Ethics

Question 1

Disciplinary review committee (DRC)

Answer 1

Enforcement of the Code and Standards

Question 2

Standards of Practice Council (SPC)

Answer 2

Maintains and interprets the code and Standards

Question 3

Standards of professional conduct

Answer 3

1. Professionalism
2. Integrity of capital markets
3. Duties to clients
4. Duties to employers
5. Investment analysis, recommendations and actions
6. Conflicts of interest
7. Responsibilities as a CFA institute member or CFA candidate

Question 4

Professionalism

Answer 4

• Knowledge of the law
• Independance and objectivity
• Misinterpretation
• Misconduct

Question 5

Integrity of Capital Markets

Answer 5

• Material nonpublic information
• Market manipulation

Question 6

Duties to clients

Answer 6

• Loyalty, prudence and care
• Fair dealing
• Suitability
• Performance presentation
• Preservation of confidentiality

Question 7

Duties to employer

Answer 7

• Loyalty
• Additional compensation arrangements
• Responsabilities of supervisors

Question 8

Investment analysis, recommendations and actions

Answer 8

• Diligence and reasonable basis
• Communication with clients and prospective clients
• Record retention

Question 9

Conflicts of interest

Answer 9

• Disclosure of conflicts
• Priority of transactions
• Referral fees

Question 10

Responsibilities as a CFA institute member or CFA candidate

Answer 10

• Conduct as participants in CFA institute programs
• Reference to CFA institute, the CFA designation and the CFA program

Question 11

Federal Deposit Insurance Corporation

Answer 11

Guarantess the deposits in financial institutions up to a certain limit

Question 12

Soft Dollar Standards

Answer 12

• Are voluntary standards for Members
• Soft dollars can be for mixed-use products
• Soft dollars arrangement must be disclosed

Question 13

• Agency trade
• Principal trade

Answer 13

• Involves the payment of a commission
• Involves a “discount” or a “spread”

Question 14

Client-directed brokerage

Answer 14

• The member or candidate must disclose to the client in those instances where directed brokerage may not be providing the best execution at the best price

Question 15

In determining the portion of mixed-use research to be paid with client brokerage, the investment manager must:

Answer 15

• be able to make a reasonable, justifiable, and documentable allocation of the cost of the research according to its expected usage
• pay with client brokerage only the portion of the research that is actually used by the investment manager in the investment decision-making process
• reevaluate the mixed-use research allocation at least annually

Question 16

Reference to the CFA Institute and designation

Answer 16

• Violation: state that the competencies of the CFA chartholders are superior to those of others not holding the designation
• Not a violation: state that someone passed all their CFA exams on the first attempt
• Violation: state that someone would have superior competencies because they passed all their CFA exams on the first attempt

Question 17

Recommendation categories

Answer 17

Should include a benchmark

Question 18

Disclosure regarding potential conflicts of interest

Answer 18

Should be comprehensive

Question 19

Investment suitability in the overall portfolio

Answer 19

Investment decisions may be judged in the context of the total portfolio rather than by individual investments within the portfolio

Question 20

Prudent man rule (replaced by the prudent investor rule)

Answer 20

• The trustee was not allowed to delegate any duties to others
• The preservation of the principal and purchasing power by earning a return sufficient to offset inflation was required
• The impartiality standard requires prudent handling of different interests, such as those of different beneficiaries

Question 21

Prudent investor rule

Answer 21

• Risk must be determined and minimized with diversification according to the trust’s (investor’s) needs.
• Fees and expenses must be reasonable
• There must be a fair compromise between current income beneficiaries and remainder beneficiaries (growth versus income)
• Trustees can delegate responsibilities to experts (a key difference from the old rule)
• The impartiality standard requires prudent handling of different interests, such as those of different beneficiaries

Question 22

Gifts from clients

Answer 22

• Receiving a gift, benefit, or consideration from a client can be distinguished from gifts given by entities seeking to influence a member or candidate to the detriment of other clients. When possible, prior to accepting gifts from clients, members and candidates should disclose to their employers such benefits offered by clients. If notification is not possible prior to acceptance, members and candidates must disclose to their employer benefits previously accepted from clients
• Gifts requiring a certain performance threshold must receive approval from the employer before being accepted

Question 23

Independent practice that might cause a conflict of interest with the current employer

Answer 23

Standard IV(B) requires members and candidates to obtain permission from their employer before accepting compensation or other benefits from third parties for the services rendered. Members and candidates must obtain written consent from their current employer before engaging in such activities

Question 24

Independent practice that do not cause a conflict of interest with the current employer

Answer 24

• It is permitted to have another source of income when it does not compete with the original employer
• Members must not deprive their employer of their skills and ability and must not cause harm to the said employer

Question 25

Research objectivity standard on public appearances

Answer 25

Recommends that sufficient information be included for investors to assess the appropriateness of the investment for their own personal risk profile

Question 26

Research objectivity standard on trading contrary to published recommendations

Answer 26

It is prohibited for employees and their immediate families to trade contrary to published recommendations except in cases of extreme financial hardship

Question 27

Research objectivity standard on conflicts of interest

Answer 27

All conflicts of interest must be **disclosed** but they **do not prohibit coverage** of companies where such a conflict may be present