Ethical and Professional Standards — CFA Level I practice questions

A firm requires a 30-day cooling-off period on personal trades after firm recommendations on the same security. This policy is MOST accurately characterized as:

1. Violating Standard VI(B) by permitting any personal trades
2. Conflicting with Standard III(B) because clients trade later
3. Overriding Standard I(B) independence and objectivity duties
4. Implementing Standard VI(B) by putting client trades first

Answer: D — Implementing Standard VI(B) by putting client trades first

A) Personal trading is permitted under the Standards when properly restricted. B) Fair Dealing addresses recommendation distribution, not personal trading timing. C) Independence and objectivity governs research quality, not trading order. D) Correct — cooling-off and pre-clearance operationalize Priority of Transactions.

GIPS verification under the current standards is performed by:

1. An independent third party that assesses the firm's composite construction and performance calculation policies overall
2. The firm's own internal audit team, given internal audit's familiarity with the internal control environment of the firm
3. The portfolio managers themselves, who self-certify the firm's compliance with the GIPS standards on an annual basis

Answer: A — An independent third party that assesses the firm's composite construction and performance calculation policies overall

A) Correct — verification is by definition independent third-party review. B) Internal audit does not satisfy independence. C) Self-certification by portfolio managers is not GIPS verification.

A CFA candidate posts on LinkedIn describing herself as a 'CFA Level III candidate.' Under the Standards, this reference is:

1. Permitted only while the candidate is currently registered for the next Level III sitting
2. Permitted whenever the candidate has passed at least Level I of the CFA exam program
3. A per se violation of Standard VII(B) regardless of the candidate's registration status
4. Permitted only after the candidate has formally passed the Level III examination

Answer: A — Permitted only while the candidate is currently registered for the next Level III sitting

A) Correct — Standard VII(B) allows current-registration references only. B) Passing Level I alone does not confer active candidate status. C) Overstates; the reference is allowed if accurate. D) Confuses candidate status with charterholder status.

CFA Level I exam structure:

1. Open-book with unlimited reference material
2. A hands-on laboratory practical exercise
3. A multi-week take-home written exam
4. Computer-based, 180 multiple-choice questions

Answer: D — Computer-based, 180 multiple-choice questions

A) CFA Level I is closed-book. B) No lab component exists. C) Administered in-person at test centers. D) Correct — 180 MCQs over 4.5 hours, four windows/year.

Under the current GIPS standards, composite returns must generally be calculated using:

1. A simple arithmetic average of the monthly returns computed across every constituent portfolio in the composite each period
2. Money-weighted returns exclusively, applied across every asset class and every mandate that the firm reports externally
3. Time-weighted total returns, with money-weighted returns permitted for certain closed-end private-market strategies only

Answer: C — Time-weighted total returns, with money-weighted returns permitted for certain closed-end private-market strategies only

A) Simple arithmetic averages are not the required GIPS methodology. B) MWR is a limited exception, not the default. C) Correct — TWR default; MWR for closed-end private capital.

Performance evaluation: GIPS standards:

1. No formal industry standards exist
2. Global Investment Performance Standards by CFA
3. Standards of a single asset manager firm
4. Purely internal firm-specific rules only

Answer: B — Global Investment Performance Standards by CFA

A) GIPS is the recognized global standard. B) Correct — CFA Institute's voluntary global framework. C) GIPS is cross-firm, not proprietary. D) External verification is a core GIPS feature.

The CFA Code's client-first principle is MOST directly operationalized in:

1. Continuing education requirements for members
2. Standard V(A) Diligence and Reasonable Basis duty
3. Standard VII(A) Conduct as Members of CFA Institute
4. Standard III(A) Loyalty, Prudence, and Care duties

Answer: D — Standard III(A) Loyalty, Prudence, and Care duties

A) CE preserves competence but is not the primary client-first mechanism. B) V(A) governs research quality, not the client-priority duty. C) VII(A) governs conduct toward CFA Institute itself. D) Correct — III(A) requires acting for the benefit of clients with prudence and reasonable care, a fiduciary-like duty.

Standard III(C) Suitability requires that, before recommending an investment, a member:

1. Obtain a signed acknowledgment of risks from the client
2. Verify the security is above the model portfolio benchmark
3. Confirm the security appears on the firm's approved list
4. Inquire into client experience, objectives, and constraints

Answer: D — Inquire into client experience, objectives, and constraints

A) Signed acknowledgments are useful documentation but not the Standard's core requirement. B) Beating a benchmark is not the suitability test. C) Firm approval does not substitute for suitability judgment for a specific client. D) Correct — suitability requires a reasonable inquiry into experience, objectives, constraints, and IPS fit.

An advisor places his discretionary clients in a new IPO before placing his own purchase order, but at the same time receives a 'friends and family' allocation he intends to keep. This is BEST evaluated under:

1. Standard V(A) Diligence and reasonable basis
2. Standard II(A) Material Nonpublic Information
3. Standard III(B) Fair Dealing among clients
4. Standard VI(B) Priority of Transactions rules

Answer: D — Standard VI(B) Priority of Transactions rules

A) V(A) governs research quality, not personal trading. B) II(A) concerns MNPI, not allocation ordering. C) III(B) applies but VI(B) is the more specific standard here. D) Correct — VI(B) requires client priority plus disclosure and preclearance of IPO participation.

An analyst publicly recommends a stock he and his family already own. Under the Standards this is MOST appropriately handled by:

1. Disclosing beneficial ownership whenever the rec is issued
2. Selling the family position before publishing any research
3. Refraining from public discussion of the security entirely
4. Transferring the position to a discretionary trust silently

Answer: A — Disclosing beneficial ownership whenever the rec is issued

A) Correct — Standard VI(A) requires disclosure of conflicts, including beneficial ownership. B) Divestment goes beyond what the Standards demand. C) Suppressing coverage penalizes clients who would benefit from the research. D) A silent trust move does not eliminate the disclosure obligation.

What is the 'firewall' (information barrier)?

An internal procedure separating departments (e.g., investment banking from research) to prevent conflicts of interest and misuse of material nonpublic information.

What is Standard I(B) 'Independence and Objectivity'?

Members must maintain independence and objectivity. Must not offer, solicit, or accept gifts that could compromise their independence.

What is Standard III(A) 'Loyalty, Prudence, and Care'?

Members must act for the benefit of clients and place client interests before employer or personal interests.

What is Standard V(A) 'Diligence and Reasonable Basis'?

Members must exercise diligence, independence, and thoroughness in analyzing, recommending, and taking investment actions with a reasonable and adequate basis.