving an employer: Assume you have submitted your resignation and decided to leave your
employer. There is a one month notice period. During this period:
You must continue to act in the best interests of your current employer.
You must not reveal trade secrets to your new employer.
You must not misuse client lists.
You must not solicit existing clients to shift their business to the new employer.
Once you have left your current employer and are being paid by the new employer, you may seek business
from old clients if you have not signed a non-compete agreement with the previous employer.
Nancy Keene has not violated any standard because she did not sign any non-compete agreement, and did not
solicit any of her clients during the transition period. Moreoevr, she wants to contact her former clients after joining
new Firm.
55 Phillip Cochran, a CFA charterholder, is a portfolio analyst with Frazier Trust, and manages the portfolio of Dennis
Quad. Although Cochran receives a salary from his employer, Quad tells him that “any year my portfolio exceeds a
rate of return of 16% before tax; you can fly to Paris at my expense and use my apartment for a week”. Cochran
fails to inform his employer of the arrangement and his vacation in Paris the following year. Cochran most likely
A) Additional Compensation Arrangement.

B) Suitability.
Answer A) Additional Compensation Arrangement.
Explanation A is correct. Cochran has Standard IV(B) Additional Compensation Arrangements by not informing his employer of
the arrangement with Dennis Quad and his vacation in Paris the following year. According to Standard IV(B)
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. Cochran should have considered
the following before accepting such a compensation.
Obtain permission before accepting compensation that might create a conflict. He must first disclose to his
mployer and obtain written consent for any compensation that may create a conflict.
“Written consent” includes any form of communication that can be documented.
Standard III (C) Suitability is not violated as Cochran did not make any recommendation or take any investment
action that was not consistent with Dennis Quad’s stated objectives and constraints of the portfolio. According to
Standard III (C) Suitability, 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.
Cochran has not violated Standard 1 (B) Independence and Objectivity as accepting such a compensation from his
client whose portfolio he is managing does not automatically imly that his independence or objectivity is
compromised. Standard 1 (B) Independence and Objectivityrequires that “Members and Candidates must use
reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities.
Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that
reasonably could be expected to compromise their own or another’s independence and objectivity”.
56 Selma Hyek, a senior executive of Avery Capital, issues a performance report for the accounts that showed capital
appreciation for the years 1990 to 2006. Avery Capital claims compliance with GIPS standards. Returns are not
calculated in accordance with the GIPS standards, because the composites are not asset weighted. Hyek most likely
violates the CFA Institute Standards of Professional Conduct relating to:
A) Performance Presentation.
B) Integrity of Capital Markets.
C) Record Retention.
Answer A) Performance Presentation.
Explanation A is correct. Hyek has violated Standard III(D) Performance Presentation because She claimed compliance with
GIPS standards but returns are not calculated in accordance with the GIPS standards. According to Standard III (D)
Performance Presentation, when communicating investment performance information, members and candidates
must make reasonable efforts to ensure that it is fair, accurate, and complete.
Standard II: Integrity of Capital Markets is not violated. This Standard has following two sub-standards:
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.
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.
Standard V (C) Record Retention is also not violated. This Standard requires that “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”.
57 Steve Miller is enrolled as a candidate in the CFA Program. He works as an assistant manager in Trust Investment
Bank. He enjoys drinking liquor during his lunch break. Miller’s colleagues have noticed that he is visibly intoxicated
after the lunch break and is not in a position to make rational investment decisions. Miller most likely violates the
Standard of:
A) Misconduct.
B) Knowledge of the Law.
Answer A) Misconduct.
Explanation A is correct. Miller has violated Standard I(D) Misconduct. According to Standard I (D) Misconduct, Members and
Candidates 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. Using alcohol during business
hours, though not illegal impairs a person’s ability to think objectively. Hence, Miller has violated Standard I(D)
Misconduct by drinking liquor during his lunch break because he is visibly intoxicated after the lunch break and is
not in a position to make rational investment decisions.
Steve Miller has not violated Standard 1 (A) Knowledge of the Law as drinking liquor during his lunch break does not
imply that he does not understand and comply with all applicable laws, rules, and regulations of any government,
regulatory organization, licensing agency, or professional association governing their professional activities. As per
this Standard, “Members and Candidates must understand and comply with all applicable laws, rules, and
regulations of any government, regulatory organization, licensing agency, or professional association governing
their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law,
rule, or regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from
any violation of such laws, rules, or regulations”.
Standard VI (A) Disclosure of Conflicts is not violated. As per this Standard, “Members and Candidates must make
information effectively”.
58 Steve Tylor, a CFA candidate and a technology analyst with Rock Brokers, is invited by SuperTech to participate in a
technology conference at SuperTech’s expense. SuperTech has also invited a few other analysts from different
companies to the same conference. It arranges and pays for Tylor’s airfare and accommodation for two nights.
The trip is strictly for business purposes and Tylor is not offered any lavish hospitality by SuperTech. Tylor informs
his employer of the arrangement and is given permission to attend the conference. By accepting this invitation, has
Tylor violated the CFA Institute Standards of Professional Conduct?
A) No.
B) Yes, because it creates a conflict of interest.
C) Yes, because it compromises Tylor’s independence and objectivity.
Answer A) No.
Explanation A is correct. Tylor has not violated the CFA Institute Standards of Professional Conduct . B is incorrect because
participating in a technology conference at SuperTech’s expense does not apparently create any conflict of
interest. It is stated that the trip is strictly for business purposes and Tylor is not offered any lavish hospitality by
SuperTech. Moreover, Tylor took permission from his employer and has informed him about this arrangement.
Standard VI (A) Disclosure of Conflicts requires that “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
disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively”.
Tylor has not violated Standard 1 (B) Independence and Objectivity because participating in a technology
conference at SuperTech’s expense does not compromise his independence and objectivity because the is strictly
for business purposes and Tylor is not offered any lavish hospitality by SuperTech. According to Standard 1 (B)
Independence and Objectivity, “Members and Candidates must use reasonable care and judgment to achieve and
maintain independence and objectivity in their professional activities. Members and Candidates must not offer,
solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to
compromise their own or another’s independence and objectivity”.
59 Franz Beckenbaur, CFA, is a trader for Lee Inc., an investment and brokerage firm. He receives compensation for
referrals from the firm’s portfolio and financial planning division. He usually refers clients from his previous
employer and does not have a non-compete arrangement with them. Beckenbaur uses his own personal material to
contact them and informs them duly of the referral arrangement. Has Beckenbaur violated any Standard ?
A) No, because he discloses to his former clients the referral arrangement.

B) Yes, because he has a duty of loyalty to his clients.
C) Yes, because of a breach of loyalty to his former employer
Answer A) No, because he discloses to his former clients the referral arrangement.
Explanation A is correct. According 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”. Beckenbaur discloses to his former clients the referral
arrangement. B is incorrect because Beckenbaur did not compromise towards his duty of loyalty to his clients by
receiving compensation for referrals from the firm’s portfolio and financial planning division. According to 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”. C is incorrect because he
usually refers clients from his previous employer and does not have a non-compete arrangement with them.
Further, Beckenbaur uses his own personal material to contact them. According 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”.
60 Penelope Gonzales is employed as a part-time analyst with Cooper Associates, an institutional asset manager. She
is paid a flat fee to complete a study of the technology industry within a certain time span. She is also given
unlimited access to Cooper’s files and data. Gonzales can use the office facilities of Cooper during normal working
hours. Towards the conclusion of her report, she is offered a job at Noblex, which is an IT firm. Gonzales submits a
copy of her report along with recommendations to her new employer. Has Gonzales violated any Standard?
A) No.
B) Yes, loyalty.
C) Yes, misrepresentation.
Answer B) Yes, loyalty.
Explanation B is correct. Gonzales has violated Standard IV(A) Loyalty as she neither took consent from Cooper nor disclosed
them that she shared a copy of her report with her new employer. The report prepared by her is Cooper’s
property. Standard IV (A) Loyalty requires 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”. She has not yet joined new
employer. Hence, it is not appropriate to share a copy of her report along with recommendations to her new
employer.
C is incorrect because she has not violated Standard 1 (C) Misrepresentation because she did not misrepresent
anything in her report. Standard 1 (C) Misrepresentation requires that “Members and Candidates must not
knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other
professional activities”.
61 Leila Salman works for a firm that advertises its past performance in various periodicals. Salman discovers that
some accounts have left the firm recently and the returns of these accounts are not included in the promotional
material. The omission has led to inflated performance returns. Salman is asked to use the same material while
soliciting clients. By doing so, Salman will least likely be violating the CFA Institute Standard of:
A) Knowledge of the Law.

C) Performance Presentation.
Answer A) Knowledge of the Law.
Explanation A is correct. Salman has not violated Standard I (A) Knowledge of the Law. According to this Standard, “Members
and Candidates must understand and comply with all applicable laws, rules, and regulations of any government,
regulatory organization, licensing agency, or professional association governing their professional activities. In the
event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and
Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules,
or regulations”.
By not including the returns of the accounts who have left the firm in the promotional material, Salman has violated
Standard I(C) Misrepresentation and Standard III (D) Performance Presentation.
According to Standard I (C) Misrepresentation, “Members and Candidates must not knowingly make any
misrepresentations relating to investment analysis, recommendations, actions, or other professional activities”. A
misleading. The omission of the accounts hwo have recently left the Firm has led to inflated performance returns.
According to Standard III (D) Performance Presentation, when communicating investment performance
information, members and candidates must make reasonable efforts to ensure that it is fair, accurate, and
complete. The information regarding performance returns presented in the promotional material is not fair,
accurate, and complete.

62 Janice McDowell, CFA, is the chief investment officer of Zenith Investment Bank and wants to improve the
diversification of one of its balanced funds in order to improve its returns. The investment policy statement of the
fund mentions low risk investments in large-cap equities, government bonds of AA ratings and corporate bonds of
high investment grade ratings. However, a new IPO offering of a small pharmaceutical company with high growth
potential, promises high returns since the issue is being offered at a discount. He immediately allocates some
portion of the issue to his fund, without exceeding the limit on the equity exposure of this fund. McDowell has least
likely violated the CFA Institute Standards of Professional Conduct relating to:
A) Loyalty, prudence and care.

B) Suitability.
C) Fair dealing.
Answer C) Fair dealing.
Explanation C is correct. McDowell has not violated Standard III (B) Fair Dealing. This Standard requires 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”. By immediately allocating
some portion of the IPO issue to his fund, without exceeding the limit on the equity exposure of this fund does not
imply that he dealth unfairly with his clients.
McDowell has violated the Standards related to III(A) Loyalty, Prudence, and Care and III(C) Suitability.
According to 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”. This
Standard implies that care must be taken in developing portfolios, which are consistent with the clients’ objectives,
circumstances, constraints, and risks. Investment decisions should be based on the overall portfolio, rather than
the characteristics of an individual investment. Although, the shares of a small pharmaceutical company with high
growth potential, promises high returns since the issue is being offered at a discount, this investment is not
suitable for the client because the IPS mentions low risk securities, and describes the asset classes.
Acoridng to Standard III (C) Suitability, 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. The IPS mentions low risk
securities, and describes the asset classes. Therefore investment in the pharma stock may not be suitable for this
portfolio.
63 Alan Clay, candidate in the CFA Program, works for a large money manager. He recently applied for an analyst
position at Rodham & Winston, an investment bank and was hired by them. Before leaving his current employer, he
copies the firm’s software that he developed, which he believes is his property. Clay feels that his software is one of
a kind and will help him in his new job. Has Clay violated any Standard ?
A) No, the software was developed exclusively by him.

B) Yes, with respect to loyalty.
C) Yes, because he failed to inform his new employer that the model was developed for his previous employer.
Answer B) Yes, with respect to loyalty.
Explanation B is correct. Clay violated Standard IV(A) Loyalty because he misappropriated her firm’s property without
permission. As per 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 although the
software was developed exclusively by him, this software is his former employer’s property which he cannot use /
copy without his employer’s consent.
64 Avi Sharon is an analyst for Ariel Investment Management. He recommends the purchase of ABC company’s stock
after conducting due diligence on the company and has published a research report that is well accepted by the
company’s management. The business managers of ABC invite him for further discussions. They sponsor his air
ticket and accommodations at an expensive hotel. Sharon, as per the policy of Ariel, discusses the travel and stay
arrangements with his employer and is given permission. He further meets with the CFO in a dinner arranged by
ABC and gives full disclosure to his employer upon his return. According to the Standards of Practice Handbook,
has Sharon violated any CFA Institute Standard ?
A) Yes, with respect to Disclosure of Conflicts.

B) Yes, with respect to Additional Compensation Arrangements.
C) No.
Answer C) No.
Explanation C is correct. Sharon disclosed his travel and accommodation arrangements to his employer and had only accepted
them after being given permission by his firm. His actions on return do not cause conflicts of interest between his
company and ABC, because he makes a full disclosure of his dinner with the CFO to his employer. A is incorrect
because he made full and fair disclosure of travel and accommodation arrangements as well as of his dinner with
the CFO to his employer. Standard VI (A) Disclosure of Conflicts requires that “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, or employer. Members and
Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the
relevant information effectively”.
B is incorrect because he has not violated Standard IV (B) Additional Compensation Arrangements. He has obtained
permission from his employer before accepting travel and accommodation arrangements. According to Standard IV
(B) 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”.
65 Zion mutual fund advertises in its marketing brochures that all the fund managers at Zion are CFA charterholders,
and hence achieve better performance results. Which CFA Institute Standard of Professional Conduct is most likely
violated?
A) Reference to CFA Institute, CFA Designation, and the CFA Program.

B) Professional misconduct.
C) Misrepresentation.
Answer A) Reference to CFA Institute, CFA Designation, and the CFA Program.
Explanation A is correct. Zion Mutual Fund has violated Standard VII (B) Reference to CFA Institute, CFA Designation, and CFA
Program by giving an improper reference to the CFA Designation that the charter holders achieve better
performance results. According to Standard VII (B) Reference to CFA Institute, CFA Designation, and CFA Program,
“when referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA program,
Members and Candidates must not misrepresent or exaggerate the meaning of or implications of membership in
CFA Institute, holding the CFA designation, or candidacy in the CFA program”. It is not allowed to state that
someone with a CFA designation will exhibit superior performance.
B is incorrect. Standard I (D) Misconduct is not violated. This standard says that “Members and Candidates 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”.
C is incorrect. Standard I (C) Misrepresentation is not violated as Zion has not made any misrepresentations
relating to investment analysis, recommendations, actions in its marketing brochures. According to Standard I (C)
Misrepresentation, “Members and Candidates must not knowingly make any misrepresentations relating to
investment analysis, recommendations, actions, or other professional activities”.
66 Ann Haley posts on her Twitter account that her Level III of the CFA exam went very well. She further adds that
although the exam was difficult and very tiring she still managed to do fairly well by effectively managing time. Has
Haley violated any Standard ?
A) No.
B) Yes, with respect to her conduct as participant in the CFA Program.
C) Yes, with respect to reference to the CFA Program.
Answer A) No.
Explanation A is correct. Haley did not violate Standard VII Responsibilities as a CFA Institute Member or CFA Candidate. This
Standard has two sub-standards, i.e. Standard VII (A) Conduct as Participants in CFA Institute Programs and
Standard VII (B) Reference to CFA Institute, CFA Designation, and CFA Program. Standard VII (A) Conduct as
Participants in CFA Institute Programs requires that “Members and Candidates must not engage in any conduct
that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or
security of CFA Institute programs”.
Candidates may discuss non-confidential information and curriculum material with others while preparing for the
exam. Examples of information that cannot be disclosed include:
Specific details of questions appearing in the exam.

Discussing what areas or formulas were tested on the exam.
Members are free to express their opinion or discontent with CFA Institute regarding its policies and procedures.
For example, if you say the exam was not a good representation of the curriculum, then it is not a violation of the
standard. However, if you discuss specific topics or questions, then it is a violation.
Ann Haley has not violated this Standard because she only expressed her opinion about the CFA exam and did not
disclose any specific topic or question that was tested.
Ann Haley has not violated Standard VII (B) as she has not misrepresented or exaggerated the meaning of or
implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA program.
According to Standard VII (B) Reference to CFA Institute, CFA Designation, and CFA Program, when referring to
CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA program, Members and
Candidates must not misrepresent or exaggerate the meaning of or implications of membership in CFA Institute,
holding the CFA designation, or candidacy in the CFA program”.
67 Signa is a local wealth management firm that mostly employs either CFA charterholders or candidates in the CFA
Program as its employees. Hence it uses the name Signa, Chartered Financial Analysts, Inc. as the firm’s name.
Which Standard did Signa most likely violate?
A) Reference to the CFA Designation.

C) Knowledge of the Law.
Answer A) Reference to the CFA Designation.
Explanation A is correct. Signa has violated Standard VII(B) Reference to the CFA Designation by using it inappropriately as the
company’s name. The designation is only meant for individuals and must not be used as a firm’s name. According
to Standard VII (B) Reference to CFA Institute, CFA Designation, and CFA Program, when referring to CFA Institute,
CFA Institute membership, the CFA designation, or candidacy in the CFA program, Members and Candidates must
not misrepresent or exaggerate the meaning of or implications of membership in CFA Institute, holding the CFA
designation, or candidacy in the CFA program”.
Standard I (C) Misrepresentation is not violated as Signa has not made any misrepresentations relating to
investment analysis, recommendations, actions. According to Standard I (C) Misrepresentation, “Members and
Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations,
actions, or other professional activities”.
Signa has not violated Standard I (A) Knowledge of the Law. According to this Standard, “Members and Candidates
must understand and comply with all applicable laws, rules, and regulations of any government, regulatory
organization, licensing agency, or professional association governing their professional activities. In the event of
conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and
Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules,
or regulations”.

68 Shiraz Ahmed is a trader at an investment management firm. He is also involved in the buy-side trades of an
aggressive equity fund managed by the firm. During a recent decline in the market many securities of the
aggressive equity fund show a marked decline in value, but the performance of the fund does not show a change in
return. Ahmed at once mentions it to his supervisor and the compliance officer, who tell him that the fund is doing
well and he should concentrate on his job at the trading desk instead of asking irrelevant questions. The CFA
Institute Standard that is least likely violated is:
A) Professional Misconduct.
B) Responsibilities of Supervisors.
C) Material Nonpublic Information.
Answer C) Material Nonpublic Information.
Explanation C is correct. According to Standard IV(C) Responsibilities of Supervisors, the supervisor and the compliance officer
have the responsibility to investigate Ahmed’s concerns. Standard IV (C) Responsibilities of Supervisors requires
that “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”.
Standard 1 (D) Misconduct is also violated as it seems that reported performance of the fund is deceiving. Standard
1 (D) Misconduct requires that “Members and Candidates 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”.
Standard II (A) Material Nonpublic Information is not violated. According to this Standard, 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.
69 Chang Li is head of sales at an investment bank. Li while reviewing the marketing material of the bank realizes that
some of the information contained there-in is out of date. The marketing material is generated from the results
provided by the bank’s mutual funds and Li has no control over it. He continues to provide the material to his sales
team without updates. Did Li violate any Standard?
A) Yes, with respect to misrepresentation.

B) No, because he has no control over the marketing material.
C) Yes, with respect to disclosure of conflicts.
Answer A) Yes, with respect to misrepresentation.
Explanation A is correct. Li has violated Standard I(C) Misrepresentation by presenting out-of-date information to clients.
Standard 1 (C) Misrepresentation requires that “Members and Candidates must not knowingly make any
misleading.
C is incorrect because Chang Li has no conflict of interest which needs to be disclosed. According to Standard VI
(A) Disclosure of Conflicts, “Members and Candidates must make full and fair disclosure of all matters that could
prominent, are delivered in plain language, and communicate the relevant information effectively”.
70 Greg Lou has been asked by his firm, Binkley Investment Management, to find an adviser for one of its funds which
invests in derivatives and complex securities. Lou selects 12 firms based on their annual total return performance
and finalizes on the adviser with the highest annual total return. Which CFA Institute Standards of Professional
Conduct did Lou violate?
A) Communications with Clients and Prospective Clients.

B) Professional Misconduct.
C) Diligence and Reasonable Basis.
Answer C) Diligence and Reasonable Basis.
Explanation C is correct. Lou violated Standard V(A) Diligence and Reasonable Basis by not conducting sufficient review of
potential firms. Lou slected firms solely based on its annual total return performance. According to Standard V (A)

Standard 1 (D) Misconduct is not violated as Lou did not do any act involving dishonesty, fraud, or deceit. Standard
1 (D) Misconduct requires that “Members and Candidates must not engage in any professional conduct involving
competence”.
A is incorrect. Lou did not violate Standard V (B) Communication with Clients and Prospective Clients by finalizing
advisor solely based on annual total return. As per this Standard, Members and Candidates must:
changes that might materially affect those processes.
process.
4. Distinguish between fact and opinion in the presentation of investment analyses and recommendations.
This standard emphasizes the need for communicating clearly and frequently with clients.
71 Samina Haq a CFA candidate, works for Superior Trust Company. While reviewing the performance of one of the
trust funds, she finds out that the trust fund has on an average performed at 5% for the last three years yet the
brochure of her fund advertises an annual compound growth rate of 20%, which happened only in the past year. It
also boasts of a consistent increment in the investment value above the entire market which also took place during
last year. Haq’s highest priority in avoiding a violation of the CFA Institute Standards of Professional Conduct is to:
A) correct the performance calculation and length of time.

B) continue with the advertisement since it did rise above the market.
C) use the firm’s average rate of return in her marketing material for all accounts.
Answer A) correct the performance calculation and length of time.
Explanation A is correct. According to Standard III(D) Performance Presentation Haq needs to correct the calculation and
length of time specifying the performance of her trust fund. According to Standard III (D) Performance
Presentation, when communicating investment performance information, members and candidates must make
reasonable efforts to ensure that it is fair, accurate, and complete.
72 Weinberg Inc., a global asset management company, has a large position in Wessner Pharma. The trading volume
of this stock is low. In order to boost the liquidity of the stock, multiple trading desks at Weinburg start buying and
selling Wessner shares from each other. The CFA Institute Standard most likely violated by Weinberg is:
A) Market Manipulation.
B) Misconduct.
C) Acting on Non Public Information.
Answer A) Market Manipulation.
Explanation A is correct. Standard II (B) Market Manipulation is violated. Multiple trading desks at Weinburg start buying and
selling Wessner shares from each other. Hence, Weinberg created an appearance of greater liquidity of stock
through its trading strategy and was able to manipulate the market. According 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.
Standard 1 (D) Misconduct is not violated. This Standard requires that “Members and Candidates 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”.
C is incorrect. Weinberg did not act on non-public information. Standard II (A) Material Nonpublic Information states
“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”.
73 Norman Bates, CFA works as an analyst for Angle Investments. She has been asked to cover investments in the
Asian markets for their high rate of return. The trip is sponsored by Sia, an investment and brokerage firm. Bates
knows that Sia charges commission at a higher rate than the other brokerage facilities used by her firm.
Nevertheless she convinces the trading desk at Angle to give more business to Sia so she can take the trip. Bates is
most likely violating the CFA Institute Standard of Professional Conduct related to:

B) Loyalty, Prudence, and Care.
Answer B) Loyalty, Prudence, and Care.
Explanation B is correct. Bates is violating Standard III(A) Loyalty, Prudence and Care. He should have weighed the benefits of
the trip against the commission charged by Sia. He should have also determined whether best execution and prices
could be received from Sia.
A is incorrect. She has not violated Standard V (A) Diligence and Reasonable Basis. According to Standard V (A)

74 Mary Burnette supervises a team of research analysts at Brigham Money Managers. One of her team member Siri
Desai, an auto analyst, follows various websites and blogs for research purposes on the auto industry. Desai while
browsing through the internet comes across a report by an independent research analyst on the hybrid car
introduced by Koyota Motor Company. Based on that report she gives a recommendation of ‘buy’ in her research
report without giving reference of her source. Burnette is under a deadline by her firm to compile the reports and
to implement the recommendations. She does not review Desai’s work and sets up a meeting with the portfolio
managers to discuss the execution strategy based on the research reports submitted by her team. Burnette least
likely violated the CFA Institute Standard of:
A) Responsibilities of Supervisors.
Answer C) Disclosure of Conflicts.
Explanation C is correct. Burnette has violated Standard IV(C) Responsibilities of Supervisors by neglecting to review thoroughly
Desai’s report and her recommendations. It is Burnette’s responsibility to set up appropriate procedures; these are
documented, communicated and followed by the personnel working for her. Standard IV (C) Responsibilities of
Supervisors requires that “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”.
She has also violated Standard of Diligence and Reasonable basis by exercising proper due diligence and performing
thorough analysis of the research report and its findings. According to Standard V (A) Diligence and Reasonable
Basis, Members and Candidates must:

C is incorrect because Burnette has no conflict of interest which needs to be disclosed. According to Standard VI
(A) Disclosure of Conflicts, “Members and Candidates must make full and fair disclosure of all matters that could
prominent, are delivered in plain language, and communicate the relevant information effectively”.
75 Raza Jaffery works as an independent analyst for the medical equipment industry. His reports are based on an
analysis of customer interviews, manufacturers, on-site company visits, and secondary research from other
analysts. Jaffery does not maintain any records or files for the information he collects but he mentions the source
of his research in his reports. If the clients need information on the specific web sites, Jaffery always provides them
with the relevant information. Jaffery most likely violated which of the following Standards?
A) Record Retention.
C) Misrepresentation
Answer A) Record Retention.
Explanation A is correct. Refer to Standard V(C) Record Retention. Jaffery must carefully document and maintain copies of all
information that goes in his reports in order to avoid violation of Standard V(C). Standard V (C) Record Retention
requires that “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”.
B is incorrect. Standard V (A) Diligence and Reasonable Basis is not violated because Jaffery’s report is based on
detailed and thorough investment analysis, including analysis of customer interviews, manufacturers, on-site
company visits, and secondary research from other analysts. According to Standard V (A) Diligence and
Reasonable Basis, Members and Candidates must:

C is incorrect. Jaffery has not violated Standard I (C) Misrepresentation as he did not misrepresent anything in his
report. Standard I (C) Misrepresentation requires that “Members and Candidates must not knowingly make any
misleading.
76 Cora Bentley works for an investment counseling firm. She is approached by a new client Sue Grey for financial
advice. Bentley very enthusiastically explains to her how she can increase her return by investing in a few small-cap
stocks that are selling at a discount in the market. Has Bentley committed a violation of the CFA Institute
Standards?
A) No.
B) Yes, Bentley should have explained her qualifications, her education, and experience and the meaning of her CFA
Designation.
C) Yes, Bentley should have determined Grey’s needs, objectives, tolerance and risk before making any
recommendations.
Answer C) Yes, Bentley should have determined Grey’s needs, objectives, tolerance and risk before making any
recommendations.
Explanation C is correct. Bentley should determine whether the investment is suitable to the client’s financial situation. She
should make an inquiry into the risk and return objectives of the client before making any recommendations.
Bentley has violated Standard III(C) Suitability.
77 Robert Brown is an analyst at Lazarus Investment Bank, which is one of the underwriters of Coolidge Inc. Brown
discovers that the company has not given accurate earnings figures. The actual figures are much lower than the
numbers presented. The preliminary prospectus has been distributed. Brown talks to his supervisor, who casually
dismisses the matter. Brown requests his manager to assign him to another project. His action most likely
conforms to which Standard ?
A) Knowledge of the Law.

C) Difference between fact and opinion.
Answer A) Knowledge of the Law.
Explanation A is correct. Brown’s actions are in line with Standard I(A) Knowledge of the Law. After knowing that the preliminary
prospectus is misleading, Brown reported his findings to his supervisor. Since the matter was not corrected, Brown
should dissociate from underwriting. He can also seek legal advice to determine whether additional reporting or
other action should be taken. According to Standard 1 (A) Knowledge of the Law, “Members and Candidates must
understand and comply with all applicable laws, rules, and regulations of any government, regulatory organization,
licensing agency, or professional association governing their professional activities. In the event of conflict,
Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates
must not knowingly participate or assist in and must dissociate from any violation of such laws,
rules, or regulations ”.
Participation in or association with violations by others: You are responsible for violations in which you knowingly
participate or assist. Knowingly is the key word here. Assume you are part of a group and you have reasonable
grounds to believe a violation is taking place. Under such circumstances:
First, make an attempt to stop the behavior by bringing it to the notice of your supervisor/compliance
department.
Seek the advice of independent legal counsel if the compliance department was not helpful.
Dissociate yourself with that activity. Dissociation varies based on your role in the organization; it could be:
Removing your name from the investment reports and recommendations.
Asking for a different assignment.
Refusing to accept a new client or continuing to advise the current client.
In extreme cases, leave the organization.
Not taking an action after reporting a violation (and continuing association with the illegal activity), can be
considered as participating in the illegal or unethical conduct.
If you are not sure that a violation is taking place, then the appropriate action would be to seek the advice of
legal/compliance counsel.
CFA Institute does not compel you to report violations to the government or regulatory organization unless
required by law.
C is incorrect. The preliminary prospectus is misleading because the company has not given accurate earnings
figures. It is not about distinction between fact and opinion. Members and Candidates must distinguish between
fact and opinion in the presentation of investment analysis and recommendations. This pertains to Standard V (B)
Communication with Clients and Prospective Clients. This standard emphasizes the need for communicating clearly
and frequently with clients.
78 An independent analyst recommends a stock based on a 5-minute pre-market talk show by a reputed analyst, on
the TV that morning. The recommendation is least likely a violation of:

B) Suitability.
C) Fair Dealing.
Explanation C is correct. There is no evidence of discrimination among clients. Hence, Standard III (B) Fair Dealing is not
violated. This Standard requires 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”.
However, by recommending the stock without due diligence, the analyst has violated Standard V(A) Diligence and
Reasonable Basis, and Standard III (C) Suitability.
According to Standard V (A) Diligence and Reasonable Basis, Members and Candidates must:

action.
2..When members and candidates are responsible for managing a portfolio to a specific mandate, strategy, or
79 Martina Bart, CFA, is working as a portfolio manager at a large global investment manager. Most of her clients are
residents of a conservative country called Inara, where the new government has introduced a new law barring
equity holdings in tobacco companies. Bart’s clients have significant exposure to tobacco companies through
international funds in their portfolio because of the handsome returns they have earned in the past. Three months
have passed, Bart is unaware of the change in law and takes no action. According to the Standards, his inaction is:
A) is a violation of the Standards as members should stay informed of the changes in applicable laws.
B) not a violation of the Standards since the exposure is through international funds and not domestic tobacco
companies.
C) not a violation since it is a recommended procedure and a member cannot be expected to keep track of the laws
of all the countries his clients are from.
Answer A) is a violation of the Standards as members should stay informed of the changes in applicable laws.
Explanation A is correct. If it is illegal to hold stocks of tobacco companies, Bart should have taken steps to stay informed of
the applicable laws. His actions indicate violation of Standard I(A) Knowledge of the Law. According to Standard 1
(A) Knowledge of the Law, “Members and Candidates must understand and comply with all applicable laws, rules,
and regulations of any government, regulatory organization, licensing agency, or professional association
governing their professional activities. In the event of conflict, Members and Candidates must comply with the more
strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in and must
dissociate from any violation of such laws, rules, or regulations”.
B is incorrect because even the exposure is through international funds but Bart should comply with the rules of
the resident country of his clients i.e. Inara.
C is incorrect. Martina Bart must be aware of all laws where he conducts business. Stating that he is not aware of
the laws and hence a violation occurred, will not be acceptable.
80 BU Airlines has taken INR 1.1 billion of debt and is unable to service it. The stock prices have been falling and some
investors are accumulating the stock in the hope it will rise soon. Most investors are unaware of the health of the
loss-making airline. The research team at Emitus Investment Management, covers the stock and wants to publish
an adverse opinion on the stock. The firm’s policy does not permit dissemination of a negative opinion about a
client, as it was the underwriter when BU went public two years ago. The best course of action is:
A) defy the firm’s orders and issue an adverse opinion as loyalty to clients takes precedence.
B) to put BU on a restricted list.
C) issue a favorable report for now as the airline industry is volatile and the company may turn around.
Answer B) to put BU on a restricted list.
Explanation B is correct. The recommended course of action would be to put BU Airlines on a restricted list and disseminate
only factual data. This refers to Standard I(B) Independence and Objectivity. According to this Standard, “Members
and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in
their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit,
compensation, or consideration that reasonably could be expected to compromise their own or another’s
independence and objectivity”. The recommended procedure for compliance with this Standard is to create a
restricted list for companies where a firm wants to disseminate only factual information, and no negative or positive
opinion.
81 Lunu Mbasa is an independent analyst who writes a popular financial blog on stock selection. He is hired by an
investor relations firm to publish a research report on FKart, an online lifestyle firm, on his blog. Mbasa will be paid a
fixed fee plus a monthly voucher that can be redeemed on the site if any investor buys the stock based on his
report. There is no disclaimer about the arrangement in his blog post. This arrangement is least likely a violation of:
A) Disclosure of conflicts.
B) Independence and Objectivity.
C) Suitability.
Answer C) Suitability.
Explanation C is correct. Lunu Mbasa has violated Standard I(B) Independence and Objectivity and VI(A) Disclosure of Conflicts
by not giving any disclaimer about the arrangement in his blog post. According to Standard I(B) Independence and
Objectivity, “Members and Candidates must use reasonable care and judgment to achieve and maintain
independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or
accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their
own or another’s independence and objectivity”. This kind of arrangement is highly expected to impair Mbasa’s
independence and objectivity with regard to his comments / report on FKart.
According to 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
disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively”.
Mbasa should have disclosed about his arrangement with FKart.
Lunu Mbasa has not violated Standard III (C) Suitability as he is not making any investment recommendation or
taking investment action that is not suitable to the client’s financial situation and consistent with the client’s written
objectives, mandates, and constraints. According to Standard III (C) Suitability,
1.When members and candidates are in an advisory relationship with a client, they must:
action.
82 Pratik Mathew, a candidate registered for the Level II exam copies important concepts ad formulas from difficult
topics such as Economics, Quantitative Methods and Derivatives daily from the CFA Institute curriculum and posts
them on his Facebook page. He had paid for the online version of the curriculum. He does not attribute the source
of his post. Mathew is most likely in violation of:
B) Misconduct.
C) Responsibilities as a CFA Institute Member or CFA Candidate.
Answer A) Misrepresentation.
Explanation A is correct. Pratik Mathew has violated Standard I(C) Misrepresentation by not providing / mentioning the source of
his post, that is, CFA Institute curriculum. According to Standard I (C) Misrepresentation, Members and Candidates
must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or
other professional activities. A misrepresentation is any untrue statement, or omission of fact, or any statement
that is otherwise false or misleading. Plagiarism also comes under misrepresentation. Plagiarism is using the work
of others without acknowledging or attributing the source of information.
B is incorrect. Not attributing the source of his posts does not imply dishonesty, fraud, or deceit. Accordingt to
Standard I (D) Misconduct, Members and Candidates must not engage in any professional conduct involving
competence.
C is incorrect because not providing disclaimer in his Facebook posts that concepts and formulas are taken from
CFA Institute curriculum does not impair his conduct as Participant in CFA Institute Programs nor does it imply that
he is making any improper reference to CFA Institute, CFA Designation, and CFA Program. Standard VII
Responsibilities as a CFA Institute Member or CFA Candidate has following two sub-standards:
Standard VII (A) Conduct as Participants in CFA Institute Programs: Members and Candidates must not engage
in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the
integrity, validity, or security of CFA Institute programs.
Standard VII (B) Reference to CFA Institute, CFA Designation, and CFA Program: When referring to CFA Institute,
CFA Institute membership, the CFA designation, or candidacy in the CFA program, Members and Candidates must
not misrepresent or exaggerate the meaning of or implications of membership in CFA Institute, holding the CFA
designation, or candidacy in the CFA program.
83 Inventure Advisors hires ten research analysts at the entry level from a reputed management school. One of the
recruits, Smith, has served a three-day jail term after being convicted for drug abuse, while still in school, that was
not disclosed at the time of recruitment. He has since reformed after being to a rehabilitation center. However,
Smith had provided references, who would have acknowledged this incident if the firm had done the background
check. Who is most likely in violation of Standard I(V) Misconduct?
A) Smith, for not revealing the offence at the time of recruitment.

B) The firm for not conducting the background check.
C) Both Smith and the firm.
Answer C) Both Smith and the firm.

Explanation C is correct. It is recommended that firms check reference of potential employees. According to Standard I (D)
Misconduct, “Members and Candidates 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”. The
recommended procedures for compliance with Standard I (D) says the employer should do background (reference)
checks of employees to ensure they have not had a brush with the law in the past and are eligible to work in the
investment profession.
84 Sanjay Babu is a research analyst at Waterhouse Investment Management firm. He covers Sat Corp, a technology
services firm. Babu, during a visit to the firm to interview the business heads about future growth prospects,
overhears a conversation between the CFO and VP-HR in the adjoining room, that the market regulator of India is
privately interrogating the CEO’s involvement in an insider trading case of Sat Corp. What is the best course of
action for Babu to take?
A) Issue a sell recommendation as the stock will fall once the information is public.
B) Encourage Sat Corp. to make the information public.
C) Communicate the information to his research team members so that they do not make any investment
recommendation on the firm.
Answer B) Encourage Sat Corp. to make the information public.
Explanation B is correct. C is incorrect because when public dissemination is not possible, member must communicate only to
the designated supervisory or compliance personnel and not to their teams.. This Standard requires that,
“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”.
85 The Food Safety and Standards Authority of India (FSSAI) was investigating the presence of dangerous substances
in a popular baby cereal, manufactured by Selet Limited. Selet is a publicly listed company with operations around
the world. The tests results showed the presence of harmful chemicals above permissible limits that could mean
product recalls and a temporary ban on production. The results of the test have not made public as yet. Tara, a
lead scientist at one of Selet’s labs, confides the results to Raul, a research analyst who covers Selet and manages
Tara’s portfolio. She asks him to sell her holdings in Selet. If Raul acts on Tara’s information only for her portfolio,
he would most likely violate which of the following Standards?
A) Fair Dealing.
B) Material Nonpublic Information.
C) Market Manipulation.
Answer B) Material Nonpublic Information.
Explanation B is correct. Raul must not act on the information passed by Tara and must encourage her and her firm to achieve
public dissemination. Standard II(A) Material Nonpublic Information. This Standard requires that, “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”.
A is incorrect. If Raul acts on Tara’s information only for her portfolio does not indicate discrimination behavior
towards other clients. Standard III (B) Fair Dealing says “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”.
C is incorrect. If Raul acts on the information passed by Tara, then it will not be a violaton of Standard II (B) Market
Manipulation as his actions are not meant to disseminate false information into the market or mislead market
participants by distorting prices. According to this Standard, “Members and Candidates must not engage in
practices that distort prices or artificially inflate trading volume with the intent to mislead market participants”.
86 Alex Karachanis, CFA, is an independent financial advisor with a roster of over 100 clients. Along with advisory
services, he also facilitates in executing the trades for his clients and manages their portfolio. Adonia Papadakis
signed up Alex in November 2013 to advise and manage her portfolio. After detailed discussions on Adonia’s
circumstances and return requirements, it was agreed that only large cap equity investments will be made. In mid-
2013 Alex felt that large cap stocks were excessively overvalued and shifted 50% of the portfolio to small-cap
stocks. Over the next six months, small-cap stocks significantly outperformed large cap stocks. It is now January
2014 and Adonia has just received her account statement for 2013. She is very happy with the performance of her
portfolio. Which Standard did Alex least likely violate?
A) Performance Presentation.
B) Communication with Clients and Prospective Clients.
C) Suitability.
Answer A) Performance Presentation.
Explanation A is correct. Standard V(B) Communication with Clients and Prospective Clients is violated because Alex should
have discussed the change with the client before moving to small cap stocks. Acording to Standard V (B)
Communication with Clients and Prospective Clients, Members and Candidates must:
changes that might materially affect those processes .
process.
4. Distinguish between fact and opinion in the presentation of investment analyses and recommendations.
Standard III(C) Suitability is also violated because small cap stocks did not correspond to the client’s risk profile
(even though they ended up performing well). According to Standard III (C) Suitability, when members and
candidates are in an advisory relationship with a client, they must:
Standard III(D) Performance Presentation is least likely violated, because the question does not provide enough
information to infer that the account statement was not fairly presented. Standard III (D) Performance Presentation
requires that “when communicating investment performance information, members and candidates must make
reasonable efforts to ensure that it is fair, accurate, and complete”.
87 Riya, CFA, a portfolio manager has two high net worth clients: Rita and Anita. The two clients are sisters and except
a few asset classes, their portfolio holdings are the same. The sisters have received $200,000 each in inheritance.
Both, Rita and Anita, have expressed interest in taking exposure in risky international equities, especially China.
Anita also plans to buy a new house in the next 3-4 months and needs to make a down payment of $450,000. Riya
is aware of Anita’s plans and her needs for liquidity. After a thorough research, Riya identifies a fund that has the
potential to earn good returns in the next three years, and recommends it to Rita for investment. Has Riya violated
any Standard by not recommending the fund to Anita?
A) Yes, Standard III (B) Fair Dealing.

B) No.
C) Standard III (C) Suitability.
Answer B) No.
Explanation B is correct. Anita’s circumstances have changed and the down payment takes precedence. She cannot invest any
surplus in risky investments now. Since the stock was not suitable, Riya did not recommend the fund. So, she did
not violate any standard.
Standard III (B) Fair Dealing is not violated as Riya did not recommend fund to Anita because it was not suitable for
her. There is no discrinmation on part of Riya. Standard III (B) Fair Dealing requires 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”.
C is correct. Riya is in compliance with Standard III (C) Suitability by not recommending the fund to Anita because
the stock was not suitableto her. According to Standard III (C) Suitability, “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”.
88 Roland Andrade manages a small-cap, growth fund called Equity Opportunity Series – Growth. He purchases the
stock of large-cap dividend paying company as it will bring stability to the fund. After the purchase, the stock has
the highest holding in the fund. Which Standard did Andrade most likely violate?
A) Suitability.
C) Loyalty, Prudence, and Care.
Answer A) Suitability.
Explanation A is correct. A large-cap dividend paying company is usually not growth-focused. By choosing this stock for the
fund, Andrade has violated Standard III (C) Suitability as it does not fit the fund’s investment mandate. According to
Standard III (C) Suitability, “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 is least likely violated, because the question does not
provide enough information to infer that Andrade did not exercise diligence, independence, and thoroughness in
analyzing investments. According to Standard V (A) Diligence and Reasonable Basis, Members and Candidates
must:

C is also incorrect. Standard III (A) Loyalty, Prudence, and Care is least likely violated because it is not evident from
the information provided in the question that Andrade acted against the benefit of his clients and did not place his
client’s interests before his employer’s or his own interests. Standard III (A) Loyalty, Prudence, and Care requires
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”.
89 Alba Parker, CFA, is working on a presentation for prospective clients. She showcases the return for the past seven
years of a composite of the firm’s discretionary accounts whose objective is to invest in European growth
companies. Parker includes the returns of terminated accounts as the returns are impressive. She adds a note to
the presentation indicating that the returns of terminated accounts have also been included. Is Parker in compliance
with Standard III (D) Performance Presentation and GIPS Standards?
A) No.
B) Yes, in compliance with Standard III (D) Performance Presentation, but not with GIPS.
C) Yes.
Answer B) Yes, in compliance with Standard III (D) Performance Presentation, but not with GIPS.
Explanation B is correct. Including terminated accounts with a disclaimer is not in accordance with GIPS, but it complies with
Standard III (D). According to Standard III (D) Performance Presentation, when communicating investment
performance information, members and candidates must make reasonable efforts to ensure that it is fair, accurate,
and complete. Firms that claim compliance without applying GIPS standards must
Include terminated accounts as part of performance history. Also state when those accounts were terminated.
Include disclosures that fully explain the performance results being reported.
90 Ind Bank has recently started advisory services at its new branch in Nhasi located in an affluent neighborhood of
high net worth individuals. To promote its services, the bank conducts a marketing drive and in one month signs up
many clients. Ent Nes, an advisor at the bank, is meeting with a new client at the latter’s home. The client wants to
know if anyone from the community are Nes’ clients and whether any private equity (PE) investments have been
made. Nes boasts of the business he has garnered in the past month and says a few people have recently made PE
investments, but does not reveal their names. Has Nes violated any Standard?
A) No.
B) Loyalty.
Answer A) No.
Explanation A is correct. The assets managed by a firm is presented to clients, and is not confidential. Since no names or
confidential details of the clients were disclosed, Standard III (E) Preservation of Confidentiality is not violated.
According 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.
2. Disclosure is required by the law.
3. The client or prospective client permits disclosure of the information.”
B is incorrect. Standard IV (A) Loyalty is not violated as Nes has not acted against the benefit of his employer, Ind
Bank, and did not divulge any confidential information. Standard IV (A) Loyalty requires 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”.
91 Vishal Kachru, CFA, works as a research analyst with HDC Investments. On Saturdays, he gives lectures on
leadership and brand building for three hours at a management school nearby. He is compensated well for this
activity as an independent lecturer. Kachru ensures that he schedules this class only when he is not required at
work. Did Kachru violate any Standard?
A) Yes, Standard IV (A) Loyalty by not informing his employer of this engagement and compensation.
B) No, because it does not affect the responsibilities to his employer.
C) Yes, Standard VI (C) Disclosure of Conflicts.
Answer B) No, because it does not affect the responsibilities to his employer.
Explanation B is correct. Since it does not interfere with his responsibilities at work, there is no violation.
92 Andrea Whistler, CFA is a research analyst at Awesome Investments. Among the list of stocks she covers is home
e-tailer Fabnish, which was issued a buy recommendation recently. Whistler is also a passionate home décor
blogger in her spare time. To promote their newly launched home décor section, Fabnish has approached Whistler
to do an objective post on home improvement using the products on their site. She will be compensated through
vouchers for this activity that can be redeemed on the site. Whistler does not inform her employer of this activity
as it does not interfere with her work commitments. Did any violation take place?
A) Yes, she should have informed her employer of the additional compensation.
B) No, because there was no conflict of interest.
C) No, because she was loyal to her employer.
Answer A) Yes, she should have informed her employer of the additional compensation.
Explanation A is correct. Since Fabnish is a client covered as part of their research analysis, there is a conflict of interest. She
was paid for her engagement which she should have disclosed to her employer. Whistler has violated Standard
IV(B) Additional Compensation Arrangements. According to Standard IV (B) Additional Compensation
Arrangements, “Members and Candidates must not accept gifts, benefits, compensation, or consideration that
unless they obtain written consent from all parties involved”.
93 Aidan Ackermann, CFA, is recently hired as a banking analyst at Becker Investments. One of the mandates given by
his supervisor Abigail Wohlers, is to improve the online presence of Becker among social media platforms.
Ackermann posts regularly on the company’s Facebook page and Twitter on the various services offered by Becker
as well as snippets of the companies on his research list. He shares his buy/sell/hold recommendation in a brief
manner on Twitter before the report is released to all clients. Wohlers is least likely to have violated the Standard
relating to?
A) Fair Dealing.
B) Responsibilities of Supervisors.
Answer C) Preservation of Confidentiality.
Explanation C is correct. By not educating Ackermann of the compliance procedures for social media, and not supervising what
was being posted online, Wohlers has violated Standard IV(C) Responsibilities of Supervisors. According to
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”.
Ackermann has violated Standard III (B) Fair Dealing by sharing his buy/sell/hold recommendation on Twitter before
the report is released to all clients. Standard III (B) Fair Dealing requires 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”.
Guidelines on how recommendations must be disseminated to clients:

All your clients must have a fair opportunity to act on the investment recommendation.
There should not be selective disclosure such that your large clients receive a report first and the smaller
clients later. There may be practical difficulties in reaching all clients at the exact same time because of time
differences and modes of communication, but an effort must be made to communicate in an equitable
manner.
There may be instances when you may change your recommendation. Let’s assume you issued a buy
recommendation for a stock erroneously. You changed it later to sell and if there are clients who have acted
on the buy order but are not aware of the change to sell, you must advise them of the change before
accepting the order.

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L1 R03 GUID Q-Bank With Answers

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Level I R03 Guidance for

Question Q-Code: L1-ES-GUID-001

A) disclose his personal transaction.

Answer A) disclose his personal transaction.

Question Q-Code: L1-ES-GUID-002

Standard III (C) Suitability

Question Q-Code: L1-ES-GUID-003

Question Q-Code: L1-ES-GUID-004

A) dissociate from the report, the underwriting, and the client.

Question Q-Code: L1-ES-GUID-005

According to Standard III (C) Suitability,

Question Q-Code: L1-ES-GUID-006

Question Q-Code: L1-ES-GUID-007

A) to communicate the change of method to his clients and prospective clients.

Question Q-Code: L1-ES-GUID-008

Question Q-Code: L1-ES-GUID-009

A) remove it without looking at it and call the proctor.

Question Q-Code: L1-ES-GUID-010

A) decline to accept supervisory responsibilities.

Answer A) decline to accept supervisory responsibilities.

Question Q-Code: L1-ES-GUID-012

Answer C) Priority of Transactions.

Question Q-Code: L1-ES-GUID-014

Answer C) Fair Dealing.

Question Q-Code: L1-ES-GUID-015

A) Loyalty. prudence, and care.

Question Q-Code: L1-ES-GUID-016

A) Yes, relating to Misconduct.

Question Q-Code: L1-ES-GUID-017

Answer A) CFA Designation.

Question Q-Code: L1-ES-GUID-018

Answer B) Yes, related to reference to CFA Designation.

A) Diligence and Reasonable Basis.

Answer C) Conflicts of Interest.

Question Q-Code: L1-ES-GUID-020

Answer C) Preservation of Confidentiality.

The information concerns illegal activities on the part of the client.

Question Q-Code: L1-ES-GUID-021

Question Q-Code: L1-ES-GUID-022

Answer C) Independence and Objectivity.

Question Q-Code: L1-ES-GUID-023

Answer B) Yes relating to Communications with Clients and Prospective Clients.

Question Q-Code: L1-ES-GUID-024

Answer B) Material Nonpublic Information.

Question Q-Code: L1-ES-GUID-025

Question Q-Code: L1-ES-GUID-026

A) Conduct as Participants in the CFA Program.

Answer A) Conduct as Participants in the CFA Program.

Question Q-Code: L1-ES-GUID-027

Answer C) Independence and Objectivity.

Question Q-Code: L1-ES-GUID-029

A) Communications with Clients and Prospective Clients.

Answer A) Communications with Clients and Prospective Clients.

Question Q-Code: L1-ES-GUID-030

Question Q-Code: L1-ES-GUID-031

Answer B) Priority of Transactions.

Question Q-Code: L1-ES-GUID-032

A) Yes, for both his clients.

Answer B) Yes, only in Ahisma’s case.

Question Q-Code: L1-ES-GUID-033

A) Yes, related to conflicts of interest.

Question Q-Code: L1-ES-GUID-034

Question Q-Code: L1-ES-GUID-035

A) Yes related to Market Manipulation.