CFA Level 1 - Ethical and Professional Session 1 - Reading 1

CFA Level 1 - Ethical and Professional Standards Session 1 - Reading 1 (Notes, Practice Questions, Sample Questions) 1. In accordance with Standard III (A) Loyalty, Prudence and Care, which of the following statements is least accurate? Members and Candidates should: 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: C)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 2. 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)The SEC. B)Colleagues in the investment profession. C)The public. Explanation: A)The SEC is not 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 3. Which of the following is NOT part of the CFA Institute Code of Ethics? A)Independent judgment. B)Contractual provisions. C)Competence. Explanation: B)Contractual provisions are not part of the Code of Ethics 4. According to the CFA Institute Code of Ethics, CFA Institute members shall: A)maintain knowledge and comply with all applicable laws, rules and regulations. B)act 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. C)preserve the confidentiality of information communicated by clients, prospects, or employers concerning investment matters. Explanation: B)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 5. All of the following are components of the Code of Ethics EXCEPT: A)using reasonable care and exercising independent professional judgment. B)striving to maintain and improve their competence and the competence of others in the profession. C)demonstrating diligence, independence, and thoroughness when preparing investment reports Explanation: C)Demonstrating diligence, independence, and thoroughness when preparing investment reports is found in the Standards of Professional Conduct 6. The Code of Ethics does NOT explicitly say that a CFA Institute member shall do which of the following? A)Exercise independent professional judgment. B)Actively lobby for new laws to protect the public. C)Act with integrity Explanation: B)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 7. 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: A)Component one mentions duties to the public, clients, prospects, employers, employees, and fellow members. No ordering of priorities is given 8. Which of the following is a component of the Code of Ethics? CFA Institute members shall: A)use reasonable care and exercise independent professional judgment. B)not knowingly participate or assist in any violation of laws, rules, or regulations. C)use particular care in determining applicable fiduciary duty. Explanation: A)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 9. 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: C)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 10. According to the Code of Ethics, a member reflects credit on the profession when a member: A)practices in a professional and ethical manner. B)consults with other members on a regular basis. C)places the clients first. Explanation: A)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 11. 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)humility. B)integrity. C)respect Explanation: A)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 12. According to the CFA Institute Code of Ethics, CFA Institute Members and Candidates must do all of the following EXCEPT: A)exercise independent judgment. B)not knowingly violate the securities acts and laws. C)act with integrity and dignity Explanation: B)Not knowingly violating the law is in the Standards of Professional Conduct, but is not in the Code of Ethics 13. Which of the following is a component of the Code of Ethics? A)Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession. B)Members and candidates shall not engage in any conduct or commit any act that compromises the integrity of the CFA designation or the integrity or validity of the examinations leading to the award of the right to use the CFA designation. C)Members shall not copy or use, in substantially the same form as the original, material prepared by another without acknowledging and identifying the name of the author, publisher, or source of such material. Members may use, without acknowledgment, factual information published by recognized financial and statistical reporting services or similar sources Explanation: A)This is a component of the Code of Ethics. Others pertain to the Standards of Practice 14. 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)Reflect credit on the profession. C)Act with integrity. Explanation: A)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 15. In dealing with the public and others, the CFA Institute Code of Ethics indicates that CFA Institute members will act with: A)integrity, competence, and respect. B)confidence, knowledge, and high ethical standards. C)honesty, professionalism, and goodwill Explanation: A)Integrity, competence, and respect are included in the first component of the Code of Ethics 16. Which of the following is a component of the Code of Ethics? CFA Institute members shall: A)strive to maintain and improve their competence and the competence of others in the profession. B)act for the benefit of their clients and place their clients' interests before their own. C)disclose to their employer all matters that reasonably could be expected to interfere with their duty to their employer or ability to make unbiased and objective recommendations. Explanation: A)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 17. The first component of the Code of Ethics does NOT explicitly say that a CFA Institute member will act with which of the following? A)Integrity. B)Solemnity. C)Competence. Explanation: B)Component one mentions all of these except sole 18. Which of the following is NOT an act explicitly referred to in the Code of Ethics? A)Giving free introductory seminars on investing to the public. B)Using reasonable care when making investment recommendations. C)Improve professional competence Explanation: A)Although the Code says a member has obligations to the public, educating the general public for whatever reason is not implied 19. 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)maintain and improve their competence and strive to maintain the competence of others in the profession. C)comply with the CFA Institute Performance Presentation Standards. Explanation: C)The CFA Institute-PPS 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 20. 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)humility. B)integrity. C)respect. Explanation: A)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 21. 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. B)Members shall not engage in any professional conduct involving dishonesty, 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: C)This is a component of the Code of Ethics. Others pertain to the Standards of Professional Conduct. 22. Which of the following is NOT part of the CFA Institute Code of Ethics. Members of CFA Institute will: A)recommend investments that maximize returns for a given level of risk. B)use reasonable care and exercise independent professional judgment. C)strive to maintain and improve their competence and the competence of others in the profession Explanation: A)Standard of Professional Conduct III(C), not the Code of Ethics, requires that investments be appropriate and suitable 23. 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)identify other clients for whom JKM may be a suitable investment and notify them immediately of his recommendation. B)document the details of the conversation with the client with regard to his investment recommendation. C)verify the suitability of the investment recommendation before placing the client’s order. Explanation: B)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 24. 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: A)violated Standard IV(A) Loyalty by divulging confidential information that is the intellectual property of his employer. B)violated Standard VI(B) Priority of Transactions by releasing material information to the public before releasing to the firm’s clients. C)violated Standard II(A) Material Nonpublic Information by releasing material that could negatively impact the price of the security Explanation: C)Malone is in violation of Standard II(A) because the information is both material and nonpublic. He is in violation whether or not he divulges the impending downgrade by his firm on his blog, because he is using nonpublic information. A “sell” opinion on a security issued by a large brokerage firm will almost certainly impact the stock’s price 25. Which of the following activities would be following a component of the Code of Ethics explicitly? A)Consulting with colleagues about opinions you reach in your research. B)Attending continuing education seminars on investing and inviting colleagues to come along. C)Maintaining a list of colleagues who have violated the CFA Institute standards. Explanation: B)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 26. 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: A)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.” 27. In accordance with Standard III (A) Loyalty, Prudence and Care, which of the following statements is least accurate? Members and Candidates should: 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: C)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 28. 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)Colleagues in the investment profession. B)The SEC. C)The public Explanation: B)The SEC is not 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 29. Which of the following is NOT part of the CFA Institute Code of Ethics? A)Independent judgment. B)Competence. C)Contractual provisions. Explanation: C)Contractual provisions are not part of the Code of Ethics 30. All of the following are components of the Code of Ethics EXCEPT: A)using reasonable care and exercising independent professional judgment. B)demonstrating diligence, independence, and thoroughness when preparing investment reports. C)striving to maintain and improve their competence and the competence of others in the profession Explanation: B)Demonstrating diligence, independence, and thoroughness when preparing investment reports is found in the Standards of Professional Conduct 31. The Code of Ethics does NOT explicitly say that a CFA Institute member shall do which of the following? A)Exercise independent professional judgment. B)Act with integrity. C)Actively lobby for new laws to protect the public Explanation: C)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 32. 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)correct. B)not correct, because no such ordering or priority is given in the Code. C)not correct, because his first duty is to the public Explanation: B)Component one mentions duties to the public, clients, prospects, employers, employees, and fellow members. No ordering of priorities is given 33. Which of the following is a component of the Code of Ethics? CFA Institute members shall: A)use reasonable care and exercise independent professional judgment. B)not knowingly participate or assist in any violation of laws, rules, or regulations. C)use particular care in determining applicable fiduciary duty Explanation: A)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 34. 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)Understand and comply with all applicable laws, rules, and regulations. C)Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession. Explanation: B)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 35. 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)practices in a professional and ethical manner. C)places the clients first Explanation: B)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 36. 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: B)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 37. According to the CFA Institute Code of Ethics, CFA Institute Members and Candidates must do all of the following EXCEPT: A)not knowingly violate the securities acts and laws. B)exercise independent judgment. C)act with integrity and dignity Explanation: A)Not knowingly violating the law is in the Standards of Professional Conduct, but is not in the Code of Ethics 38. Which of the following is a component of the Code of Ethics? A)Members and candidates shall not engage in any conduct or commit any act that compromises the integrity of the CFA designation or the integrity or validity of the examinations leading to the award of the right to use the CFA designation. B)Members shall not copy or use, in substantially the same form as the original, material prepared by another without acknowledging and identifying the name of the author, publisher, or source of such material. Members may use, without acknowledgment, factual information published by recognized financial and statistical reporting services or similar sources. C)Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession Explanation: C)This is a component of the Code of Ethics. Others pertain to the Standards of Pra 39. The Code of Ethics does NOT explicitly say that a CFA Institute member shall do which of the following? A)Reflect credit on the profession. B)Actively lobby for new laws to protect the public. C)Act with integrity Explanation: B)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 40. In dealing with the public and others, the CFA Institute Code of Ethics indicates that CFA Institute members will act with: A)integrity, competence, and respect. B)confidence, knowledge, and high ethical standards. C)honesty, professionalism, and goodwill. Explanation: A)Integrity, competence, and respect are included in the first component of the Code of Ethics 41. Which of the following is a component of the Code of Ethics? CFA Institute members shall: A)strive to maintain and improve their competence and the competence of others in the profession. B)act for the benefit of their clients and place their clients' interests before their own. C)disclose to their employer all matters that reasonably could be expected to interfere with their duty to their employer or ability to make unbiased and objective recommendations Explanation: A)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 42. The first component of the Code of Ethics does NOT explicitly say that a CFA Institute member will act with which of the following? A)Solemnity. B)Integrity. C)Competence Explanation: A)Component one mentions all of these except solemnity 43. Which of the following is NOT an act explicitly referred to in the Code of Ethics? A)Using reasonable care when making investment recommendations. B)Improve professional competence. C)Giving free introductory seminars on investing to the public Explanation: C)Although the Code says a member has obligations to the public, educating the general public for whatever reason is not implied 44. 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 Performance Presentation Standards. C)maintain and improve their competence and strive to maintain the competence of others in the profession. Explanation: B)The CFA Institute-PPS 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 45. 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)humility. B)integrity. C)respect. Explanation: A)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 46. Which of the following is a component of the Code of Ethics? A)Members shall use reasonable care and exercise independent professional judgment. B)Members shall not knowingly participate or assist in any violation of such laws, rules, or regulations. C)Members shall not engage in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on their honesty, trustworthiness, or professional competence. Explanation: A)This is a component of the Code of Ethics. Others pertain to the Standards of Professional Conduct 47. Which of the following is NOT part of the CFA Institute Code of Ethics. Members of CFA Institute will: A)use reasonable care and exercise independent professional judgment. B)recommend investments that maximize returns for a given level of risk. C)strive to maintain and improve their competence and the competence of others in the profession Explanation: B)Standard of Professional Conduct III(C), not the Code of Ethics, requires that investments be appropriate and suitable 48. According to the Code of Ethics, the professional judgment of a member should be: A)independent. B)guided by the SEC guidelines. C)dependent on that of his/her colleagues. Explanation: A)The Code of Ethics states that the CFA Institute member shall “Use reasonable care and exercise independent professional judgment.” None of the other answers resemble anything in the Code 49. According to the Code of Ethics, when practicing in a professional and ethical manner the goal is to: A)increase membership in CFA Institute. B)resolve conflicts between clients and employers. C)reflect credit on members and the profession Explanation: C)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.” 50. 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: A)violated Standard IV(A) Loyalty by divulging confidential information that is the intellectual property of his employer. B)violated Standard II(A) Material Nonpublic Information by releasing material that could negatively impact the price of the security. C)violated Standard VI(B) Priority of Transactions by releasing material information to the public before releasing to the firm’s clients. Explanation: B)Malone is in violation of Standard II(A) because the information is both material and nonpublic. He is in violation whether or not he divulges the impending downgrade by his firm on his blog, because he is using nonpublic information. A “sell” opinion on a security issued by a large brokerage firm will almost certainly impact the stock’s price 51. Which of the following activities would be following a component of the Code of Ethics explicitly? A)Consulting with colleagues about opinions you reach in your research. B)Attending continuing education seminars on investing and inviting colleagues to come along. C)Maintaining a list of colleagues who have violated the CFA Institute standards. Explanation: B)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. 52. 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 V, Investment Analysis, Recommendations, and Actions B)Standard VI, Conflicts of Interest C)Standard I, Professionalism Explanation: B)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.”