CFA Level I
Question #1 of 120 Question ID: 1214789
Questions 1 through 18 relate to Ethical and Professional Standards. (27 minutes)
Adam Schute, CFA, is on a conference call with the CFO of an investment banking client with his phone speaker on and his door open.
As a result, salesmen and traders overhear the CFO describing problems with production target dates that have not been publicly
disclosed. The salesmen relay this information to clients and the traders reduce their positions in the stock. With respect to the Standard
on material nonpublic information, Schute has:
A) not violated the Standard because he has not acted on the information, but the traders and
salesmen have violated the Standard.
B) violated the Standard because he should have taken steps to prevent the
dissemination of the information.
C) violated the Standard by not making the information public when he realized others had
overheard the call.
Explanation
Schute has violated the Standard by not taking steps to ensure that the nonpublic information he has received as part of his investment
banking work was not shared with others in the firm.
For Further Reference:
(Study Session 1, Module 3.3, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #2 of 120 Question ID: 1214800
Peter Wellington has changed his status in marketing materials to "Level III CFA candidate." Wellington passed the Level II CFA exam
and just received his results. He intends to register for the next Level III CFA examination that is offered the following June. Wellington
has:
A) not violated the Standards of Professional Conduct.
B) violated the Standard on conduct as participants in CFA Institute programs.
C) violated the Standard on reference to the CFA Institute, the CFA Designation, and the
CFA Program.
Explanation
Under Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program, candidates in the CFA Program may
appropriately reference their participation in the CFA Program. However, to be considered a candidate, individuals must be registered to
,take the next scheduled CFA examination. Therefore, Wellington, who intends to register for the next exam, but has not done so, has
violated Standard VII(B). Wellington may indicate that he passed Level II of the CFA Program and the year in which he passed, but he is
not a candidate unless he is registered for the next exam or awaiting exam results. Standard VII(A) Conduct as Participants in CFA
Institute Programs addresses issues that concern the validity and security of the exams and the integrity and reputation of the CFA
designation and CFA Institute.
For Further Reference:
(Study Session 1, Module 3.9, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #3 of 120 Question ID: 1214802
Which of the following statements relating to the Global Investment Performance Standards (GIPS®) is least accurate?
A) Only investment management firms may claim compliance with GIPS.
B) GIPS represent standards to which members of CFA Institute and CFA candidates
must adhere.
C) To claim GIPS compliance, a firm must present at least five years (or since its inception if
less than five years) of annual investment performance that complies with GIPS.
Explanation
Global Investment Performance Standards represent ethical reporting standards, but compliance with GIPS is not a requirement of CFA
Institute membership or to sit for the CFA examination.
For Further Reference:
(Study Session 1, Module 4.1, LOS 4.a)
CFA® Program Curriculum, Volume 1, page 227
Question #4 of 120 Question ID: 1214794
When he assumed the job of compliance officer two years ago, Ed Michaels, CFA, issued written compliance procedures and made all
covered employees aware of the procedures. A report by an external auditor found that on several occasions over the past two years,
two different employees traded in recommended securities ahead of trades made in managed client accounts. Michaels fires both
employees and recirculates the written compliance procedures that explain clearly which activities are prohibited. Michaels has violated
the Standard concerning:
A) Responsibilities of Supervisors by firing the employees instead of restricting their activities.
B) Responsibilities of Supervisors by failing to implement reasonable procedures to
detect violations.
C) Misconduct because, as the compliance officer, he is associated with, and ultimately
responsible for, the unethical activity.
Explanation
Michaels has violated Standard IV(C) Responsibilities of Supervisors, which requires him to make reasonable efforts to detect and
prevent violations of compliance procedures. Simply making employees aware of the rules is not enough. Monitoring of employee
,trades, duplicate confirms, establishing blackout periods, or preclearance of employee trades are all methods that would have revealed
the problem prior to the external audit. Michaels has not violated Standard I(D) Misconduct because his actions did not exhibit
dishonesty or lack of integrity.
For Further Reference:
(Study Session 1, Module 3.2, 3.6, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #5 of 120 Question ID: 1214797
Ralph Malone, CFA, has many clients, including a trust account that benefits three of his immediate family members. His firm changes
its recommendation on a stock from "hold" to "buy" on a security that is suitable for many clients, including the trust. Which of the
following would be considered a violation of the Standard concerning priority of transactions?
A) Malone waits until after the firm purchases the security to buy it for the family trust
account.
B) Malone trades on the family account shortly after his firm’s clients have been informed of the
buy recommendation.
C) The firm gives clients time to act on the new recommendation and then buys 100,000 shares
for its own account prior to publicly disclosing the new recommendation.
Explanation
Because the family account is a client account, it should be treated as any other client account would be. Waiting until after the firm buys
shares would violate Standard VI(B) Priority of Transactions. There is no requirement that a firm's recommendations be made public.
For Further Reference:
(Study Session 1, Module 3.8, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #6 of 120 Question ID: 1214795
Patricia Nelson, CFA, is informed by one of her clients that if she can get the performance of the client firm's pension portfolio above that
of the Standard & Poor's average by year-end, the client will give her a free trip to Singapore to visit the firm's offices. If Nelson agrees
to this arrangement, which of the following actions complies with CFA Institute Standards of Professional Conduct? Nelson:
A) must inform her employer of this agreement but does not need consent.
B) must inform her employer of this agreement and may accept it with verbal consent.
C) may inform her employer by email of this agreement and must receive written
consent.
Explanation
To comply with Standard IV(B) Additional Compensation Arrangements, because the additional compensation is contingent on future
performance, Nelson must disclose this additional compensation to her employer and must receive written consent, which can be email
or any other form of communication that can be documented.
For Further Reference:
, (Study Session 1, Module 3.6, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #7 of 120 Question ID: 1214796
John Anderson, CFA, follows Radley Manufacturing for his employer, Atlas Brokers. Radley has announced a takeover bid for Palmer
Industries, a company that Atlas does not follow. To get out a research note about the potential effects of the acquisition on Radley,
Anderson purchases a report on Palmer from a research firm Atlas regularly uses. Anderson incorporates projections and analysis from
the purchased report into his research note on what a post-acquisition Radley would look like but does not cite the source. Anderson
has violated the Standard on:
A) misrepresentation.
B) independence and objectivity.
C) diligence and reasonable basis.
Explanation
Anderson has violated Standard I(C) Misrepresentation by representing the work of another as his own in the report. The use of third-
party research is not necessarily a violation of Standard I(B) Independence and Objectivity or Standard V(A) Diligence and Reasonable
Basis. Using a research firm that is approved by his company is permitted as long as he has no knowledge that the work is of less than
good quality.
For Further Reference:
(Study Session 1, Module 3.1, 3.2, 3.7, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #8 of 120 Question ID: 1214786
Roger Smith, CFA, has been invited to join a group of analysts in touring the riverboats of River Casino Corp. For the tour, River Casino
has arranged chartered flights from casino to casino since commercial flight schedules are not practical for the group's time schedule.
River Casino has also arranged to pay for the analysts' lodging for the three nights of the tour. According to CFA Institute Standards of
Professional Conduct, Smith:
A) may accept the arrangements as they are.
B) may accept the flight but is required to pay for his lodging.
C) is required to pay for his flight and lodging.
Explanation
Because the itinerary required charter flights due to a lack of commercial transportation, River Casino can appropriately provide them.
While Standard I(B) Independence and Objectivity recommends that members pay their own room costs, it is not required and it is not
unusual for members to accept accommodations.
For Further Reference:
(Study Session 1, Module 3.1, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #1 of 120 Question ID: 1214789
Questions 1 through 18 relate to Ethical and Professional Standards. (27 minutes)
Adam Schute, CFA, is on a conference call with the CFO of an investment banking client with his phone speaker on and his door open.
As a result, salesmen and traders overhear the CFO describing problems with production target dates that have not been publicly
disclosed. The salesmen relay this information to clients and the traders reduce their positions in the stock. With respect to the Standard
on material nonpublic information, Schute has:
A) not violated the Standard because he has not acted on the information, but the traders and
salesmen have violated the Standard.
B) violated the Standard because he should have taken steps to prevent the
dissemination of the information.
C) violated the Standard by not making the information public when he realized others had
overheard the call.
Explanation
Schute has violated the Standard by not taking steps to ensure that the nonpublic information he has received as part of his investment
banking work was not shared with others in the firm.
For Further Reference:
(Study Session 1, Module 3.3, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #2 of 120 Question ID: 1214800
Peter Wellington has changed his status in marketing materials to "Level III CFA candidate." Wellington passed the Level II CFA exam
and just received his results. He intends to register for the next Level III CFA examination that is offered the following June. Wellington
has:
A) not violated the Standards of Professional Conduct.
B) violated the Standard on conduct as participants in CFA Institute programs.
C) violated the Standard on reference to the CFA Institute, the CFA Designation, and the
CFA Program.
Explanation
Under Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program, candidates in the CFA Program may
appropriately reference their participation in the CFA Program. However, to be considered a candidate, individuals must be registered to
,take the next scheduled CFA examination. Therefore, Wellington, who intends to register for the next exam, but has not done so, has
violated Standard VII(B). Wellington may indicate that he passed Level II of the CFA Program and the year in which he passed, but he is
not a candidate unless he is registered for the next exam or awaiting exam results. Standard VII(A) Conduct as Participants in CFA
Institute Programs addresses issues that concern the validity and security of the exams and the integrity and reputation of the CFA
designation and CFA Institute.
For Further Reference:
(Study Session 1, Module 3.9, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #3 of 120 Question ID: 1214802
Which of the following statements relating to the Global Investment Performance Standards (GIPS®) is least accurate?
A) Only investment management firms may claim compliance with GIPS.
B) GIPS represent standards to which members of CFA Institute and CFA candidates
must adhere.
C) To claim GIPS compliance, a firm must present at least five years (or since its inception if
less than five years) of annual investment performance that complies with GIPS.
Explanation
Global Investment Performance Standards represent ethical reporting standards, but compliance with GIPS is not a requirement of CFA
Institute membership or to sit for the CFA examination.
For Further Reference:
(Study Session 1, Module 4.1, LOS 4.a)
CFA® Program Curriculum, Volume 1, page 227
Question #4 of 120 Question ID: 1214794
When he assumed the job of compliance officer two years ago, Ed Michaels, CFA, issued written compliance procedures and made all
covered employees aware of the procedures. A report by an external auditor found that on several occasions over the past two years,
two different employees traded in recommended securities ahead of trades made in managed client accounts. Michaels fires both
employees and recirculates the written compliance procedures that explain clearly which activities are prohibited. Michaels has violated
the Standard concerning:
A) Responsibilities of Supervisors by firing the employees instead of restricting their activities.
B) Responsibilities of Supervisors by failing to implement reasonable procedures to
detect violations.
C) Misconduct because, as the compliance officer, he is associated with, and ultimately
responsible for, the unethical activity.
Explanation
Michaels has violated Standard IV(C) Responsibilities of Supervisors, which requires him to make reasonable efforts to detect and
prevent violations of compliance procedures. Simply making employees aware of the rules is not enough. Monitoring of employee
,trades, duplicate confirms, establishing blackout periods, or preclearance of employee trades are all methods that would have revealed
the problem prior to the external audit. Michaels has not violated Standard I(D) Misconduct because his actions did not exhibit
dishonesty or lack of integrity.
For Further Reference:
(Study Session 1, Module 3.2, 3.6, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #5 of 120 Question ID: 1214797
Ralph Malone, CFA, has many clients, including a trust account that benefits three of his immediate family members. His firm changes
its recommendation on a stock from "hold" to "buy" on a security that is suitable for many clients, including the trust. Which of the
following would be considered a violation of the Standard concerning priority of transactions?
A) Malone waits until after the firm purchases the security to buy it for the family trust
account.
B) Malone trades on the family account shortly after his firm’s clients have been informed of the
buy recommendation.
C) The firm gives clients time to act on the new recommendation and then buys 100,000 shares
for its own account prior to publicly disclosing the new recommendation.
Explanation
Because the family account is a client account, it should be treated as any other client account would be. Waiting until after the firm buys
shares would violate Standard VI(B) Priority of Transactions. There is no requirement that a firm's recommendations be made public.
For Further Reference:
(Study Session 1, Module 3.8, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #6 of 120 Question ID: 1214795
Patricia Nelson, CFA, is informed by one of her clients that if she can get the performance of the client firm's pension portfolio above that
of the Standard & Poor's average by year-end, the client will give her a free trip to Singapore to visit the firm's offices. If Nelson agrees
to this arrangement, which of the following actions complies with CFA Institute Standards of Professional Conduct? Nelson:
A) must inform her employer of this agreement but does not need consent.
B) must inform her employer of this agreement and may accept it with verbal consent.
C) may inform her employer by email of this agreement and must receive written
consent.
Explanation
To comply with Standard IV(B) Additional Compensation Arrangements, because the additional compensation is contingent on future
performance, Nelson must disclose this additional compensation to her employer and must receive written consent, which can be email
or any other form of communication that can be documented.
For Further Reference:
, (Study Session 1, Module 3.6, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #7 of 120 Question ID: 1214796
John Anderson, CFA, follows Radley Manufacturing for his employer, Atlas Brokers. Radley has announced a takeover bid for Palmer
Industries, a company that Atlas does not follow. To get out a research note about the potential effects of the acquisition on Radley,
Anderson purchases a report on Palmer from a research firm Atlas regularly uses. Anderson incorporates projections and analysis from
the purchased report into his research note on what a post-acquisition Radley would look like but does not cite the source. Anderson
has violated the Standard on:
A) misrepresentation.
B) independence and objectivity.
C) diligence and reasonable basis.
Explanation
Anderson has violated Standard I(C) Misrepresentation by representing the work of another as his own in the report. The use of third-
party research is not necessarily a violation of Standard I(B) Independence and Objectivity or Standard V(A) Diligence and Reasonable
Basis. Using a research firm that is approved by his company is permitted as long as he has no knowledge that the work is of less than
good quality.
For Further Reference:
(Study Session 1, Module 3.1, 3.2, 3.7, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
Question #8 of 120 Question ID: 1214786
Roger Smith, CFA, has been invited to join a group of analysts in touring the riverboats of River Casino Corp. For the tour, River Casino
has arranged chartered flights from casino to casino since commercial flight schedules are not practical for the group's time schedule.
River Casino has also arranged to pay for the analysts' lodging for the three nights of the tour. According to CFA Institute Standards of
Professional Conduct, Smith:
A) may accept the arrangements as they are.
B) may accept the flight but is required to pay for his lodging.
C) is required to pay for his flight and lodging.
Explanation
Because the itinerary required charter flights due to a lack of commercial transportation, River Casino can appropriately provide them.
While Standard I(B) Independence and Objectivity recommends that members pay their own room costs, it is not required and it is not
unusual for members to accept accommodations.
For Further Reference:
(Study Session 1, Module 3.1, LOS 3.a, 3.b, 3.c)
CFA® Program Curriculum, Volume 1, page 55
