Answers - Reading 42 Code of Ethics

Question #1 of 23 Question ID: 1474112 All of the following are components of the Code of Ethics EXCEPT: A) demonstrating diligence, independence, and thoroughness when preparing investment reports. B) using reasonable care and exercising independent professional judgment. C) striving to maintain and improve their competence and the competence of others in the profession. Explanation Demonstrating diligence, independence, and thoroughness when preparing investment reports is found in the Standards of Professional Conduct. (Module 42.1, LOS 42.a) Question #2 of 23 Question ID: 1474116 Michael Malone, CFA, is an investment analyst for a large brokerage firm in New York who covers the airlines industry. After hours in his personal time, Malone maintains an online blog on which he expresses his personal opinions about various investment opportunities, including, but not limited to, the airlines industry. On his blog, he posts a very negative investment opinion about WestAir stock. Malone knows that WestAir's stock will be downgraded to a "sell" by his firm next week. Malone has most likely violated: A) violated Standard IV(A) Loyalty. B) Standard VI(B) Priority of Transactions. C) violated Standard II(A) Material Nonpublic Information. Explanation By expressing his investment analysis on his personal blog ahead of his employer, Malone deprived his employer of the benefits of his skills and abilities and therefore violated Standard IV(A) Loyalty. Malone did not possess material nonpublic information about WestAir and no transactions have taken place. (Module 42.1, LOS 42.b) Question #3 of 23 Question ID: 1474117 John Elliot, CFA, says that in issues of ethics he always puts the clients first according to the guidelines in the Code of Ethics. In doing so he is: A) not correct, because no such ordering or priority is given in the Code. B) correct. C) not correct, because his first duty is to the public. Explanation Component one of the Code of Ethics mentions duties to the public, clients, prospects, employers, employees, and fellow members. No ordering of priorities is given. Standards of Professional Conduct on the other hand, does give priority. Standard III.A, Duties to Clients, specifies that clients have priority over employers. (Module 42.1, LOS 42.b) Question #4 of 23 Question ID: 1474102 In dealing with the public and others, the CFA Institute Code of Ethics requires that CFA Institute members act with: A) honesty, professionalism, and high ethical standards. B) integrity, competence, and respect. C) candor, skill, and honor. Explanation Integrity, competence, and respect are mentioned by name in the first component of the Code of Ethics. (Module 42.1, LOS 42.a) Question #5 of 23 Question ID: 1474105 In accordance with Standard III (A) Loyalty, Prudence and Care, which of the following statements is NOT a required or recommended action? A) Utilize client brokerage to the sole benefit of the client. B) Submit to clients, at least quarterly, itemized statements detailing all of the period’s transactions. C) Vote all proxies on behalf of clients in a responsible manner. Explanation Because of the time and expense involved in voting a proxy, Members and Candidates are not required to vote every proxy. A cost benefit analysis can be performed to determine if it is necessary to vote a proxy. Standard III(A) requires that client brokerage be used to benefit the client. Quarterly statements to clients are recommended. (Module 42.1, LOS 42.a) Question #6 of 23 Question ID: 1474103 Which of the following is a component of the Code of Ethics? CFA Institute members shall: A) make reasonable efforts to detect and prevent violations by those who are under their supervision. disclose to their employer all matters that reasonably could be expected to B) interfere with their duty to their employer or ability to make unbiased and objective recommendations. C) strive to maintain and improve their competence and the competence of others in the profession. Explanation Striving to maintain and improve their competence and the competence of others in the profession is one of the components of the Code of Ethics, whereas the other statements are part of the Standards of Professional Conduct. (Module 42.1, LOS 42.a) Question #7 of 23 Question ID: 1474109 According to the CFA Institute Code of Ethics, CFA Institute members shall: A) preserve the confidentiality of information communicated by clients, prospects, or employers concerning investment matters. act with integrity, competence, diligence, respect, and in an ethical manner B) when dealing with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets. C) maintain knowledge and comply with all applicable laws, rules and regulations. Explanation Acting with integrity, competence, diligence, respect, and in an ethical manner when dealing with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets is one of the six components of the Code of Ethics, whereas the other statements are part of the Standards of Professional Conduct. (Module 42.1, LOS 42.a) Question #8 of 23 Question ID: 1474115 Which of the following activities would be following a component of the Code of Ethics explicitly? A) Maintaining a list of colleagues who have violated the CFA Institute standards. B) Consulting with colleagues about opinions you reach in your research. C) Attending continuing education seminars on investing and inviting colleagues to come along. Explanation The Code states that a member shall "Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals." None of the other answers qualify. (Module 42.1, LOS 42.b) Question #9 of 23 Question ID: 1474119 According to the Standards of Professional Conduct, investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner. This concept is most directly addressed in: A) Standard VI, Conflicts of Interest B) Standard V, Investment Analysis, Recommendations, and Actions C) Standard I, Professionalism Explanation Standard VI(B) addresses priority of transactions, and states that "Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner." (Module 42.1, LOS 42.b) Question #10 of 23 Question ID: 1474111 Which of the following is a component of the Code of Ethics? A) Members shall not knowingly participate or assist in any violation of such laws, rules, or regulations. Members shall not engage in any professional conduct involving dishonesty, B) fraud, deceit, or misrepresentation or commit any act that reflects adversely on their honesty, trustworthiness, or professional competence. C) Members shall use reasonable care and exercise independent professional judgment. Explanation This is a component of the Code of Ethics. Others pertain to the Standards of Professional Conduct. (Module 42.1, LOS 42.a) Question #11 of 23 Question ID: 1474118 The Code of Ethics does NOT explicitly say that a CFA Institute member shall do which of the following? A) Actively lobby for new laws to protect the public. B) Exercise independent professional judgment. C) Act with integrity. Explanation The Code of Ethics says nothing about a CFA Institute member lobbying for new laws. In fact, legal issues are not a part of the Code. The Standards of Professional Conduct say that the member shall obey laws. (Module 42.1, LOS 42.b) Question #12 of 23 Question ID: 1474101 Which of the following is least likely a component of the Code of Ethics? In dealing with the public, clients, prospects, employers, employees, and fellow members, CFA Institute members shall act with: A) integrity. B) humility. C) respect. Explanation Although acting with humility may be desirable, CFA Institute members are not required to do so. However, they should act in a manner that reflects credit on themselves and their profession. (Module 42.1, LOS 42.a) Question #13 of 23 Question ID: 1474110 According to the Code of Ethics, a member reflects credit on the profession when a member: A) consults with other members on a regular basis. B) places the clients first. C) practices in a professional and ethical manner. Explanation Component four of the Code says that a member shall "Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and the profession." Neither of the other choices are implied by the Code. (Module 42.1, LOS 42.a) Question #14 of 23 Question ID: 1474099 The CFA Institute Code of Ethics least likely requires a Member or Candidate to: A) Strive to maintain and improve the competence of others in the profession. B) Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession. C) Understand and comply with all applicable laws, rules, and regulations. Explanation Understanding and complying with all applicable laws, rules, and regulations is required by Standard I(A) – Knowledge of the Law. The other choices are included in the Code of Ethics. (Module 42.1, LOS 42.a) Question #15 of 23 Question ID: 1474106 According to the Code of Ethics, which of the following statements is NOT correct? CFA Institute members are required to: A) use reasonable care and exercise independent professional judgment. B) comply with the CFA Institute Global Investment Performance Standards. C) maintain and improve their competence and strive to maintain the competence of others in the profession. Explanation The CFA Institute-GIPS are voluntary standards for the industry. Firms are not required to comply with these standards when presenting performance. The other statements are each components of the CFA Institute Code of Ethics. (Module 42.1, LOS 42.a) Question #16 of 23 Question ID: 1474113 Which of the following is least likely to be a reason for imposing a suspension on a member or candidate? A) Failing to return the annual professional conduct statement. B) Misdemeanor charge for possession of narcotics. C) Discussing a question from the CFA exams on social media. Explanation A misdemeanor charge not related to professional conduct is not grounds for a suspension. The other choices are violations of the Code and Standards and may result in CFA Institute imposing a suspension of membership or participation. (Module 42.1, LOS 42.a) Question #17 of 23 Question ID: 1474098 Which of the following is least likely part of the CFA Institute Code of Ethics? A) Competence. B) Contractual provisions. C) Independent judgment. Explanation Contractual provisions are not part of the Code of Ethics. (Module 42.1, LOS 42.a) Question #18 of 23 Question ID: 1474108 Which of the following is a component of the Code of Ethics? A) B) C) Transactions for clients and employers have priority over transactions in which a member or candidate is the beneficial owner. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession. Members and candidates must not engage in conduct that compromises the integrity of the CFA designation or the security of the CFA examinations. Explanation This is a component of the Code of Ethics. Others pertain to the Standards of Practice. (Module 42.1, LOS 42.a) Question #19 of 23 Question ID: 1474107 According to the Code of Ethics, when practicing in a professional and ethical manner the goal is to: A) resolve conflicts between clients and employers. B) reflect credit on members and the profession. C) increase membership in CFA Institute. Explanation The Code states that a member shall "Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession." (Module 42.1, LOS 42.a) Question #20 of 23 Question ID: 1474104 The CFA Institute Code of Ethics specifies that CFA Institute Members and Candidates must do all of the following EXCEPT: A) act with integrity, competence, diligence, respect, and in an ethical manner. B) C) refrain from any conduct that compromises the reputation or integrity of the CFA designation. use reasonable care and exercise independent professional judgment when engaging in professional activities. Explanation Not compromising the reputation or integrity of the CFA designation is a part of the Standards of Professional Conduct, but is not specifically mentioned the Code of Ethics. (Module 42.1, LOS 42.a) Question #21 of 23 Question ID: 1474097 The first component of the Code of Ethics does NOT explicitly say that a CFA Institute member will act in a certain manner with respect to which of the following groups? A) Prospective clients. B) CFA Institute members and candidates in the CFA Program. C) Colleagues. Explanation Participants in the CFA Program are not specifically mentioned in the Code of Ethics. Component one mentions duties to the public, clients, prospects, employers, employees, colleagues, and other participants in the global capital markets. (Module 42.1, LOS 42.a) Question #22 of 23 Question ID: 1474100 Which of the following is a component of the Code of Ethics? CFA Institute members shall: A) not knowingly participate or assist in any violation of laws, rules, or regulations. B) use particular care in determining applicable fiduciary duty. C) use reasonable care and exercise independent professional judgment. Explanation Using reasonable care and exercising independent professional judgment is one of the components of the Code of Ethics, whereas the other statements are part of the Standards of Professional Conduct. (Module 42.1, LOS 42.a) Question #23 of 23 Question ID: 1474114 Liam McCoy has lunch with a wealthy client whose portfolio he manages. McCoy advises the client to double his current position in the JKM Corporation due to an anticipated increase in sales. In accordance with Standard (V) Investment Analysis, Recommendations and Actions, when McCoy returns to his office he should: A) B) C) verify the suitability of the investment recommendation before placing the client’s order. identify other clients for whom JKM may be a suitable investment and notify them immediately of his recommendation. document the details of the conversation with the client with regard to his investment recommendation. Explanation Standard V(C) Record Retention requires that Members and Candidates document all recommendation and communications with clients. McCoy should document the details of the conversation, including any resulting investment decisions and/or actions. The suitability of the investment should have already been considered before the recommendation and McCoy should not execute the order until the client instructs him to. Identifying other clients for this investment would fall under Standard III(B) Fair Dealing. (Module 42.1, LOS 42.b)