Ethical and Professional Standards: Practice Pack

1. [Guidance for Standards I–VII] Peter Jonas, CFA, works as an analyst on an

investment team. Jonas accepts an assignment to collaborate with a colleague to
publish an investment recommendation for distribution to clients. During this
collaboration, Jonas observes an unethical activity by his colleague. Jonas
contacts his supervisor to report the matter but the supervisor says she is
unable to investigate due to a lack of firm resources.
To comply with the Standards, Jonas must:
A. disassociate from the activity.
B. notify CFA Institute of his colleague's activity.
C. continue to work with the colleague to avoid delays in distributing the
recommendation to clients.

2. [Guidance for Standards I–VII] Lisa Fourier, CFA, works at an investment firm
where she is responsible for hiring outside fund managers. During an overseas
visit at the office of a potential fund manager, she is offered expensive tickets
to a sporting event as a gift from the fund manager. Fourier knows that offering
and accepting gifts is an accepted business practice in the fund manager's
country. As required by her firm’s policy, she obtains written approval from all
parties involved after accepting the tickets.
Are Fourier's actions consistent with the Standards?
A. Yes
B. No, because she accepts a gift from a potential manager
C. No, because she fails to obtain approval before accepting the tickets

3. [Guidance for Standards I–VII] Johanna Mentu, CFA, is an analyst at an

investment firm. She prepares a research report for clients and adds the
forecast of a central bank economist, as well as the latest statistics from a
recognized statistical reporting service, to her report. Mentu also adds a
summary of the findings of a third-party newsletter. In her final report sent to
clients, Mentu only acknowledges the economist as a source for her report.
Did Mentu violate the Standard relating to misrepresentation?
A. No
B. Yes, by failing to acknowledge the third-party newsletter as a source in her
report
C. Yes, by failing to acknowledge the recognized statistical reporting service as
a source in her report
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4. [Guidance for Standards I–VII] Margaret Belle, CFA, owns an investment firm.
She is found guilty of deceitful business conduct, the circumstances of which
lead directly to her personal bankruptcy. Belle is also an activist for climate
action. On one particular weekend, Belle attends a public, nonviolent protest as
part of a permitted demonstration in her country. After the protest she is
arrested by the police for trespassing on a company's property.
Belle has violated the Standard relating to misconduct by:
A. attending a public protest.
B. filing for personal bankruptcy.
C. trespassing on the property of a company.

5. [Guidance for Standards I–VII] Petra Maybolk, CFA, works for a large
investment firm where she oversees a team of market makers. Maybolk's firm
has just taken a small issuer public and is a market maker in the issuer's stock.
After receiving material nonpublic information about the small issuer, Maybolk
instructs her subordinates to continue market-making activities for the small
issuer and to take only the contra side of unsolicited customer trades in the
stock.
Did Maybolk's actions violate the Standards?
A. No
B. Yes, because Maybolk instructs her subordinates to continue market-making
activities for the small issuer
C. Yes, because Maybolk instructs her firm's market maker to only take the
contra side of unsolicited customer trades in the small issuer's stock

6. [Guidance for Standards I–VII] Julia Anderson, CFA, a trader, notices a decline
in liquidity of Stock 1. She starts buying and selling Stock 1 to incentivize
market activity in the stock. Anderson also notices that Stock 2 trades at
different prices in two different exchanges, and starts buying and selling Stock
2 to exploit the price difference. Anderson has violated the Standard(s) by
trading:
A. Stock 1 only.
B. Stock 2 only.
C. both Stock 1 and Stock 2.

7. [Guidance for Standards I–VII] John Keen, CFA, concludes through his analysis
that Stock 1 is significantly undervalued and buys a large amount of the stock.
As a result, Stock 1's price increases significantly. A few days later, Keen sells
Stock 1 at a profit. One week later, Keen notices that Stock 2 is trading at
different prices in two different exchanges. Keen buys and sells Stock 2 to

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exploit the difference in prices and makes a profit. Has Keen violated the
Standard relating to market manipulation?
A. No
B. Yes, by trading Stock 1
C. Yes, by trading Stock 2

8. [Guidance for Standards I–VII] The president of a university hires Rose Jay,
CFA, to manage the employee pension plan. Jay owes her duty of loyalty to the:
A. university.
B. beneficiaries of the fund.
C. president of the university.

9. [Guidance for Standards I–VII] Becky Wilkins, CFA, an analyst, prepares a buy
recommendation for a stock. The recommendation is also suitable for her sister,
a standard fee-paying client. To avoid a conflict of interest, Wilkins sends the
recommendation to her sister one day after sending it to all of her other
suitable clients. Wilkins then calls all of her premium fee-paying clients to
provide further details about the recommendation.
Has Becky violated the Standard relating to fair dealing?
A. No
B. Yes, by providing further details about the recommendation to her premium
fee-paying clients
C. Yes, by sending the recommendation to her sister one day after sending it to
her other clients

10. [Guidance for Standards I–VII] Thomas Li, CFA, was recently hired to manage
an equity fund. Li reads the following company policies regarding the
dissemination of investment recommendations:
• Policy 1: An analyst should limit the number of people who are privy to the
fact that a recommendation is going to be disseminated.
• Policy 2: An analyst should limit the amount of time that elapses between
the decision to make an investment recommendation and the time the actual
recommendation is disseminated.
To be consistent with the the Standard relating to fair dealing, Li should follow:
A. Policy 1 only.
B. Policy 2 only.
C. both Policy 1 and Policy 2.

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11. [Guidance for Standards I–VII] Jo Atkins, CFA, a portfolio manager, is meeting
with a new client, Jay Sanderson. In preparing Sanderson's IPS, Sanderson
refuses to fully disclose his holdings to Atkins. As a result, Atkins completes
Sanderson's suitability analysis based on limited information. Sanderson has a
high tolerance for risk. Having done careful research, Atkins recommends a
portfolio of information technology stocks. One of the technology stocks is
significantly affected by unexpected changes in market sentiment, which results
in a large loss for Sanderson in the first year.
Has Atkins violated the Standard(s)?
A. No
B. Yes, by failing to prevent a large loss for Sanderson
C. Yes, by completing Sanderson's suitability analysis based on limited
information

12. [Guidance for Standards I–VII] Jeremy Bay, CFA, is a wealth manager. His
client, Laura Nam, requests that Bay buy a risky stock for her. The risk level of
the stock is not consistent with Nam's risk tolerance as documented in her IPS.
Bay discusses with Nam his concerns about adding the stock to her portfolio.
Nam acknowledges the discussion and insists on the stock purchase regardless.
Bay purchases the stock for Nam. One week later, the stock decreases
significantly in value.
Has Bay violated the Standard relating to suitability?
A. No
B. Yes, because the stock's risk level is not appropriate for Nam
C. Yes, because Nam suffers a significant loss from the stock purchase

13. [Guidance for Standards I–VII] Amy Watson, CFA, prepares a presentation
about her investment fund. The fund has consistently delivered a return above
6% for the past five years, with volatility of less than 10% in each year. In her
presentation she writes:
Statement 1: "The fund's past performance indicates a return of at least 5% in
the next few years."
Statement 2: "Monetary policy changes may increase the fund volatility to
above 10% in the next few years."
Which of the statements violates the Standard relating to performance
presentation?
A. Statement 1 only
B. Statement 2 only
C. Both Statement 1 and Statement 2

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14. [Guidance for Standards I–VII] Julian Johnson, CFA, receives an inquiry from
the country's securities regulator about one of his clients, Samantha Smith, who
is suspected of illegal market activities. Johnson shares all requested
information about Smith with the securities regulator. The next day, Johnson
receives a call from Smith asking not to disclose any information if Johnson gets
contacted by anyone. Later that same day, Johnson receives a call from the local
tax authority, which is investigating Smith for tax fraud. Johnson sends the
requested information to the tax authority.
Has Johnson violated the Standard relating to preservation of confidentiality?
A. No
B. Yes, by sharing Smith's information with the tax authority
C. Yes, by sharing Smith's information with the securities regulator

15. [Guidance for Standards I–VII] Julia Stevens, CFA, works for TBL Investments
(TBLI). The firm has no employee trading policy. Stevens observes that her
colleague bought and sold GLT stock to exploit the difference in prices in
different exchanges. Stevens fails to inform her firm's compliance department
about her colleague's trading activity. Separately, for all client trades, TBLI
requests that Stevens pay higher brokerage fees than she believes is justified
to maintain good relationship with their primary broker. Due to a lack of
sufficient benefit to clients, Stevens refuses to comply with her employer's
request.
Has Stevens violated the Standard relating to loyalty?
A. No
B. Yes, by failing to comply with her employer's request to pay higher
brokerage fees
C. Yes, by failing to inform her firm's compliance department about her
colleague's activity

16. [Guidance for Standards I–VII] Jeremy Seagate, CFA, a portfolio manager, has
investments in Company 1 and Company 2 for his clients' portfolios. Seagate has
a personal relationship with the CEO of Company 1. He discloses this relationship
to his employer. Seagate's sister, a standard fee-paying client of his firm,
requests to buy a large position in Company 2. The company, as well as the size
of the requested investment, are suitable for Seagate's sister. Seagate buys
the requested position in Company 2's stock for her and notifies his employer.
Did Seagate violate the Standard relating to avoid or disclose conflicts?
A. No
B. Yes, by trading the stock of Company 1
C. Yes, by trading the stock of Company 2

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17. [Guidance for Standards I–VII] Alina Sokolova, CFA, has been an advisor at BT
Investments (BTI) for the past seven years. She has disclosed her private
holdings twice since she joined BTI. Sokolova allocates shares of a highly
anticipated IPO to her clients on a pro-rata order basis. One of these clients is
her sister, who is a regular fee-paying client of BTI.
Are Sokolova's actions consistent with the Standard relating to priority of
transactions?
A. Yes
B. No, because she allocated the IPO to her sister
C. No, because she has disclosed her private holdings only twice since she
joined the firm

18. [Guidance for Standards I–VII] Lisa Peterson, CFA, is a portfolio manager at
GHI Investments (GHI). Peterson uses the software of AIQ, an external
vendor. She recommends AIQ's software to her clients and receives a referral
fee from AIQ when clients subscribe to the software. Peterson informs her
employer and all clients about the arrangement with AIQ. Separately, GHI gives
existing clients a small discount on the firm's service fees after referring new
clients to GHI. Peterson informs all referred clients about this arrangement
immediately after they sign GHI's service agreement.
Did Peterson's actions violate the Standard relating to referral fees?
A. No
B. Yes, by accepting referral fees from AIQ
C. Yes, by informing all referred clients about the referral arrangement
immediately after they sign GHI's service agreement

19. [Guidance for Standards I–VII] Jenny Lew sits for the Level III exam of the
CFA Program. After the exam, she speaks to her friend, Tom Gerkin, who
intends to take the Level III exam the next year. Lew does not reveal any exam
content, only that fixed income concepts were not tested. Gerkin sets up a study
group for the following year's Level III exam. In the group, Gerkin discusses
exam questions from a Level III mock exam in detail.
Have the Standards been violated?
A. No
B. Yes, by Lew
C. Yes, by Gerkin

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20. [Guidance for Standards I–VII] John Teff and Julia Pinson recently took the
CFA Level III exam and discussed it afterwards. Teff thinks the exam is too
difficult and posts on his LinkedIn page: &"The CFA Institute sets the pass rate
too low.&" After the exam, Pinson shares with Teff that she solicited past exam
questions from her colleague. However, the exam questions provided to Pinson by
her colleague did not help her during the Level III exam.
Have the Standard(s) been violated?
A. No
B. Yes, by Teff
C. Yes, by Pinson

21. [Guidance for Standards I–VII] James Witt, CFA, chats with his colleague Elsa
Otkins, CFA, in a LinkedIn forum about professional credentials. Witt writes to
Otkins: "Passing the CFA exams has given me an edge to deliver superior
investment performance compared to others." Witt does not make this
statement when talking to his clients. Otkins writes: "I definitely have enhanced
my knowledge in economics by studying the CFA curriculum." She adds the same
sentence to her resume.
Have the Standards been violated?
A. No
B. Yes, by Witt
C. Yes, by Otkins

22. [Guidance for Standards I–VII] On his LinkedIn profile page, Jeremy Bo, CFA,
writes: "I passed the CFA exam in three consecutive years." He also adds: "I
enrolled in the CFA Program to obtain the highest set of credentials in the
global investment management industry.”
Did Bo violate the Standards?
A. No
B. Yes, by stating that he passed the CFA Program exam in three consecutive
years
C. Yes, by stating that he took the CFA exam to obtain highest set of
credentials in the global investment management industry

23. [Guidance for Standards I–VII] Han-seo Kwak, CFA, head of research at an
equity fund, assigns Mi-ri Kim, CFA, a new junior analyst, to forecast the growth
rate of KLE, a small-cap company. Kim performs a thorough analysis using the
firm's model. After a quick review of Kim's analysis, Kwak concludes that KLE is
overvalued. Based on Kwak's conclusion, the fund does not invest in KLE. After
KLE's stock price rises following positive recommendations from other funds,
Kwak performs a more in-depth review and identifies two assumptions in Kim's
forecast that caused an overly pessimistic valuation.

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Have the Standards been violated?

A. No
B. Yes, only by Kwak
C. Yes, both by Kwak and by Kim

24. [Guidance for Standards I–VII] Barbara Eng, CFA, is an equity research analyst
at Minute Research. Eng solely authors an annual automotive sector report.
After Minute Research issues the report, Eng leaves Minute Research to
become an independent research analyst. Eng intends to reissue the report for
distribution to her new clients.
According to the Standards, who has the right to re-issue the report?
A. Eng only
B. Minute Research only
C. Both Eng and Minute Research

25. [Guidance for Standards I–VII] Lilian Gosh, CFA, a portfolio manager, is
preparing a year-end performance review report with a colleague. He makes the
following statements to his colleague:
Statement 1: "We can exclude terminated accounts from performance history."
Statement 2: "We can present performance using a weighted composite of
similar portfolios."
Which of the statements is consistent with the Standard relating to
performance presentation?
A. Statement 1 only
B. Statement 2 only
C. both Statement 1 and Statement 2

26. [Guidance for Standards I–VII] Anya Harmon, CFA, is an account manager at a
wealth management firm. The client fees are calculated based on the average
daily balance of assets in each client's account. The firm is switching to a new
fee calculation method using end-of-billing-cycle balances, thus reducing fees
for most clients. Harmon discloses the new method only to new clients.
According to the Standards, is Harmon required to disclose the new fee
calculation method to existing clients?
A. No
B. Yes, to all existing clients
C. Yes, but only to existing clients incurring a higher fee

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27. [Guidance for Standards I–VII] Bala Park, CFA, is an investment adviser at
Cristallo Wealth. The firm's clients have the option to invest in both internally
managed mutual funds as well as third-party funds. Park invests client assets in
the internally managed funds when they align with client needs. Recently,
Cristallo Wealth raised the sales commission rates paid to advisers for
recommending the internally managed funds. For some of these funds, the rates
exceed the industry average.
To comply with the Standards, Park must:
A. disclose to all clients the increase in commission rate.
B. refrain from investing in the internally managed funds.
C. invest for clients in funds with the lowest commission rates.

28. [Guidance for Standards I–VII] Beatrix Kang, CFA, is the new chief compliance
officer at CV Investments (CVI), a large investment firm. Kang reviews the
firm's compliance procedures and believes they are adequate. She does identify
the need to update the electronic signature section in these procedures. She
assigns Ben Lee, CFA, to review all staff electronic signatures. After Lee's
review, Kang provides clear, written guidelines for acceptable electronic
signature usage and integrates the updated section into CVI's Code of Ethics.
According to the Standards, Kang should have:
A. declined in writing to accept supervisory responsibility.
B. separated the updated section from the Code of Ethics.
C. avoided delegating the review of the electronic signatures to Lee.

29. [Guidance for Standards I–VII] Benjie Lobo, CFA, a fund manager, plans to issue
a report on Neustift Cheese. Lobo visits the manufacturing plant of Neustift
and meets with the company's CEO, who discusses a recent news release about
the acquisition of production facilities due to forecast increase in orders. The
CEO mentions that he is more optimistic than the analysis in the news release.
He says that he estimates a 10% reduction in the firm's costs next year. He
adds that the company is also considering international expansion through the
acquisition of a major competitor, and it will be announced once finalized.
According to the Standards, which information is Lobo permitted to use in his
report Neustift Cheese?
A. The order increase forecast
B. The estimated reduction in costs
C. The planned international expansion

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30. [Guidance for Standards I–VII] Bettina Chu, CFA, an investment advisor,
recently joined the board of directors of Rabbat Music, an online music
platform. As a board member, she is compensated by receiving free access to
Rabbat's music library. She recommends Rabbat's stock to her clients when
appropriate and she discloses the board position and compensation to the
clients.
According to the Standards, Chu must:
A. decline the music library access.
B. exclude Rabbat from her investment universe.
C. obtain written consent from her employer regarding the music library
access.

31. [Guidance for Standards I–VII] Biju Kassem, CFA, an analyst at a bank, is asked
to write a research report on Karajan Coffee. Kassem's best friend works as a
coffee taster at Karajan and shares his professional opinion with Kassem about
the company's coffee. Kassem's grandmother, who owns €500,000 worth of
Karajan stock, tells Kassem that she named him as the beneficiary of the
portfolio in her will. Kassem's uncle is a minor Karajan shareholder and a regular
fee-paying client of the bank.
According to the Standards, in his report, Kassem must disclose:
A. his uncle's investment account at the bank.
B. that he is the beneficiary of his grandmother's portfolio.
C. his best friend's professional opinion about Karajan's coffee.

32. [Guidance for Standards I–VII] Barrett White, CFA, leaves his equity analyst
job at Barrow Investments (BI) to launch an online investment portal, where he
recommends a list of stocks to buy. Last month, while still employed at BI,
White issued a buy recommendation for DaBacon Co. based on his expectation
that the company's market share would double over the next year. After leaving
BI, White recalls his buy recommendation for DaBacon. Because White is
confident that his analysis was sound, and no further analysis is required, he
decides to include DaBacon in his buy recommendation list on his online
investment portal.
Did White's actions violate the Standards?
A. No
B. Yes, because he issued the buy recommendation without supporting
documentation
C. Yes, because he recommends the same stock he recommended at his previous
employer

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33. [Code of Ethics and Standards of Professional Conduct] Jean Dirac, CFA,
resides in country MS, where securities laws are more strict than the Code and
Standards. Dirac does business with Charles Pauli in country LS, where
securities laws are less strict than the Code and Standards. Pauli is a citizen of
country LS. The law of country MS applies to their business, but country MS's
law states that the client's home country law governs.
Dirac must adhere to the:
A. laws of country LS.
B. laws of country MS.
C. Code and Standards.

34. [Code of Ethics and Standards of Professional Conduct] Hans Bohr, CFA, resides
in country MS, where securities laws are more strict than the Code and
Standards. Bohr does business with Ted Feynman in country LS, where
securities laws are less strict than the Code and Standards. Feynman is a citizen
of country MS. The law of country MS applies to their business, but country
MS's law states that the client's home country law governs.
Bohr must adhere to the:
A. laws of Country LS.
B. laws of Country MS.
C. Code and Standards.

35. [Code of Ethics and Standards of Professional Conduct] Suzanne Blair, CFA, is
an equity analyst. She is currently working on a research report about a new
corporate client's stock. Based on her thorough and professional research, she
intends to issue a sell recommendation on the stock. However, her firm is
unwilling to permit dissemination of the adverse opinion.
To be consistent with the Standards, Blair should:
A. communicate her opinion to clients despite the firm's reluctance.
B. encourage her firm to disseminate only factual information about the
company.
C. discourage her firm from removing the controversial company from the
research universe.

36. [Code of Ethics and Standards of Professional Conduct] Jacquie Clemens, CFA,
is a securities analyst. Her manager, Samuel Kerouac, currently has a "buy"
recommendation on Atlas Semiconductors. Kerouac asks Clemens to take over
coverage of Atlas, instructing Clemens that under no circumstances should she
change the existing buy recommendation. Clemens believes her manager's
instructions have compromised her ability to cover Atlas objectively.
The action for Clemens that would be most consistent with the Standards is:

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A. telling her manager she cannot cover the company under these constraints.
B. escalating her concerns to other supervisors in the firm before performing
her own analysis.
C. perform her own independent, unbiased analysis and issue her opinion without
considering her manager's recommendation.

37. [Code of Ethics and Standards of Professional Conduct] Which of the following
actions violates the Standard relating to misconduct? A portfolio manager who
is a member:
A. declares personal bankruptcy due to medical expenses.
B. trespasses while protesting a company accused of environmental damage and
is arrested.
C. relies solely on another member's due diligence to understand risks of an
investment before making an investment recommendation.

38. [Code of Ethics and Standards of Professional Conduct] Amanda Jones, CFA, is a
portfolio manager for a fund dedicated to socially responsible investing. She is
also an environmental activist. Jones relies solely on her colleague's due
diligence, without doing her own due diligence, to understand the risks of an
ESG bond before recommending an investment in the bond. Jones later
participates in a nonviolent protest. She trespasses on the property of a
petroleum producer accused of damaging the environment and is arrested.
Jones violates the Standard relating to misconduct:
A. only by trespassing and being arrested.
B. only by relying on her colleague's due diligence to understand the risks of an
ESG bond.
C. both by trespassing and being arrested and by relying on her colleague' s due
diligence to understand the risks of an ESG bond.

39. [Code of Ethics and Standards of Professional Conduct] Sam Patterson, CFA,
hosts a conference call about the auto industry on behalf of his investment firm.
The call is held for a small number of clients. Aditya Rao, the CFO of L2 Motors
(L2M), an electric car manufacturer, is a featured guest. In response to a
question during the call, Rao mentions a recent major advance in L2M's battery
technology not previously disclosed to the public. Patterson determines the
information is material.
According to the Standards, Patterson should:
A. encourage L2M to disseminate information about the new technology to the
public.
B. promptly issue a press release on behalf of his firm to make the information
about the new technology publicly available.

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C. immediately have conference attendees sign a nondisclosure agreement to

preserve confidentiality of the information.

40. [Code of Ethics and Standards of Professional Conduct] Terence Salk, CFA, is an
equity analyst at TriGamma Securities. TriGamma has no policy governing outside
work arrangements of its employees. Salk intends to work a few hours on
weekends to supplement his income, teaching English as a second language as an
independent contractor for Lightspeed Languages, a firm in his neighborhood.
To be consistent with the Standard relating to additional compensation
arrangements, Salk:
A. does not need to inform TriGramma of his employment arrangement with
Lightspeed.
B. must provide written notice to TriGramma before entering into an
employment arrangement with Lightspeed.
C. is required to obtain written consent from both TriGramma and Lightspeed
before entering into an employment arrangement with Lightspeed.

41. [Code of Ethics and Standards of Professional Conduct] Ralph Schmidt, CFA, is
an equity analyst at TriAlpha Securities. Schmidt intends to work several hours
on weekends to supplement his income, providing equity analysis consulting
services to a client of TriAlpha.
To comply with the Standard relating to additional compensation arrangements,
Schmidt must:
A. provide written notice only to TriAlpha before entering into a consulting
arrangement with the client.
B. obtain written consent only from TriAlpha before entering into a consulting
arrangement with the client.
C. obtain written consent from both TriAlpha and the client before entering
into a consulting arrangement with the client.

42. [Code of Ethics and Standards of Professional Conduct] Hiroshi Kato, CFA, is a
supervisor at an investment management firm. Kato learns one of his employees
may have violated the Standards. Kato promptly initiates an investigation to
determine the extent of the potential wrongdoing and concludes that the
employee violated the Standards. Kato then reports the misconduct up the chain
of command and warns the employee to cease the activity. While waiting for the
outcome of the investigation, Kato takes no further steps to prevent repeated
violations.
Are Kato's actions consistent with the Standard relating to responsibilities of
supervisors?
A. Yes
B. No, because Kato should take steps to ensure the violation is not repeated

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C. No, because Kato should report the violation to the Professional Conduct
Program

43. [Code of Ethics and Standards of Professional Conduct] Hiroshi Mariana Parra,
CFA, is an investment analyst. After consulting industry specialists, Parra
believes oil prices will become less volatile over the coming months. Parra's
colleague, Jeremy Fallon, constructs a statistical model of oil prices, including
extremely positive and negative scenarios. Para understands the model well and
relies on it for her analysis. Parra then recommends an options strategy to
clients to take advantage of expected lower volatility. Within a month, clients
who followed the recommendation suffer large losses due to an unforeseen
event.
Did Parra's actions violate the Standards?
A. No
B. Yes, by relying on Fallon's model for her analysis
C. Yes by issuing a recommendation resulting in large losses for her clients

44. [Code of Ethics and Standards of Professional Conduct] Geoff Carlson, CFA, is
responsible for selecting external investment advisors for his asset management
firm. Carlson designs a manager selection policy for his firm that specifies a
standardized set of criteria for evaluating the adequacy of external advisors.
The policy specifies that fund allocations to external advisors should be
reviewed every two years.
Is Carlson's policy consistent with the Standard relating to diligence and
reasonable basis?
A. Yes
B. No, because the policy should specify custom criteria for each advisor type
C. No, because the policy should specify that allocations of funds to advisers be
reviewed at least annually

45. [Code of Ethics and Standards of Professional Conduct] Taro Sato, CFA, an
analyst, recently finished his report on Accel Automotive, a small electric car
manufacturer operating one factory. For the last three months, Sato has
counted the number of vehicles shipped from Accel's factory every Friday.
From these observations, he forms an opinion on estimated total shipments for
the last quarter. Sato limits the scope of his report by omitting details not
relevant to production activity. He concludes in his report: "Based on the fact
the company shipped 50,000 vehicles last quarter, I recommend a strong BUY."
Did Sato violate the Standard relating to communication with clients and
prospective clients?
A. No
B. Yes, because Sato states opinion as fact

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C. Yes, because Sato limits the scope of his report

46. [Code of Ethics and Standards of Professional Conduct] Greg Romo, CFA, an
analyst, recently completed a report on Poweron Automotive, a small electric car
manufacturer operating one factory. Over the last three months, Romo has
counted the number of vehicles shipped from Poweron's factory every
Wednesday. From his one day per week observations, he forms an opinion on
estimated total shipments for the last quarter. Romo limits the scope of his
report by omitting details not relevant to production activity. Romo concludes in
his research report: &"Based on the fact that I observed an average of 830
vehicles shipped every Wednesday last quarter, I recommend a strong BUY.&"
Did Romo violate the Standard relating to communication with clients and
prospective clients?
A. No
B. Yes, because Romo states opinion as a fact
C. Yes, because Romo limits the scope of his report

47. [Code of Ethics and Standards of Professional Conduct] Jorge Rodrigo, CFA, is a
portfolio manager for Ephesus Securities. Rodrigo maintains records that
support his decisions to buy or sell a security. He also maintains records on
reviews undertaken which do not lead to a change in his investment positions.
Rodrigo maintains all records only in hard copy, for a period of five years. With
regard to record retention, Ephesus has no relevant policy and there is no
applicable law.
Are Rodrigo's actions consistent with the Standard relating to record
retention?
A. Yes
B. No, because Rodrigo must also maintain records in electronic form
C. No, because Rodrigo should maintain records for at least seven years

48. [Code of Ethics and Standards of Professional Conduct] Felix Johnson, CFA, is a
portfolio manager for Claros Securities. Johnson maintains all records only in
hard copy for a period of three years. He maintains all records that support
decisions to buy or sell securities. He also maintains records on reviews
undertaken which do not lead to a change in investment positions. Claros
Securities has no policy regarding record retention. In contrast, regulatory
guidance states that firms must maintain records for at least three years.
Are Johnson's actions consistent with the Standard relating to record
retention?
A. Yes
B. No, because Johnson must also maintain records in electronic form
C. No, because Johnson should maintain records for at least seven years

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49. [Code of Ethics and Standards of Professional Conduct] Christina Tam, CFA, and
Peter Wolf, CFA, are employed at Hamilton Investments. Tam develops an equity
research model and uses it to issue a report on Iron Mining Corp. She also begins
a report on Copper Core Inc. Shortly thereafter, Tam leaves the firm and Wolf
uses Tam's model to issue a report on Zinc Drilling Ltd. without providing
attribution to Tam. Wolf also finishes Tam's work on Copper Core and issues a
report solely under his own name without providing attribution to Tam. Wolf
later reissues Tam's report on Iron Mining, again solely under his own name.
Which of Wolf's actions violates the Standards?
A. Using Tam's model without providing attribution to her
B. Reissuing Tam's report on Iron Mining solely under his own name
C. Finishing Tam's work on Copper Core and issuing a report solely under his
own name without providing attribution to Tam

50. [Application of the Code and Standards: Level II] Mei Li, CFA, is excited to
receive her CFA charter and updates her professional social media profile to
add her achievement. Li violates the Standards if she posts which of the
following statements on her social media profile?
A. "The CFA Program enhanced my portfolio management skills"
B. "CFA charterholders achieve better investment performance results"
C. "I passed all three CFA Program examinations in three consecutive years"

51. [Application of the Code and Standards: Level II] Vivienne Mercier posts the
following three statements on social media immediately after sitting for the
CFA exam:
Statement 1: "I only trade fixed income, so most of the other CFA Program
content is not relevant for me."
Statement 2: "I was so disappointed they did not test the binomial option
valuation model on the exam because I studied this difficult topic extensively."
Statement 3: "I should have spent less time memorizing, because I had a hard
time solving the quantitative questions."
Which of Mercier's statements violates the Standard relating to conduct as
participants in CFA Institute Programs?
A. Statement 1
B. Statement 2
C. Statement 3

52. [Application of the Code and Standards: Level II] Derek Buckley, CFA, is a
portfolio manager. When allocating oversubscribed IPO shares, Buckley initially
allocates shares to his firm’s proprietary account based on his loyalty to his
employer. He then allocates shares to his father’s standard fee-paying account
at the same time as other clients’ fee-paying accounts.

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Do Buckley's actions violate the Standard related to priority of transactions?

A. No
B. Yes, by initially allocating IPO shares to the firm’s proprietary account
C. Yes, by allocating shares to his father’s account at the same time as other
clients’ accounts

53. [Application of the Code and Standards: Level II] Jerry Mack, CFA, an
investment advisor, leaves his employer (Firm 1) to start at a competing firm
(Firm 2). Mack does not have a noncompete agreement with Firm 1. Before
leaving Firm 1, he calls his long-term client to describe Firm 2's product
offerings so he can help the client reach his financial goals. After joining Firm 2,
he opens a new social media account. From memory, he finds all his former
clients on the social media platform and solicits business from them.
Did Mack's actions violate the Standard relating to loyalty?
A. No
B. Yes, by calling his long-term client
C. Yes, by soliciting business from former clients using the new social media
account

54. [Application of the Code and Standards: Level II] Karen McQueen, CFA, leaves
her former employer without a noncompete agreement. She then starts a new
job at a competitor firm, where she creates a new LinkedIn account. She recalls
her former clients' names from memory and finds several of them on LinkedIn.
She sends invitations on LinkedIn to connect to those clients to solicit business.
Did McQueen's actions violate the Standards?
A. No
B. Yes, by soliciting former clients using LinkedIn
C. Yes, by failing to notify her former employer that she contacts former
clients

55. [Application of the Code and Standards: Level II] Grant Bradley, CFA, is an
investment advisor for private clients in a country without applicable laws on
information confidentiality. Bradley discovers that Client 1 engages in tax
evasion and that Client 2 engages in money laundering activities. After consulting
his firm’s legal counsel, he reports Client 1 to the tax authorities. Afterwards,
Bradley reports Client 2 to the financial regulator. His reports include
confidential client information relevant to the illegal activities.
Did Bradley's actions violate the Standard relating to preservation of
confidentiality?
A. No
B. Yes, by reporting Client 1 to the tax authorities
C. Yes, by reporting Client 2 to the financial regulator

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56. [Application of the Code and Standards: Level II] Flora Valentina, CFA, advises
private clients at Blue Sky Wealth (BSW). She also volunteers for Care-4-Pups
(C4P), a charity that rescues abandoned dogs. One of Valentina's clients, Alan
Mitchell, likes to support animal charities. Valentina invites Mitchell as her guest
to the C4P fundraising dinner with the intention to ask Mitchell for a donation
to the charity. She also adds Mitchell’s email address, which is located in BSW's
records, to the charity's donor database. However, she forget to tell Mitchell
about adding him to the donor database.
Did Valentina's actions violate the Standard relating to preservation of
confidentiality?
A. No
B. Yes, by inviting Mitchell to the fundraising dinner
C. Yes, by adding Mitchell’s email address to the to the donor database

57. [Application of the Code and Standards: Level II] Adam Dempsey, CFA, manages
a fund-of-funds that invests in three asset classes. Since the fund’s inception
three years ago, he has used the same model to determine his asset allocation.
For the fund's marketing brochure, he applies his model retroactively for the
seven years prior to the fund's inception to produce simulated performance
results over a 10-year period. In the brochure, Dempsey does not indicate that
the fund's 10-year results are partially simulated because he consistently uses
the same model and methodology.
Did Dempsey's actions violate the Standard regarding performance
presentation?
A. No
B. Yes, because he uses simulated performance results in the brochure
C. Yes, because he does not indicate that performance results are partially
simulated

58. [Application of the Code and Standards: Level II] Larry Petrov, CFA, manages a
mutual fund with a mandate to invest in the Canadian large-cap financial services
sector. The fund's mandate also requires the fund to be fully invested in long
positions only. His analysis indicates Canadian bank stocks are generally
overvalued. Due to the lack of other suitable stocks within his investment
universe, he buys the Canadian bank stock that he believes to be the least
overvalued. After thorough analysis, he also buys a Japanese bank stock for the
fund due to its attractive dividend yield and expected currency appreciation.
Did Petrov's actions violate the Standard relating to suitability?
A. No
B. Yes, by buying the Japanese bank stock
C. Yes, by buying the Canadian bank stock

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59. [Application of the Code and Standards: Level II] Amy Wynn, CFA, is a research
analyst at an investment bank. In an email to all of her clients, she includes a
research report with a “buy” recommendation on one of the stocks she covers.
Afterwards, she calls her premium fee-paying clients to discuss the report in
detail. When her standard fee-paying clients call about the report, she declines
the calls and asks her research associate, who co-wrote the report, to return
the calls on her behalf.
Did Wynn's actions violate the Standard related to fair dealing?
A. No
B. Yes, by calling her premium fee-paying clients to discuss the report in detail
C. Yes, by declining the calls of standard fee-paying clients and asking her
associate to reply

60. [Application of the Code and Standards: Level II] James Keith, CFA, manages a
fund that replicates the S&P 500 index. He uses two brokers, Broker 1 and
Broker 2, to which he pays execution-only commission rates. Broker 1 offers
Keith an all-expenses-paid trip to a biodiversity conference if he generates
sufficient soft dollar commissions. Keith is interested in the conference because
he is interviewing for ESG fund manager jobs. He then directs all his trades to
Broker 1, which results in generate enough soft dollars to attend the
conference.
Did Keith's actions violate the Standards?
A. No
B. Yes, by redirecting all his trades to Broker 1
C. Yes, by paying execution-only commission rates

61. [Application of the Code and Standards: Level II] Susan Winter, CFA, manages a
small-cap fund and a growth fund. Both funds hold Artificial Intelligence Limited
(AIL), an illiquid stock that is suitable for both funds. After a significant
increase in AIL's stock price, she decides to sell all AIL stock from the funds
despite several analysts expecting further price increases of artificial
intelligence stocks. Before selling AIL stock from both funds, to protect the
interest of investors in the funds, she trades AIL back and forth between the
two funds. This results in large and growing volumes observed by other market
participants. Winter then sells all AIL stock from both funds.
Did Winter violate the Standard relating to market manipulation?
A. No
B. Yes, by trading AIL stock between the two funds
C. Yes, by selling AIL stock from both funds despite analysts' price increase
expectations

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62. [Application of the Code and Standards: Level II] Karla Dimitrova, CFA, manages
the pension plan of Global Railway (GR). GR is conducting a hostile takeover of
EE Railway (EE). GR's CEO asks Dimitrova to buy EE shares and vote to support
the takeover. Although her own analysis and the consensus of analysts indicate
EE stock to be overvalued, she buys shares of EE for the pension fund to
demonstrate her loyalty to the GR's CEO. Soon thereafter, EE stock price
increases unexpectedly.
Did Dimitrova's actions violate the Standard relating to loyalty, prudence, and
care?
A. No
B. Yes, by purchasing EE stock for the pension fund
C. Yes, by failing to anticipate the EE stock price increase

63. [Application of the Code and Standards: Level II] Jane Parker, CFA, is a
portfolio manager. Parker's husband is a non-fee paying client at her firm, while
her aunt is a standard fee-paying client. When allocating oversubscribed IPO
shares, Parker allocates shares to all other fee-paying clients first. As a result,
the accounts of her husband and aunt often do not get any allocation.
Does Parker's actions violate the Standard relate to priority of transactions?
A. No
B. Yes, by not allocating IPO shares to her husband similarly with other clients
C. Yes, by not allocating IPO shares to her aunt similarly with other fee-paying
clients

64. Jack Mackenzie, CFA, is an investment advisor. He receives referral fees when
he refers clients to an estate planning lawyer. In turn, Mackenzie pays referral
fees when he receives client referrals from an insurance broker. He discloses
the details of both of these referral arrangements, including fees, to his
employer and clients. Mackenzie discloses this information to his clients before
entry into formal service agreements with them.
Does Mackenzie's actions violate the Standard related to referral fees?
A. No
B. Yes, by paying referral fees to an insurance broker
C. Yes, by receiving referral fees from an estate planning lawyer

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Solutions
1. A is Correct because Standard I(A), Knowledge of the Law, states if a member
or candidate has reasonable grounds to believe that imminent or ongoing client
or employer activities are illegal or unethical, the member or candidate must
dissociate, or separate, from the activity.

2. B is Correct because according to Standard I (B), Independence and

Objectivity, 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. Further, when
serving in a hiring capacity, members and candidates should not solicit gifts,
contributions, or other compensation that may affect their independence and
objectivity, and should refuse gifts, donations, and other offered compensation
that may be perceived to influence their decision-making process.
Therefore, Fourier's acceptance of the tickets is not consistent with the
Standards because the expensive tickets could reasonably be expected to
compromise her independence and objectivity when selecting managers.

3. B is Correct because Standard I(C), Misrepresentation, states that a violation

of this standard is the preparation of research reports based on multiple
sources of information without acknowledging the sources. Further, the
recommended procedures clarify that to avoid plagiarism in preparing research
reports or conclusions of analysis, members and candidates should attribute to
their sources any paraphrases or summaries of material prepared by others.
Therefore, Mentu must acknowledge the third-party newsletter in the summary
of her findings in the report.

4. B is Correct because because according to Standard I (D), Misconduct, filing for

personal bankruptcy does not always violate the Standards. However, if the
circumstances of the bankruptcy involve fraudulent or deceitful business
conduct, the bankruptcy may be a violation of this standard. In this case, Belle's
bankruptcy circumstances involve deceitful business conduct which represents a
violation of this Standard.

5. A is Correct because according to Standard II(A), Material Nonpublic

Information, firms that continue market-making activity while in the possession
of material nonpublic information should, however, instruct their market makers
to remain passive with respect to the market—that is, to take only the contra
side of unsolicited customer trades. Otherwise, and for the case of a firm that
has taken a small issuer public with the understanding that the firm will continue
to be a market maker in the stock, a withdrawal by the firm from market-
making activities would be a clear tip to outsiders.

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6. A is Correct because according to Standard II (B), Market Manipulation,

transaction-based manipulation involves transactions that artificially affect
prices or volume to give the impression of activity or price movement in a
financial instrument. Therefore, trading Stock 1 violates this Standard.
Legitimately exploiting price differences in Stock 2 is not a violation of this
Standard.

7. A is Correct because Standard II (B), Market Manipulation, is not intended to

preclude transactions undertaken on legitimate trading strategies based on
perceived market inefficiencies. The intent of the action is critical to
determining whether it is a violation of this standard. In this case, Keen used his
analysis in trading Stock 1, and an arbitrage opportunity in Stock 2, thus not
violating this Standard.

8. B is Correct because according to Standard III(A): Loyalty, Prudence, and Care,

when the manager is responsible for the portfolios of pension plans or trusts,
however, the client is not the person or entity who hires the manager but,
rather, the beneficiaries of the plan or trust. The duty of loyalty is owed to the
ultimate beneficiaries.

9. C is Correct because 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. Her sister is a standard fee-
paying client also, so she should treat her equitably with other clients.

10. C is Correct because according to the recommended procedures for Standard

III(B), Fair Dealing, members should limit the number of people involved and
make reasonable efforts to limit the number of people who are privy to the fact
that a recommendation is going to be disseminated. Additionally, members and
candidates should make reasonable efforts to limit the amount of time that
elapses between the decision to make an investment recommendation and the
time the actual recommendation is disseminated.

11. A is Correct because according to Standard III(C), Suitability, if clients

withhold information about their financial portfolios, the suitability analysis
conducted by members and candidates cannot be expected to be complete; it
must be based on the information provided. In addition, an appropriate
suitability determination will not prevent some investments or investment
actions from losing value. Finally, 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. In
this case, despite having limited client information, Atkins performed
appropriate suitability determination about Sanderson's risk profile and careful

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research into information technology stocks that were appropriate for this risk
profile. The loss on Sanderson's investments is thus not a violation of the
Standards.

12. A is Correct because Bay appropriately discussed suitability concerns with the
client, who accepted the risk and insisted on the stock purchase regardless. This
was not a violation of the Standard relating to suitability despite the fact that
the investment lost money.
According to Standard III(C), Suitability, an appropriate suitability
determination will not prevent some investments or investment actions from
losing value. Also, in cases of unsolicited trade requests that a member or
candidate knows are unsuitable for a client, the member or candidate should
refrain from making the trade until he or she discusses the concerns with the
client, who should acknowledge the discussion and accept the conditions that
make the recommendation unsuitable.

13. A is Correct because according to Standard III(D), Performance Presentation,

members and candidates should not state or imply that clients will obtain or
benefit from a rate of return that was generated in the past. In this case, a 6%
past return is not a guarantee of any return in the future.

14. A is Correct because according to Standard III(E), Preservation of

Confidentiality,
members and candidates must keep information about current, former, and
prospective clients confidential unless certain conditions exist, including the
information concerns illegal activities on the part of the client. In this case,
Johnson shared information with both the securities regulator and the tax
authority regarding suspected illegal activities, and thus is not a violation.

15. A is Correct because according to Standard IV(A): Loyalty, "Members and

candidates must always place the interests of clients above the interests of
their employer but should also consider the effects of their conduct on the
sustainability and integrity of the employer firm" Also, "circumstances may arise
(e.g., when an employer is engaged in illegal or unethical activity) in which
members and candidates must act contrary to their employer’s interests in
order to comply with their duties to the market and clients."
In this case, higher brokerage fees were not justified and thus Stevens did not
violate the Standard relating to loyalty. "A member or candidate who pays a
higher brokerage commission than he or she would normally pay to allow for the
purchase of goods or services, without corresponding benefit to the client,
violates the duty of loyalty to the client."
Also, according to Standard II(B): Market Manipulation, "is not intended to
preclude transactions undertaken on legitimate trading strategies based on
perceived market inefficiencies. The intent of the action is critical to

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determining whether it is a violation of this standard." Thus, failing to inform

the compliance about a legitimate strategy is not a violation.

16. A is Correct because according to Standard VI(A), Avoid or Disclose 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, and
employer. In this case, because Seagate disclosed his relationship with the CEO
of Company 1 and his sister is a standard fee-paying client (of which his firm is
aware), he did not violate the Standard relating to avoid or disclose conflicts.

17. C is Correct because according to the recommended procedures for compliance

with Standard VI(B), Priority of Transactions, disclosure by investment
personnel to the firm should be made upon commencement of the employment
relationship and at least annually thereafter. Because she has disclosed her
private holdings only two times in seven years, her actions are not consistent
with the Standards.

18. C is Correct because according to Standard VI(C), Referral Fees, members have
responsibility to inform their employer, clients, and prospective clients of any
benefit received for referrals of customers and clients. Furthermore,
appropriate disclosure means that members and candidates must advise the
client or prospective client, before entry into any formal agreement for
services, of any benefit given or received for the recommendation of any
services provided by the member or candidate. Referred clients must be
informed about the arrangement before entering into an agreement and thus is
a violation of the Standards.

19. B is Correct because according to Standard VII(A), Conduct as Participants in

CFA Institute Programs, CFA Institute program rules, regulations, and policies
prohibit candidates from disclosing confidential material gained during the exam
process. Specifically, examples of information that cannot be disclosed by
candidates sitting for an exam include but are not limited to broad topical areas
and formulas tested or not tested on the exam. In this case, Lew revealed that
fixed income concepts were not tested, and thus violated the Standards.

20. C is Correct because Standard VII(A), Conduct as Participants in CFA Institute

Programs, prohibits members from disclosing and/or soliciting confidential
material gained prior to or during the exam and grading processes with those
outside the CFA exam development process. Pinson has violated this Standard by
soliciting and by receiving exam questions from her colleague.

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21. B is Correct because according to Standard VII(B), Reference to CFA Institute,

the CFA Designation, and the CFA Program, individuals must not exaggerate the
meaning or implications of membership in CFA Institute, holding the CFA
designation, or candidacy in the CFA Program. Furthermore, statements
referring to CFA Institute, the CFA designation, or the CFA Program that
overstate the competency of an individual or imply, either directly or indirectly,
that superior performance can be expected from someone with the CFA
designation are not allowed under the standard.
Witt's statement implies his superiority based on passing CFA exams, and thus
is a violation.

22. A is Correct because according to Standard VII(B), Reference to CFA Institute,

the CFA Designation, and the CFA Program, if a candidate passes each level of
the exam in consecutive years and wants to state that he or she did so, that is
not a violation of Standard VII(B) because it is a statement of fact. Also,
statements referring to CFA Institute, the CFA designation, or the CFA
Program that overstate the competency of an individual or imply, either directly
or indirectly, that superior performance can be expected from someone with
the CFA designation are not allowed under the standard.
Bo thus did not violate the Standards based on his statements that he passed
the CFA exam in three consecutive years as well as enrolled in the CFA Program
to obtain the highest set of credentials in the global investment management
industry.

23. B is Correct because Kwak violates Standard V(A), Diligence and Reasonable
Basis, by doing only a quick review of Kim's work. According to Standard V(A),
members and candidates must have a reasonable and adequate basis, supported
by appropriate research and investigation, for any investment analysis,
recommendation, or action. If members and candidates rely on secondary or
third-party research, they must make reasonable and diligent efforts to
determine such research is sound. As Kim is a new junior analyst, Kwak fails to
thoroughly review her forecast before providing a conclusion.

24. B is Correct because, according to Standard I(C), Misrepresentation, the firm

retains the right to continue using the work completed after a member or
candidate has left the organization. The firm may issue future reports without
providing attribution to the prior analysts.

25. B is Correct because according to Standard III(D), Performance Presentation,

members can meet their obligations by presenting the performance of the
weighted composite of similar portfolios rather than using a single
representative account.

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26. B is Correct because, according to Standard V(B), Communication with Clients

and Prospective Clients, any changes to the fee calculation method that are
different from the process agreed to by the clients must be disclosed. Only by
thoroughly understanding the nature of the investment product or service can a
client determine whether changes to that product or service could materially
affect his or her investment objections. Therefore, Harmon should disclose the
methodology to all existing clients.

27. A is Correct because according to Standard VI(A), Avoid or Disclose Conflicts,

members and candidates must make full and fair disclosure of all matters that
could reasonably be expected to impair their independence and objectivity.
Members and candidates must maintain their objectivity when rendering
investment advice or taking investment action. Requiring members and
candidates to disclose all matters that reasonably could be expected to impair
the member's or candidate's objectivity allows clients and prospective clients to
judge motives and possible biases for themselves.
Because some of the internally managed funds will now incur a higher commission
rate to advisers, Park is required to disclose this potential conflict of interest
to his clients.

28. B is Correct because, according to the recommended procedures of Standard

IV(C), Responsibilities of Supervisors, stand-alone codes of ethics should be
written in plain language and should address general fiduciary concepts. They
should be unencumbered by numerous detailed procedures. Mingling compliance
procedures in the firm's code of ethics goes against the goal of reinforcing the
ethical obligations of employees.
Therefore, the updated compliance procedure section should not have been
incorporated into the Code of Ethics.

29. A is Correct because, 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.
The news release is public information once the information is disseminated to
the market, it is public information that is no longer covered by this standard.
Therefore Lobo is allowed to use the information in his report.

30. C is Correct because, 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.

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31. B is Correct because, according to Standard VI(A), Avoid or Disclose Conflicts,

members and candidates must make full and fair disclosure of all matters that
could reasonable be expected to impair their independence and objectivity or
interfere with respective duties to their clients, prospective clients and
employer.
Although Kassem does not currently own Karajan stock, he currently has
beneficiary ownership of the company's stock through his grandmother's will
and should disclose this fact. Sell-side members and candidates should disclose
any materially beneficial ownership interest in a security or other investment
that the member or candidate is recommending.

32. B is Correct because, according to Standard V(C), Record Retention, the

member or candidate cannot use historical recommendations or research reports
created at the previous firm because the supporting documentation is
unavailable. For future use, the member or candidate must re-create the
supporting records at the new firm with information gathered through public
sources or directly from the covered company and not from memory or sources
obtained at the previous employer.
Therefore, White cannot issue the buy recommendation unless he re-creates
the documentation supporting the recommendation.

33. C is Correct because the client's home country is country LS, whose law governs
Dirac's business, and its law is less strict than the Code and Standards. If
applicable law is stricter than the requirements of the Code and Standards,
members and candidates must adhere to applicable law; otherwise, they must
adhere to the Code and Standards. Therefore, Dirac must adhere to the Code
and Standards.

34. B is Correct because country MS's law states that the law of the client's home
country governs, which is country MS. Since country MS's laws are more strict
than the Code and Standards, Bohr must adhere to country MS's laws. If
applicable law is stricter than the requirements of the Code and Standards,
members and candidates must adhere to applicable law; otherwise, they must
adhere to the Code and Standards. Therefore, Bohr must adhere to the law of
Country MS.

35. B is Correct because Standard I(B), Independence and Objectivity, states that
if the firm is unwilling to permit dissemination of adverse opinions about a
corporate client, members and candidates should encourage the firm to remove
the controversial company from the research universe and put it on a restricted
list so that the firm disseminates only factual information about the company.

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36. A is Correct because, according to Standard I(B), Independence and

Objectivity, if she believes that her boss’s instructions have compromised her,
she has two options: She can tell her boss that she cannot cover the company
under these constraints, or she can take over coverage of the company, reach
her own independent conclusions, and if they conflict with her boss’s opinion,
share the conclusions with her boss or other supervisors in the firm so that
they can make appropriate recommendations.

37. C is Correct because the absence of appropriate conduct or the lack of

sufficient effort may be a violation of Standard I(D), Misconduct.. A member or
candidate—whether an investment banker, rating or research analyst, or
portfolio manager—is expected to conduct the necessary due diligence to
properly understand the nature and risks of an investment before making an
investment recommendation. By not taking these steps and, instead, relying on
someone else in the process to perform them, members or candidates may
violate the trust their clients have placed in them.

38. B is Correct because the absence of appropriate conduct or the lack of

sufficient effort may be a violation of Standard I(D), Misconduct. A member or
candidate—whether an investment banker, rating or research analyst, or
portfolio manager—is expected to conduct the necessary due diligence to
properly understand the nature and risks of an investment before making an
investment recommendation. By not taking these steps and, instead, relying on
someone else in the process to perform them, members or candidates may
violate the trust their clients have placed in them.

39. A is Correct because, according to Standard II(A), Material Nonpublic

Information, if a member or candidate determines that information is material,
the member or candidate should make reasonable efforts to achieve public
dissemination of the information. These efforts usually entail encouraging the
issuing company to make the information public.

40. A is Correct because Standard IV(B). Additional Compensation Arrangements.

states that members 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. Since there is no conflict of interest with
TriGamma's interest in this case, and there is no company policy governing
outside work, Salk does not need to obtain consent from either party.

41. C is Correct because Standard IV(B), Additional Compensation Arrangements,

states that members 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.

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Since Schmidt's paid consulting arrangement with TriAlpha's client will likely
create a conflict of interest with TriAlpha's interest, Schmidt must obtain
consent from all parties involved.

42. B is Correct because according to Standard IV(C), Responsibilities of

Supervisors, reporting the misconduct up the chain of command and warning the
employee to cease the activity are also not enough. Pending the outcome of the
investigation, a supervisor should take steps to ensure that the violation will not
be repeated, such as placing limits on the employee’s activities or increasing the
monitoring of the employee’s activities.

43. A is Correct because Parra understands the model well, Fallon's analysis includes
factors likely to have a substantial influence on the investment value with
extremely positive and negative scenarios, and Parra is not required to predict
investment outcomes.
According to Standard V(A), Diligence and Reasonable Basis, members must
understand the statistical significance of the results of the models they
recommend and must be able to explain them to clients. Standard V(A) also
states that members should ensure that their analyses incorporate a broad
range of assumptions sufficient to capture the underlying characteristics of
investments. The possible scenarios for analysis should include factors that are
likely to have a substantial influence on the investment value and may include
extremely positive and negative scenarios. Finally, regarding performance,
Standard V(A) requires only that members exercise diligence, independence, and
thoroughness in analyzing investments, making investment recommendations, and
taking investment actions and have a reasonable and adequate basis, supported
by appropriate research and investigation, for any investment analysis,
recommendation, or action.

44. A is Correct because Standard V(A), Diligence and Reasonable Basis, states that
members should encourage their firms to consider adopting a standardized set
of criteria for evaluating the adequacy of external advisers. The policy should
include how often and on what basis the allocation of funds to the adviser will be
reviewed. Carlson does this and thus is consistent with the Standards.

45. B is Correct because Sato's statement of Secant's quarterly auto shipments

based on once per week observations is a quantitative opinion, not a fact. Opinion
must be distinguished from fact in research reports. Standard V(B),
Communication with Clients and Prospective Clients, states in the case of
complex quantitative analyses, members and candidates must clearly separate
fact from statistical conjecture and should identify the known limitations of an
analysis. Members and candidates may violate Standard V(B) by failing to
identify the limits of statistically developed projections because such omission
leaves readers unaware of the limits of the published projections.

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46. A is Correct because Romo has not stated opinion as fact, and he is permitted to
limit the scope of the report.

47. C is Correct because, according to Standard V(C), Record Retention, in the

absence of regulatory guidance or firm policies, CFA Institute recommends
maintaining records for at least seven years.

48. A is Correct because Johnson's actions fulfill the requirements of Standard

V(C), Record Retention, which states that in the absence of regulatory guidance
or firm policies, CFA Institute recommends maintaining records for at least
seven years. Since Claros' regulator stipulates a record retention period of
three years, this is the applicable requirement. Johnson maintains records for
three years and thus satisfies the requirement. The Standard also states that
records may be maintained either in hard copy or electronic form. Thus, records
in only hard copy are acceptable.

49. B is Correct because, according to Standard I(C), Misrepresentation, in some

situations members may use research conducted by others within the same firm
without committing a violation. The most common example relates to the
situation in which one of the original analysts is no longer with the firm.
Research developed while employed by a firm are the property of the firm. The
firm retains the right to continue using the work completed after a member has
left the organization. The firm may issue future reports without providing
attribution to the prior analysts. A member or candidate cannot, however,
reissue a previously released report solely under his or her name."
Since a report on Iron Mining was previously released, Wolf may not reissue this
report solely under his own name.

50. B is Correct because this is not a proper reference and violates Standard
VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program.
According to Standard VII(B), statements referring to CFA Institute, the CFA
designation, or the CFA Program that overstate the competency of an individual
or imply, either directly or indirectly, that superior performance can be
expected from someone with the CFA designation are not allowed under the
standard.

51. B is Correct because Statement 2 violates Standard VII(A), Conduct as

Participants in CFA Institute Programs, by disclosing content-specific
information and subject matter.
According to Standard VII (A), 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. Specifically, when expressing a personal opinion, a candidate is
prohibited from disclosing content-specific information, including any actual

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exam question and the information as to subject matter covered or not covered
in the exam.

52. B is Correct because Standard VI(B) states that, investment transactions for
clients and employers must have priority over investment transactions in which a
member or candidate is the beneficial owner. Also, client transactions must take
precedence over transactions made on behalf of the member’s or candidate’s
firm or personal transactions. Buckley thus violates Standard VI (B) by initially
allocating to the firm’s proprietary account before allocating to client accounts.

53. B is Correct because Mack's call to his long-term client before leaving Firm 1
violated Standard VI(A), Loyalty. This Standard prohibits solicitation before
leaving the former employer. A member or candidate who is contemplating
seeking other employment must not contact existing clients or potential clients
prior to leaving his or her employer for purposes of soliciting their business for
the new employer. Therefore, Mack violated Standard VI(A) by calling his long-
term client.

54. A is Correct because McQueen did not have a noncompete agreement and
solicited former clients only after joining the new firm.
Standard IV(A), Loyalty, states 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. Also, the
standard does not prohibit former employees from contacting clients of their
previous firm as long as the contact information does not come from the records
of the former employer or violate an applicable “noncompete agreement.”
Based on her actions, McQueen did not violate Standard IV(A), Loyalty.

55. A is Correct because reporting tax evasion and money laundering activities does
not violate Standard III(E), Preservation of Confidentiality, as both are illegal
activities on the part of the client.
According to Standard III(E), 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 law; or 3. The client or prospective client permits disclosure of the
information.

56. C is Correct because Valentina adding Mitchell’s email address to the donor
database violates Standard III(E), Preservation of Confidentiality.
According to this Standard, 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 law; or 3. The client or prospective client permits disclosure of the
information.

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None of these three conditions occurred in this case, so Valentina adding

Mitchell’s email address violated Standard III(E).

57. C is Correct because Dempsey's failure to indicate that the results are partially
simulated is a violation of Standard III(D), Performance Presentation.
According to Standard III(D), when communicating investment performance
information, members and candidates must make reasonable efforts to ensure
that it is fair, accurate, and complete.
Furthermore, use of simulated results should be accompanied by full disclosure
as to the source of the performance data, including the fact that the results
were the result of applying the model retroactively to that time period.

58. B is Correct because buying the Japanese bank stock goes against the mutual
fund's mandate and thus is a violation Standard III(C), Suitability. According to
the Standard, 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.
Buying the Japanese bank stock is inconsistent with the mandate of the
Canadian large-cap financial services mutual fund. Therefore, Petrov violated
Standard III(C).

59. A is Correct because Wynn did not violate Standard III(B), Fair Dealing.
According to the this Standard, members and candidates may provide more
personal, specialized, or in-depth service to clients who are willing to pay for
premium services through higher management fees or higher levels of
brokerage. Members and candidates may differentiate their services to clients,
but different levels of service must not disadvantage or negatively affect
clients.
Therefore, Wynn has not violated Standard III(B) because she is allowed to
provide differentiated service levels to her clients and did not appear to
disadvantage or negatively affect other clients.

60. B is Correct because directing all his trades to Broker 1, and thereby paying
higher commissions to attend the conference for his own benefit, violates
Standard III(A), Loyalty, Prudence and Care.
Regarding "Soft Commission Policies", conflicts may arise when an investment
manager uses client brokerage to purchase research services, a practice
commonly called “soft dollars” or “soft commissions.” A member or candidate
who pays a higher brokerage commission than he or she would normally pay to
allow for the purchase of goods or services, without corresponding benefit to
the client, violates the duty of loyalty to the client.
Keith manages a fund that replicates the S&P 500 index, so it is unlikely that his
attendance at the biodiversity conference would benefit his clients. His
intention of generating soft dollar commissions is for personal benefit, as he was

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interviewing for ESG fund manager jobs. As his motivation was for his personal
benefit, his actions were a violation of Standard III(A).

61. B is Correct because trading AIL back and forth between the two funds violates
Standard II(B), Market Manipulation. Standard II(B) requires that members
and candidates uphold market integrity by prohibiting market manipulation.
Market manipulation includes practices that distort security prices or trading
volume with the intent to deceive people or entities that rely on information in
the market.
In this case, Winter engaged in transaction-based manipulation, which involves
instances where a member or candidate knew or should have known that his or
her actions could affect the pricing of a security. Winter’s plan is based on
distortion of both trading volume and the price of the AIL stock; therefore, it
violates Standard II(B).

62. B is Correct because Dimitrova's purchase of EE stock is a violation of Standard

III(A), Loyalty, Prudence and Care. When the manager is responsible for the
portfolios of pension plans or trusts, the client is not the person or entity who
hires the manager but, rather, the beneficiaries of the plan or trust. The duty
of loyalty is owed to the ultimate beneficiaries.
Thus, Dimitrova's duty of loyalty is to the beneficiary of the GR pension plan
rather than the CEO. Because Dimitrova acted on behalf of the GR's CEO, and
despite her view that EE stock is overvalued, she violated Standard III(A).

63. C is Correct because Parker violates Standard VI(B), Priority of Transactions, in

that family accounts that are client accounts should be treated like any other
firm account and should neither be given special treatment nor be disadvantaged
because of the family relationship.
As fee-paying clients of the firm, Parker’s aunt is entitled to the same
treatment as any other client of the firm. Therefore, Parker violates Standard
VI(B) by not allocating to her aunt's fee-paying account similarly with other fee-
paying clients.

64. A is Correct because, 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.
Mckenzie discloses the details of both referral arrangements, including fees,
both to his employer and to his clients before entry into formal service
agreements. Therefore, he does not violate Standard VI(C).

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