ethics

(Ethics)

Is it acceptable to trade using material nonpublic information? Why or why not?

No. Trading on material nonpublic information is prohibited because it constitutes insider trading.

An analyst knowingly includes false information in a research report.

Violence

A portfolio manager follows all applicable laws and regulations.

Complies

An analyst refuses to participate in a client’s fraudulent scheme.

Complies

A CFA candidate cheats during the CFA exam.

Violence

A member spreads rumors about a competitor to gain clients.

Violence

An employee learns confidential earnings results before public release and buys shares.

Violence

An analyst uses information obtained from a public company filing.

Complies

A trader receives a tip from a company executive about an upcoming merger and trades on it.

Violence

A member develops an investment conclusion using public information and analysis.

Compiles

A member exaggerates past investment performance to attract clients.

Violence

An analyst accurately cites all sources used in a report.

Complies

A candidate claims to have passed CFA Level III when they have not.

Violence

A member presents another analyst’s work as their own.

Violence

A manager honestly describes both risks and benefits of an investment.

Complies

A manager places client interests above personal interests.

Complies

A member purchases securities for their own account before buying them for clients.

Violence

An analyst knowingly uses outdated financial statements to make a company appear more profitable.

A:
Violation

Standard:
Standard I(C) – Misrepresentation

Explanation:
Members must not knowingly present false or misleading information.

Difficulty:
Easy

A portfolio manager follows all applicable securities regulations in her country.

A:
No Violation

Standard:
Standard I(A) – Knowledge of the Law

Explanation:
Members must comply with all applicable laws and regulations.

Difficulty:
Easy

An analyst receives confidential merger information from a company executive and purchases shares before the announcement.

A:
Violation

Standard:
Standard II(A) – Material Nonpublic Information

Explanation:
Trading on material nonpublic information is prohibited.

Difficulty:
Easy

A research analyst develops a recommendation using only public filings and industry reports.

A:
No Violation

Standard:
Standard II(A) – Material Nonpublic Information

Explanation:
Publicly available information may be used in investment decisions.

Difficulty:
Easy

A candidate shares specific CFA exam questions with friends after the exam.

A:
Violation

Standard:
Standard VII(A) – Conduct as Participants in CFA Institute Programs

Explanation:
Exam content is confidential and may not be disclosed.

Difficulty:
Easy

An analyst accurately reports investment performance exactly as calculated.

A:
No Violation

Standard:
Standard I(C) – Misrepresentation

Explanation:
Providing accurate information is consistent with the Standard.

Difficulty:
Easy

A brokerage firm offers an analyst a luxury vacation in exchange for favorable research coverage.

A:
Violation

Standard:
Standard I(B) – Independence and Objectivity

Explanation:
Gifts that could influence professional judgment impair objectivity.

Difficulty:
Medium

An analyst declines expensive gifts from a company being evaluated.

A:
No Violation

Standard:
Standard I(B) – Independence and Objectivity

Explanation:
Declining gifts helps preserve independence and objectivity.

Difficulty:
Easy

A portfolio manager allocates a limited IPO fairly among eligible clients.

A:
No Violation

Standard:
Standard III(B) – Fair Dealing

Explanation:
Clients should be treated fairly when opportunities are limited.

Difficulty:
Medium

A manager gives a profitable recommendation only to preferred clients.

A:
Violation

Standard:
Standard III(B) – Fair Dealing

Explanation:
Members must deal fairly with all clients.

Difficulty:
Medium

An adviser recommends a highly speculative investment to a conservative retiree.

A:
Violation

Standard:
Standard III(C) – Suitability

Explanation:
Recommendations must be suitable for the client’s objectives and risk tolerance.

Difficulty:
Easy

A manager reviews a client’s risk profile before recommending an investment strategy.

A:
No Violation

Standard:
Standard III(C) – Suitability

Explanation:
Understanding client circumstances is required before making recommendations.

Difficulty:
Easy

An analyst publishes research without performing sufficient analysis.

A:
Violation

Standard:
Standard V(A) – Diligence and Reasonable Basis

Explanation:
Recommendations must be supported by adequate research.

Difficulty:
Medium

A recommendation is based on extensive financial analysis and verified data.

A:
No Violation

Standard:
Standard V(A) – Diligence and Reasonable Basis

Explanation:
Investment recommendations should have a reasonable basis.

Difficulty:
Easy

A manager buys shares for his personal account before executing client orders.

A:
Violation

Standard:
Standard VI(B) – Priority of Transactions

Explanation:
Client transactions must take priority over personal transactions.

Difficulty:
Easy

A manager completes all client trades before placing personal trades.

A:
No Violation

Standard:
Standard VI(B) – Priority of Transactions

Explanation:
Clients must receive priority.

Difficulty:
Easy

An analyst recommends a stock without disclosing that she owns shares in the company.

A:
Violation

Standard:
Standard VI(A) – Disclosure of Conflicts

Explanation:
Material conflicts of interest must be disclosed.

Difficulty:
Easy

A manager fully discloses compensation received from a third party.

A:
No Violation

Standard:
Standard VI(A) – Disclosure of Conflicts

Explanation:
Disclosure allows clients to evaluate potential conflicts.

Difficulty:
Easy

A supervisor ignores repeated compliance violations by team members.

A:
Violation

Standard:
Standard IV(C) – Responsibilities of Supervisors

Explanation:
Supervisors must make reasonable efforts to prevent violations.

Difficulty:
Medium

A supervisor establishes compliance procedures and monitors employee activities.

A:
No Violation

Standard:
Standard IV(C) – Responsibilities of Supervisors

Explanation:
Reasonable supervisory systems help prevent misconduct.

Difficulty:
Easy

An analyst spreads false rumors about a competitor to reduce its stock price.

A:
Violation

Standard:
Standard I(C) – Misrepresentation

Explanation:
Knowingly spreading false information is prohibited.

Difficulty:
Medium

Q:
An analyst overhears executives discussing a confidential acquisition in a private meeting area and trades immediately.

A:
Violation

Standard:
Standard II(A) – Material Nonpublic Information

Explanation:
The information is both material and nonpublic.

Difficulty:
Medium

A member accurately states, “I passed CFA Level I.”

A:
No Violation

Standard:
Standard VII(B) – Reference to CFA Institute, the CFA Designation, and the CFA Program

Explanation:
Factually describing exam status is permitted.

Difficulty:
Easy

A candidate claims, “Because I am a CFA candidate, I guarantee superior returns.”

A:
Violation

Standard:
Standard VII(B) – Reference to CFA Institute, the CFA Designation, and the CFA Program

Explanation:
The CFA Program may not be used to imply guaranteed performance.

Difficulty:
Easy

An analyst accepts a modest company-branded pen after a meeting.

A:
No Violation

Standard:
Standard I(B) – Independence and Objectivity

Explanation:
Nominal gifts generally do not impair objectivity.

Difficulty:
Hard

An analyst accepts an all-expenses-paid international vacation from a company she covers.

A:
Violation

Standard:
Standard I(B) – Independence and Objectivity

Explanation:
Such benefits could influence professional judgment.

Difficulty:
Easy

A manager intentionally delays selling a declining stock because selling would reduce his bonus.

A:
Violation

Standard:
Standard III(A) – Loyalty, Prudence, and Care

Explanation:
Client interests must come before personal interests.

Difficulty:
Medium

A manager makes investment decisions solely to benefit clients.

A:
No Violation

Standard:
Standard III(A) – Loyalty, Prudence, and Care

Explanation:
Members have a duty to act for the benefit of clients.

Difficulty:
Easy

A research report contains forecasts copied from another analyst without attribution.

:
Violation

Standard:
Standard I(C) – Misrepresentation

Explanation:
Using another person’s work without proper credit is misrepresentation.

Difficulty:
Medium

A supervisor learns of a potential employee violation and immediately investigates.

A:
No Violation

Standard:
Standard IV(C) – Responsibilities of Supervisors

Explanation:
Supervisors must take reasonable steps when violations are suspected.

Difficulty:
Medium

A research analyst obtains industry production statistics from a government database that requires a paid subscription. She uses the data in a report without mentioning the source.

A. Violation of Misrepresentation
B. No Violation
C. Violation of Record Retention

B. No Violation

Standard:
Standard I(C) – Misrepresentation

Explanation:
The analyst used legitimately obtained data and did not claim authorship of the data. CFA Standards do not require every factual data source to be cited in all cases.

A portfolio manager is offered free attendance at an investment conference by a brokerage firm. The conference content is relevant to her clients, and her employer approves her attendance.

A. Violation of Independence and Objectivity
B. No Violation
C. Violation of Additional Compensation Arrangements

B. No Violation

Standard:
Standard I(B) – Independence and Objectivity

Explanation:
Issuer-paid or broker-paid travel can be problematic, but in this case the conference is relevant to clients and employer approval was obtained. The benefit does not appear excessive

A member discovers that a junior analyst accidentally sent a confidential client report to the wrong client. The member immediately informs compliance and takes steps to recover the report.

A. Violation of Preservation of Confidentiality
B. No Violation
C. Violation of Loyalty to Clients

B. No Violation

Standard:
Standard III(E) – Preservation of Confidentiality

Explanation:
The error was accidental, and the member took prompt corrective action. CFA Standards focus on reasonable efforts to protect confidential information.

A manager recommends a private credit fund to a client after determining the investment fits the client’s objectives, liquidity needs, and risk tolerance.

A. No Violation
B. Violation of Suitability
C. Violation of Fair Dealing

A. No Violation

Standard:
Standard III(C) – Suitability

Explanation:
The manager evaluated objectives, liquidity needs, and risk tolerance before recommending the investment.

An analyst stores research notes electronically for six months and then deletes them, even though firm policy requires seven years of retention.

A. No Violation
B. Violation of Record Retention
C. Violation of Misconduct

B. Violation of Record Retention

Standard:
Standard V(C) – Record Retention

Explanation:
Members must maintain records according to firm policy or applicable law. Deleting records early violates the Standard.

A supervisor delegates trade surveillance responsibilities to an experienced compliance officer and periodically reviews compliance reports.

A. Violation of Responsibilities of Supervisors
B. No Violation
C. Violation because supervisors cannot delegate compliance functions

No Violation

Standard:
Standard IV(C) – Responsibilities of Supervisors

Explanation:
Supervisors may delegate tasks but not responsibility. Periodic review demonstrates reasonable supervision.

Difficulty: Medium

An adviser receives compensation from a charity for referring wealthy clients to its planned giving program. The adviser fully discloses the arrangement to clients before any referral.

A. No Violation
B. Violation of Referral Fees
C. Violation of Loyalty to Clients

A. No Violation

Standard:
Standard VI(C) – Referral Fees

Explanation:
Referral fees are permitted if disclosed before the referral relationship affects the client.

• B is incorrect because disclosure was made.

• C is incorrect because there is no evidence clients were harmed.

Difficulty: Medium

A member receives a speeding ticket while driving to a client meeting.

A. Violation of Misconduct
B. No Violation
C. Violation of Professionalism

B. No Violation

Standard:
Standard I(D) – Misconduct

Explanation:
A routine speeding ticket generally does not reflect dishonesty, fraud, or professional misconduct.

• A and C are incorrect because minor traffic violations typically do not violate CFA Standards.

Difficulty: Hard

A research analyst learns through public bankruptcy filings that a supplier has stopped doing business with a publicly traded company. She incorporates the information into her recommendation.

A. Violation of Material Nonpublic Information
B. No Violation
C. Violation of Diligence and Reasonable Basis

B. No Violation

Standard:
Standard II(A) – Material Nonpublic Information

Explanation:
Bankruptcy filings are public information. Public information may be freely used in investment analysis.

• A is incorrect because the information is public.

• C is incorrect because public filings can provide a reasonable basis for analysis.

Difficulty: Medium

A manager purchases securities for client accounts. After all client orders are completed, she purchases the same securities for her own account.

A. Violation of Priority of Transactions
B. No Violation
C. Violation of Fair Dealing

B. No Violation

Standard:
Standard VI(B) – Priority of Transactions

Explanation:
Clients received priority. Personal trading occurred only after client orders were completed.

• A is incorrect because client interests came first.

• C is incorrect because fair dealing is not the primary issue.

Difficulty: Easy

A portfolio manager receives a referral fee from a private banker for directing clients to a structured product. The manager discloses the arrangement to clients after the investment has already been made.

A. Violation of Referral Fees
B. No Violation
C. Violation of Fair Dealing

A portfolio manager receives a referral fee from a hedge fund for directing clients to its strategy. The manager discloses the arrangement in the firm’s annual compliance report, but does not inform clients directly.

A. Violation of Referral Fees
B. No Violation
C. Violation of Duties to Clients

Answer: A

Standard:
Standard VI(C) – Referral Fees

Explanation:
Referral fees must be disclosed directly to clients in a clear and timely manner. Internal or annual-only disclosure is insufficient.

• B wrong: disclosure method is inadequate

• C wrong: issue is not client fairness but disclosure obligation

An analyst uses a third-party valuation model that is widely used in the industry. However, she does not independently test the assumptions before using it in a report.

A. Violation of Diligence and Reasonable Basis
B. No Violation
C. Violation of Misrepresentation

Answer: A

Standard:
Standard V(A) – Diligence and Reasonable Basis

Explanation:
Even widely used models must be independently evaluated. Blind reliance violates due diligence.

• B wrong: industry use does not remove responsibility

• C wrong: no misrepresentation issue here

A supervisor sets clear written compliance procedures but does not follow up to ensure employees understand them.

A. Violation of Responsibilities of Supervisors
B. No Violation
C. Violation of Duties to Employer

Answer: A

Standard:
Standard IV(C) – Responsibilities of Supervisors

Explanation:
Supervisors must ensure employees understand compliance procedures, not just issue them.

• B wrong: implementation alone is insufficient

• C wrong: not an employer-duty issue

A member refuses to share client portfolio details with a marketing team that wants to use them for promotional materials.

A. Violation of Confidentiality
B. No Violation
C. Violation of Fair Dealing

Answer: B

Standard:
Standard III(E) – Preservation of Confidentiality

Explanation:
Refusing to share client data with marketing protects confidentiality and is required.

• A wrong: no disclosure occurred

• C wrong: fair dealing is unrelated

An analyst recommends a structured product after reviewing issuer-provided risk simulations but does not consider independent stress scenarios.

A. Violation of Diligence and Reasonable Basis
B. No Violation
C. Violation of Suitability

Answer: A

Standard:
Standard V(A) – Diligence and Reasonable Basis

Explanation:
Relying only on issuer-provided scenarios without independent stress testing is insufficient analysis.

• B wrong: independent analysis is required

• C wrong: suitability is secondary here

Elena Vance, a CFA candidate, resides in a country whose local securities laws permit the use of material nonpublic information if it is obtained through an independent research network. Vance is currently analyzing a cross-border acquisition involving a company listed in her home country and a company listed in a jurisdiction that strictly prohibits any use of material nonpublic information. Under the CFA Institute Standards of Professional Conduct, Vance should:

A. follow her local law, as it is the law of her primary place of business.

B. abide by the strict prohibition against using material nonpublic information.

C. apply the laws of the jurisdiction where the target company is listed.

Answer: B

Standard: Standard I(A) Knowledge of the Law

Difficulty: Medium

Explanation: Standard I(A) requires members and candidates to comply with the stricter of applicable law, regulation, or the CFA Institute Code and Standards. Because the CFA Standards strictly prohibit the use of material nonpublic information (Standard II(A)), Vance must follow this stricter rule, even if local law is more permissive. Distractors A and C incorrectly prioritize geographic jurisdiction over the universal baseline rule of adopting the strictest standard.

Liam O'Connor, CFA, is a senior technology analyst tracking an enterprise software firm. By aggregating public satellite data showing employee parking lot traffic, interviewing former mid-level engineers who left the firm over six months ago, and reviewing an unlisted but publicly accessible staging URL used by the company's developers, O'Connor concludes that a major product launch is delayed. He issues a "Sell" recommendation before the official corporate announcement. Has O'Connor violated the Standards?

A. No, because he effectively applied the mosaic theory.

B. Yes, because the staging URL constitutes material nonpublic information.

C. Yes, because interviewing former employees violates the duty to market integrity.

Answer: A

Standard: Standard II(A) Material Nonpublic Information

Difficulty: Hard

Explanation: Under the mosaic theory, analysts are free to reach investment conclusions by combining public information (satellite data) with non-material nonpublic information (insights from former mid-level employees and a publicly accessible, though unindexed, URL). Because the pieces of information gathered were individual fragments that only became material when synthesized through O'Connor’s analysis, no violation occurred. B and C are incorrect because a publicly accessible URL is technically public, and interviewing ex-employees is a standard, permissible research practice as long as they do not breach active non-disclosure agreements regarding trade secrets.

Ananya Nair, CFA, manages a high-yield bond portfolio. A regional commercial bank approaches her to manage a new discretionary fixed-income mandate. The bank offers to pay Nair a performance-linked bonus directly, separate from her firm's standard fee structure, if she beats her benchmark by 200 basis points. Nair verbally discloses this arrangement to her immediate supervisor, who congratulates her and tells her to "go get 'em." Nair accepts the mandate and begins trading. Nair has:

A. not violated the Standards because she disclosed the arrangement to her supervisor.

B. violated the Standards because she failed to obtain written consent from both her employer and the bank.

C. violated the Standards because she failed to obtain written consent from her employer before accepting the arrangement.

Answer: C

Standard: Standard IV(B) Additional Compensation Arrangements

Difficulty: Medium

Explanation: Standard IV(B) explicitly requires members and candidates to obtain written consent from all parties involved (specifically their employer) before accepting bonuses or additional compensation from third parties that might create a conflict of interest. Verbal disclosure and approval from a supervisor are insufficient. B is incorrect because the bank already proposed the arrangement (implying their consent), but her employer's formal, written sign-off was missing.

Ji-Min Park passed the CFA Level III exam in June 2025. Because he has only completed three years of professional work experience, he is waiting to accumulate the required fourth year before applying for regular membership and receiving his charter. On his professional social media profile, he updates his headline to read: "Ji-Min Park, CFA (Expected 2027)." Has Park violated the Standards?

A. No, because he has successfully passed all three levels of the CFA Program.

B. Yes, because he cannot use the CFA designation or imply an expected timeline for charter receipt.

C. Yes, because he failed to pay his annual dues before updating his status.

Answer: B

Standard: Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program

Difficulty: Medium

Explanation: Standard VII(B) prohibits members and candidates from modifying the designation or implying a specific date of charter acquisition, as the timing of work experience approval is uncertain. Park is not yet a CFA charterholder, so he cannot use the letters after his name, nor can he state an "Expected" date. A is incorrect because passing the exams does not grant immediate use of the moniker. C is incorrect because dues are only applicable once regular membership is approved and held.

Sarah Jenkins, CFA, is an algorithmic trading developer at a quantitative fund. She designs a proprietary sentiment analysis tool that scrapes Reddit and Discord to generate intraday long/short signals for volatile equities. During testing, she notes that the model performs poorly during macro economic data releases, occasionally executing irrational trades due to high data noise. Because these macro events are rare, she deploys the model to live client portfolios without altering the code or mentioning this limitation to clients. Jenkins has:

A. violated the Standards by failing to communicate a significant limitation of the investment methodology to clients.

B. violated the Standards because scraping social media data lacks a reasonable and diligent basis for investment analysis.

C. not violated the Standards because the anomaly occurs during rare, non-standard market conditions.

Answer: A

Standard: Standard V(B) Communication with Clients and Prospective Clients

Difficulty: Medium

Explanation: Standard V(B) requires members to disclose to clients and prospective clients the basic format and general principles of the investment processes they use, as well as any significant limitations and risks inherent in those processes. Jenkins' failure to disclose the model's instability during macroeconomic releases violates this standard. B is incorrect because alternative data scraping can serve as a diligent basis if properly modeled. C is incorrect because rare events must still be accounted for or disclosed if known to cause system failures.

Carlos Mendez, CFA, is a portfolio manager who utilizes a complex multi-asset strategy. To optimize execution costs for his smaller retail clients, Mendez aggregates their block trades with those of his large institutional clients. When allocations are made at the end of the trading day, Mendez distributes shares proportionally based on the target portfolio weights of each account, ensuring all accounts receive the same average execution price. Mendez has:

A. violated the Standards by treating retail and institutional clients differently during the trade day.

B. not violated the Standards because the allocation methodology is fair and treats all clients equitably.

C. violated the Standards by using block trading, which inherently favors large accounts.

Answer: B

Standard: Standard III(B) Fair Dealing

Difficulty: Easy

Explanation: Standard III(B) requires equitability, not identical treatment. Aggregating trades to reduce execution costs for all clients and allocating them proportionally based on a pre-determined, systematic objective (target weights) at an average execution price is a standard industry best practice that complies with Fair Dealing. Therefore, no violation occurred.Pop

Chloe Dupont, a candidate in the CFA Program, works as a junior analyst at a private equity firm. Her firm uses an internal valuation model to appraise illiquid infrastructure assets. While reviewing the model's source code, Dupont finds a minor math error in the discounting formula that overstates the net asset value (NAV) of a target fund by 1.2%. She reports it to her managing director, who tells her: "The deal closed yesterday, and the client is happy. Leave the legacy code alone so we don't open a can of worms." Dupont drops the matter and continues using the model for new valuations. Dupont has:

A. violated the Standards by knowingly participating in a misrepresentation.

B. not violated the Standards because she fulfilled her duty by reporting the error to her supervisor.

C. not violated the Standards because the 1.2% error is immaterial to a private equity transaction.

Answer: A

Standard: Standard I(C) Misrepresentation

Difficulty: Hard

Explanation: By continuing to use a model she knows is flawed for new valuations, Dupont is knowingly participating in the creation of misleading financial reports, which violates Standard I(C). While she took the correct first step by escalating it internally, her subsequent inaction and continued use of the broken code make her complicit. B is incorrect because internal escalation does not absolve a candidate from ongoing misrepresentation. C is incorrect because continuing to use known incorrect data violates professional integrity regardless of perceived materiality thresholds.

Tariq Al-Mansoor, CFA, runs a boutique wealth management firm. He is approached by a digital assets custodian that offers to pay him a flat referral fee of $500 for every client Al-Mansoor redirects to their crypto-storage platform. Al-Mansoor reviews the custodian's security protocols, finds them excellent, and refers three clients who have explicitly expressed interest in digital assets. He discloses the $500 referral fee arrangement in writing to these three clients before they sign up with the custodian. Al-Mansoor has:

A. violated the Standards because receiving cash referral fees from third-party custodians compromises his independence.

B. not violated the Standards because he disclosed the referral fee to the affected clients prior to the transaction.

C. violated the Standards because he failed to disclose the arrangement to all of his existing clients.

Answer: B

Standard: Standard VI(C) Referral Fees

Difficulty: Medium

Explanation: Standard VI(C) states that members must disclose to their clients, prospective clients, and employers, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services. Because Al-Mansoor conducted due diligence on the custodian and fully disclosed the fee in writing to the specific clients before they committed, he satisfies the standard. C is incorrect because disclosure is only required to the parties affected by the referral, not his entire client roster.

Mateo Rossi, CFA, is an independent research analyst. A clean-energy startup pays Rossi a flat, pre-determined cash fee to write an initiation-of-coverage report on their new hydrogen fuel cell technology. The contract explicitly states that Rossi’s compensation is independent of his final investment conclusion. Rossi conducts a thorough, objective analysis and concludes the stock is a "Buy." He publishes the report on his personal blog without mentioning that the startup sponsored the research. Rossi has:

A. not violated the Standards because his fee was flat and not contingent on a positive recommendation.

B. violated the Standards because independent analysts cannot accept direct payment from the subjects of their reports.

C. violated the Standards because he failed to disclose the sponsored nature of the research report to the public.

Answer: C

Standard: Standard VI(A) Disclosure of Conflicts

Difficulty: Medium

Explanation: Standard VI(A) requires full disclosure of all matters that could reasonably be expected to impair an analyst's independence and objectivity. Sponsored research is a severe potential conflict of interest. Even though the fee structure was flat and non-contingent (which is the correct way to structure such an arrangement to maintain independence), the failure to disclose the fact that the company paid for the report violates Standard VI(A).

Fiona Gallagher, CFA, is a portfolio manager specializing in environmental, social, and governance (ESG) mutual funds. Her investment mandate states that she will only buy equities scoring in the top quartile of a specific third-party sustainability index. One of her core holdings drops to the second quartile due to a corporate governance restructuring. Gallagher believes the restructuring is actually positive for long-term shareholder value, so she retains the stock in the portfolio and updates the fund's promotional pitch deck to highlight her "active, flexible approach to ESG metrics." Gallagher has:

A. violated the Standards by failing to adhere to the explicit investment mandate of the fund.

B. not violated the Standards because she updated the promotional materials to reflect her flexible approach.

C. not violated the Standards because her primary duty of loyalty and care is to maximize long-term shareholder value.

Answer: A

Standard: Standard III(C) Suitability

Difficulty: Medium

Explanation: Under Standard III(C), when managing a portfolio to a specific mandate, strategy, or style, members must ensure that investment recommendations and actions are consistent with the stated objectives and constraints of the portfolio. Because the fund's mandate explicitly confined investments to the top quartile, Gallagher cannot unilaterally violate this constraint, regardless of her personal opinion on its long-term value. Updating marketing materials after the fact does not erase the active violation of the mandate currently governing the clients' assets.

Amara Diallo, CFA, is an equity analyst specializing in decentralized finance (DeFi) protocols. She spends three months researching a novel automated market maker (AMM) protocol, reviewing its open-source smart contract code, evaluating the developer team's track record, and simulating liquidity stress tests. Diallo writes a comprehensive research report with a strong "Buy" recommendation. Two days before publishing the report, she notices an obscure thread on an anonymous cryptography forum claiming a minor bug exists in the protocol's governance logic. Diallo reviews the code again, determines the bug is highly unlikely to impact user funds, and publishes her report without mentioning the forum thread. Has Diallo violated the Standards?

A. Yes, because she failed to perform adequate diligence regarding the newly discovered bug.

B. No, because she established a reasonable and diligent basis for her recommendation through extensive research.

C. Yes, because she failed to disclose a potential structural risk to prospective clients.

Answer: B

Standard: Standard V(A) Diligence and Reasonable Basis

Difficulty: Medium

Explanation: Standard V(A) requires members and candidates to have a reasonable and diligent basis, supported by appropriate research and investigation, for any investment recommendation. Diallo’s deep multi-month technical and quantitative analysis constitutes a thorough research process. Because she actively investigated the forum claim and rationally judged it to be a non-material risk, she was not obligated to include anonymous, unverified forum noise in her final report.

Kenji Tanaka, CFA, is a portfolio manager at an asset management firm that requires employees to clear all personal trades through the compliance department before execution. Tanaka wants to buy shares of a thinly traded medical device company for his personal account. Compliance clears his trade on Tuesday morning. On Tuesday afternoon, a large institutional client calls Tanaka and asks him to purchase a substantial block of the same medical device company for their portfolio. Tanaka executes his personal trade first, then places the client's block trade. Tanaka has:

A. not violated the Standards because his personal trade was pre-cleared by compliance.

B. violated the Standards because client transactions must always take priority over personal transactions.

C. violated the Standards because he failed to seek a second clearance after the client called.

Answer: B

Standard: Standard VI(B) Priority of Transactions

Difficulty: Medium

Explanation: Standard VI(B) explicitly states that client transactions must take priority over personal transactions, regardless of whether a personal trade has been cleared by a firm's internal compliance department. Pre-clearance does not insulate a manager from violating the priority rule if a client order arrives before the personal trade is executed. Tanaka should have prioritized the client's order over his own.

Sofia Lindqvist is a candidate in the CFA Program who recently failed the Level II exam. Frustrated by her results, she writes a lengthy post on a popular online finance forum stating: "The CFA Level II exam is a total lottery. The clinical testing of obscure accounting rules on my specific exam paper does not measure professional competence, and the grading curve feels completely arbitrary." Lindqvist does not reveal any specific question content or topics tested on her exam. Has Lindqvist violated the Standards?

A. Yes, because her public criticism expresses a negative opinion that discredits the CFA Program.

B. No, because she expressed a generic opinion about the exam process without revealing confidential exam content.

C. Yes, because expressing an opinion about the grading process compromises the integrity of the CFA designation.

Answer: B

Standard: Standard VII(A) Conduct as Participants in CFA Institute Programs

Difficulty: Hard

Explanation: Standard VII(A) strictly prohibits revealing confidential exam content, but it does not ban candidates from expressing personal opinions, frustrations, or critiques regarding the difficulty, grading structure, or nature of the CFA Program. Because Lindqvist did not compromise the security of the exam by sharing specific questions, her critique is protected as free speech and does not violate the Standard.

Marcus Vance, CFA, is an energy analyst. He is invited by an aerospace company to tour an experimental, zero-emission aviation facility located in a remote region. The company pays for Vance’s economy class commercial airfare and provides basic lodging at the facility, as there are no alternative commercial hotels within 100 miles. Vance accepts the arrangements, completes the tour, and subsequently issues a neutral research report on the aviation sector. Vance has:

A. violated the Standards by allowing the subject company to pay for his travel and lodging.

B. not violated the Standards because the lack of commercial alternatives made the lodging necessary, and economy travel does not compromise objectivity.

C. violated the Standards because he did not obtain written permission from his employer prior to the trip.

Answer: B

Standard: Standard I(B) Independence and Objectivity

Difficulty: Medium

Explanation: While Standard I(B) recommends that analysts pay for their own travel to maintain independence, it recognizes that in exceptional circumstances—such as remote locations lacking commercial infrastructure—accepting basic corporate-sponsored lodging is permissible. Because the travel was economy scale and the lodging was a practical necessity, it is unlikely to compromise his objectivity. No violation occurred.

Zainab Al-Sayed, CFA, is a private wealth advisor. A prospective client with a highly conservative risk profile asks her to construct a portfolio utilizing a specialized "market-neutral options strategy." Zainab has never traded options and does not fully understand the mathematical Greeks driving the strategy's risk profile. However, her firm's internal quantitative research team has published an approved white paper endorsing the strategy as safe for all client types. Relying solely on this internal white paper, Zainab implements the strategy for the client. Al-Sayed has:

A. violated the Standards because she did not personally possess the competence to understand the investment risk before implementing it.

B. not violated the Standards because she relied on an approved research product from her own firm's analysts.

C. violated the Standards because an options strategy is inherently unsuitable for a conservative client.

Answer: A

Standard: Standard III(C) Suitability / Standard V(A) Diligence and Reasonable Basis

Difficulty: Hard

Explanation: Under the Standards, while a professional can rely on internal secondary research, they must still possess sufficient personal competence to understand the fundamental risks of the instruments they recommend to clients. Because Zainab did not understand the underlying options risks, she could not truly assess its suitability for a conservative client, thereby violating her duty of care. B is incorrect because internal compliance approval does not absolve individual professional responsibility. C is incorrect because complex instruments can occasionally be structured to reduce risk, but the advisor must understand them first.

Liam Devereaux, CFA, acts as an independent financial consultant. A real estate crowdfunding platform agrees to pay Devereaux a quarterly retainer fee in exchange for him providing general macroeconomic commentary for their investor newsletter. The contract states that Devereaux will not pitch specific real estate deals. Devereaux discloses this arrangement to his employer's compliance department, noting that it will not conflict with his primary work hours. The firm approves the arrangement via email. Devereaux does not disclose this retainer to his existing private consulting clients. Devereaux has:

A. violated the Standards because he failed to disclose the third-party compensation to his consulting clients.

B. not violated the Standards because the arrangement does not involve client referrals or specific asset recommendations.

C. violated the Standards because email confirmation does not constitute formal written consent.

Answer: B

Standard: Standard VI(C) Referral Fees / Standard IV(B) Additional Compensation

Difficulty: Hard

Explanation: Standard VI(C) governs referral fees paid for recommending products or services to clients. Because Devereaux is providing general macroeconomic commentary to a newsletter and is explicitly not referring clients or recommending specific investments, this is treated as an outside business activity / additional compensation arrangement. He followed Standard IV(B) perfectly by disclosing it to his employer and receiving written consent (email qualifies as written). He has no obligation to disclose a generic, non-conflicting writing gig to his private consulting clients.

Aarav Mehta, a CFA Level I candidate, works as a junior research clerk. His firm requires all employees to maintain digital research logs for five years. Mehta changes firms and joins a competitor. To hit the ground running, he copies his old research logs containing raw corporate financial data, public consensus estimates, and macro indicators onto a personal USB drive and uses them to write his first research note at the new firm. Mehta does not copy any proprietary valuation models or client information. Mehta has:

A. not violated the Standards because the copied data consisted solely of public and non-proprietary information.

B. violated the Standards because the research logs are the property of his former employer.

C. violated the Standards because he failed to maintain the records for the mandatory seven-year CFA retention period.

Answer: B

Standard: Standard IV(A) Duties to Employers - Loyalty

Difficulty: Medium

Explanation: Standard IV(A) dictates that regular records, research logs, and work-product created for an employer are the property of that firm. Members and candidates cannot take property—even raw data logs they compiled themselves—to a competitor without explicit permission from their former employer. A is incorrect because ownership remains with the firm regardless of whether the underlying data is public. C is incorrect because the seven-year retention rule applies to the firm or the ongoing documentation supporting active recommendations, not a departing employee's personal files.

Daniel Esparza, CFA, is a high-net-worth wealth advisor. One of his long-standing clients, an elderly widow, calls him in a state of panic, explaining that her grandson has been arrested abroad and she needs to wire $100,000 from her trust account immediately to an unverified offshore escrow agent. Esparza strongly suspects the client is a victim of an elder abuse phishing scam. He refuses to execute the wire transfer, places a temporary freeze on the account, and contacts the local adult protective services agency to report the suspected fraud. Esparza has:

A. violated the Standards by breaching client confidentiality and failing to follow explicit client instructions.

B. not violated the Standards because his duty of prudence and care overrides blind obedience to instructions that clearly harm the client.

C. violated the Standards by contacting an external agency without the client's prior consent.

Answer: B

Standard: Standard III(A) Loyalty, Prudence, and Care / Standard III(E) Preservation of Confidentiality

Difficulty: Hard

Explanation: Standard III(A) requires members to act with the care, competence, and diligence that a prudent professional would use. Acting prudently includes protecting vulnerable clients from clear fraud and financial exploitation. Furthermore, Standard III(E) allows exceptions to confidentiality when preserving it would harm the client's best interests or violate legal obligations. Intervening to prevent a scam is a fulfillment of prudence and care, resulting in no violation.

A firm's compliance officer, who is not a CFA charterholder or candidate, issues an updated internal compliance manual. The manual states: "All research reports must be archived for a minimum period of five years." Under local statutory laws, the mandatory record retention period is three years. Thomas Muller, a CFA candidate working at the firm, notes that the CFA Institute Standards require a seven-year retention period. Muller should archive his records for a minimum of:

A. five years, as mandated by his firm's internal compliance officer.

B. three years, as required by the prevailing local statutory law.

C. seven years, as required by the CFA Institute Standards.

Answer: C

Standard: Standard I(A) Knowledge of the Law / Standard V(C) Record Retention

Difficulty: Medium

Explanation: Under Standard I(A), members and candidates must adhere to the strictest rule among applicable local law (3 years), firm policy (5 years), or the CFA Institute Standards (7 years). Standard V(C) specifies a minimum record retention period of seven years in the absence of a stricter local law. Therefore, Muller must follow the CFA Standard baseline of seven years.

A research analyst discovers an error in a report that overstates a company’s earnings growth. The report has already been distributed to clients. The analyst immediately informs compliance and issues a correction the next morning.

A. Violation of Misrepresentation
B. No Violation
C. Violation of Duties to Clients

Answer: B. No Violation

Standard:
Standard I(C) – Misrepresentation

Explanation:
The error was unintentional, and the analyst took prompt corrective action after discovering it. CFA Standards do not require perfection, but they do require reasonable care and timely correction.

• A is incorrect because an honest mistake corrected promptly is generally not a violation.

• C is incorrect because the key issue is accuracy of information, not client loyalty.

Difficulty: Medium

A portfolio manager receives confidential client information during a divorce proceeding involving the client. A court orders the manager to provide certain records.

A. Violation of Preservation of Confidentiality
B. No Violation
C. Violation of Loyalty, Prudence, and Care

Answer: B. No Violation

Standard:
Standard III(E) – Preservation of Confidentiality

Explanation:
Confidential information may be disclosed when required by law or a valid court order.

• A is incorrect because legal disclosure is specifically permitted.

• C is incorrect because complying with a court order does not violate loyalty to clients.

Difficulty: Easy

An analyst writes a favorable report on a company. Unknown to the analyst, the analyst’s spouse purchased shares in the company the previous week.

A. Violation of Disclosure of Conflicts
B. No Violation
C. Violation of Independence and Objectivity

Answer: B. No Violation

Standard:
Standard IV(A) – Loyalty

Explanation:
Members may use general knowledge, experience, and skills gained from previous employment. What cannot be taken are proprietary records or confidential information.

• A is incorrect because no employer property was taken.

• C is incorrect because there is no misrepresentation.

Difficulty: Medium

A supervisor establishes strong compliance procedures. An employee intentionally circumvents the procedures without the supervisor’s knowledge.

A. Violation of Responsibilities of Supervisors
B. No Violation
C. Violation of Fair Dealing

Answer: B. No Violation

Standard:
Standard IV(C) – Responsibilities of Supervisors

Explanation:
A supervisor is not automatically responsible for every employee violation if reasonable compliance systems were established and enforced.

• A is incorrect because the supervisor had appropriate procedures.

• C is incorrect because fair dealing is unrelated.

Difficulty: Hard

Question 24

A member leaves a firm and uses knowledge of general industry trends learned while employed to advise clients at a new employer.

A. Violation of Loyalty
B. No Violation
C. Violation of Misrepresentation

Question 24

Answer: B. No Violation

Standard:
Standard IV(A) – Loyalty

Explanation:
Members may use general knowledge, experience, and skills gained from previous employment. What cannot be taken are proprietary records or confidential information.

• A is incorrect because no employer property was taken.

• C is incorrect because there is no misrepresentation.

Difficulty: Medium

A manager receives a gift basket worth approximately $30 from a client during the holiday season and reports it according to firm policy.

A. Violation of Independence and Objectivity
B. No Violation
C. Violation of Additional Compensation Arrangements

Answer: B. No Violation

Standard:
Standard I(B) – Independence and Objectivity

Explanation:
A small holiday gift that is reported according to firm policy is unlikely to impair objectivity.

• A is incorrect because the gift is modest.

• C is incorrect because this is not an additional compensation arrangement.

An analyst recommends a municipal bond fund after reviewing the client’s objectives. Six years later, the analyst continues recommending the same fund without updating the client’s circumstances.

A. No Violation
B. Violation of Suitability
C. Violation of Fair Dealing

Answer: B. Violation of Suitability

Standard:
Standard III(C) – Suitability

Explanation:
Client circumstances must be reviewed periodically. Continuing recommendations for six years without updating client information is inconsistent with suitability requirements.

• A is incorrect because suitability is an ongoing obligation.

• C is incorrect because fair dealing is not involved.

Difficulty: Medium

A member discovers that local law allows a marketing practice that CFA Standards prohibit. The member follows CFA Standards instead of local market practice.

A. Violation of Knowledge of the Law
B. No Violation
C. Violation of Duties to Employer

Answer: B. No Violation

Standard:
Standard I(A) – Knowledge of the Law

Explanation:
Members should comply with the stricter of local law and CFA Standards.

• A is incorrect because following the stricter rule is correct.

• C is incorrect because employer duties are unrelated.

Difficulty: Easy

A manager allocates a limited investment opportunity among clients according to a written allocation policy that was disclosed beforehand.

A. Violation of Fair Dealing
B. No Violation
C. Violation of Loyalty to Clients

Answer: B. No Violation

Standard:
Standard III(B) – Fair Dealing

Explanation:
A disclosed, pre-established allocation policy is generally acceptable and consistent with fair dealing.

• A is incorrect because fair dealing does not require identical allocations.

• C is incorrect because the policy is designed to treat clients fairly.

Difficulty: Medium

A research analyst keeps detailed notes supporting a recommendation but stores them on a personal cloud account that is not approved by the firm.

A. Violation of Record Retention
B. No Violation
C. Violation of Duties to Employer

Answer: C. Violation of Duties to Employer

Standard:
Standard IV(A) – Loyalty
(Potentially also implicates firm recordkeeping policies, but the stronger issue here is employer policy.)

Explanation:
The analyst maintained records but stored them in an unauthorized location, violating firm procedures and potentially exposing confidential information.

• A is incorrect because records were retained.

• B is incorrect because firm-approved procedures were not followed.

Difficulty: Hard

A portfolio manager is invited to speak at an industry conference. The conference organizer pays for economy airfare and one night of hotel accommodation because the manager is a featured speaker. The manager’s employer is informed and approves the arrangement.

A. Violation of Independence and Objectivity
B. No Violation
C. Violation of Additional Compensation Arrangements

Answer: B. No Violation

Standard:
Standard I(B) – Independence and Objectivity

Explanation:
Because the manager is a featured speaker, reasonable travel and lodging expenses related to the event are generally acceptable, especially with employer approval.

• A is incorrect because reasonable reimbursement for speaking engagements is typically permitted.

• C is incorrect because the employer approved the arrangement.

Difficulty: Medium

A research analyst uses a financial model developed by her former employer. She recreates the model from memory without taking any documents, spreadsheets, or source code.

A. Violation of Loyalty to Employer
B. No Violation
C. Violation of Misrepresentation

Answer: B. No Violation

Standard:
Standard IV(A) – Loyalty

Explanation:
Members may use skills, experience, and knowledge gained from prior employment. They may not take proprietary documents, code, or records.

• A is incorrect because no employer property was taken.

• C is incorrect because there is no misrepresentation.

Difficulty: Hard

A supervisor establishes compliance procedures and conducts annual audits. An employee intentionally conceals misconduct and falsifies records to avoid detection.

A. Violation of Responsibilities of Supervisors
B. No Violation
C. Violation of Record Retention

Question 34

Answer: B. No Violation

Standard:
Standard IV(C) – Responsibilities of Supervisors

Explanation:
A supervisor is not automatically liable for misconduct if reasonable supervisory systems were established and enforced.

• A is incorrect because the supervisor took reasonable steps.

• C is incorrect because record retention is not the main issue.

Difficulty: Hard

A portfolio manager receives research from a broker that was prepared by a qualified team of analysts. The manager reviews the conclusions and methodology before relying on it.

A. No Violation
B. Violation of Diligence and Reasonable Basis
C. Violation of Independence and Objectivity

Answer: A. No Violation

Standard:
Standard V(A) – Diligence and Reasonable Basis

Explanation:
Members may rely on third-party research if they have a reasonable basis for believing it is sound and review the methodology appropriately.

• B is incorrect because due diligence was performed.

• C is incorrect because objectivity is not the issue.

Difficulty: Medium

A member tells one institutional client about a recommendation change in the morning and distributes the written report to all clients later that afternoon.

A. Violation of Fair Dealing
B. No Violation
C. Violation of Loyalty to Clients

Answer: A. Violation of Fair Dealing

Standard:
Standard III(B) – Fair Dealing

Explanation:
Providing material recommendation changes to one client before others generally violates fair dealing unless there is a legitimate dissemination policy that treats clients fairly.

• B is incorrect because one client received preferential access.

• C is incorrect because loyalty is not the primary issue.

Difficulty: Hard

A manager receives a luxury vacation package from a company whose securities are widely held in client portfolios.

A. No Violation
B. Violation of Independence and Objectivity
C. Violation of Referral Fees