Ethics Practice questions *& answers.
A research analyst is facing a moral dilemma and decides to use an ethical decision-making framework.
After looking at the facts at hand and identifying the situational influences, he still cannot make a
decision on the best course of action. His least appropriate next step is to: ANS -decide, act, monitor,
and reflect. Solution
B is correct. The least appropriate action would be for the decision maker to go ahead and make a
decision based on insufficient information. By doing so, the decision maker could cause harm and make
the situation worse. The ethical decision-making framework is iterative, and users can move between
phases rather than undertaking them in any one order. If a decision maker is not yet ready to make a
decision, the most appropriate course of action would be to ask someone else to give guidance and
determine what additional information is needed to clarify the situation.
A is incorrect. If a decision maker is not yet ready to make a decision the most appropriate course of
action would be to ask someone else to give guidance and determine what additional information is
needed to clarify the situation.
C is incorrect. If a decision maker is not yet ready to make a decision the most appropriate course of
action would be to ask someone else to give guidance and determine what additional information is
needed to clarify the situation.
Jimmy Lan, CFA, is a technology analyst at Pacific Securities, Inc., and is a leading authority on Japanese
technology companies. Lan's clients include many leading Japanese equity managers. While still
employed at Pacific, Lan makes plans during weekends to start a new company, JL Consulting. His plans
consist of contracting office space, interviewing potential employees, and purchasing office equipment.
Once he feels ready to launch his new firm, Lan provides Pacific with his resignation notice. After
leaving, Lan constructs earnings models of the technology companies he previously covered, using the
knowledge and experience gained while at Pacific. He then contacts former clients by using public
sources and encourages them to become clients of his new firm. Are Lan's actions in compliance with
the Code and Standards?
Yes, assuming he is not in breach of any non-compete agreement signed while at Pacific Securities. ANS
-FOCUS ON THE QUESTION : PUBLIC SOURCE.
A is correct because Lan's actions do not violate Standard IV(A)-Duties to Employers. Lan does not use
company time to make arrangements for his new venture, nor does he misappropriate any information
(financial models or client contacts) from his former employer. All of the actions performed by Lan are
permissible under Standard IV(A).
B in incorrect because members and candidates are not prohibited from making arrangements for a new
venture while still employed providing they do so on their own time and do not inappropriately use
company property.
,C is incorrect because general skills and experience gained while employed are not considered
confidential or privileged information. Likewise, simple knowledge of the names and existence of former
clients is generally not considered confidential information under Standard IV(A).
Andrew Smith, CFA, works for Granite, a commercial bank that also has a sizeable sell side research
division. Smith is presenting financing solutions to a potential business client, Dynamic Materials Corp.
As part of his presentation, Smith mentions that Granite will initiate research coverage on Dynamic. Is
Smith's arrangement most likely appropriate with regards to the CFA Standards?
Yes.
No, because Smith cannot offer to provide research coverage on a company if they become a corporate
finance client.
No, because Granite cannot provide research coverage on a corporate finance client as this constitutes a
violation of research independence. ANS -A is correct because under Standard I(B) members and
candidates must protect their independence and objectivity. Agreeing to provide objective research
coverage of a company does not constitute a violation of this standard provided the analyst writing the
report is free to come up with their own independent conclusion. Smith can agree to provide research
coverage but cannot commit Granite's research department to providing a favorable recommendation.
B is incorrect because providing research coverage in this situation does not constitute a violation of the
Code and Standards as long as the independence of this research is not compromised.
C is incorrect because providing research coverage in this situation does not constitute a violation of the
Code and Standards as long as the independence of this research is not compromised.
Who most likely determines whether a violation of the CFA Institute Code and Standards or testing
policies has occurred and what sanction should be imposed? The:
Professional Conduct Staff and the Disciplinary Review Committee
Professional Conduct Staff
Disciplinary Review Committee ANS -Solution
A is correct. Both the Professional Conduct Staff and the Disciplinary Review Committee are responsible
for determining whether a violation of the Code and Standards or testing policies has occurred and if so
what sanction should be imposed. Following their investigation, the Professional Conduct Staff may
conclude the inquiry with no disciplinary sanction, issue a cautionary letter, or continue proceedings to
discipline the member or candidate which include the charges and a proposed sanction. If that proposal
is rejected by the member or candidate, the matter is referred to a panel composed of DRC Members.
The panel's task is to determine whether a violation of the Code and Standards or testing policies
occurred and if so what sanction should be imposed.
, B is incorrect. Both the Professional Conduct Staff and the Disciplinary Review Committee are
responsible for determining whether a violation of the Code and Standards or testing policies has
occurred and if so what sanction should be imposed.
C is incorrect. Both the Professional Conduct Staff and the Disciplinary Review Committee are
responsible for determining whether a violation of the Code and Standards or testing policies has
occurred and if so what sanction should be imposed.
Which of the following groups is most likely responsible for maintaining oversight and responsibility for
the Professional Conduct Program (PCP)?
CFA Institute Board of Governors
Disciplinary Review Committee
Professional Conduct Division ANS -A is correct. All CFA Institute members and candidates enrolled in
the CFA Program are required to comply with the Code and Standards. The CFA Institute Board of
Governors maintains oversight and responsibility for the Professional Conduct Program (PCP).
B is incorrect. The Disciplinary Review Committee (DRC) works in conjunction with the PCP and is
responsible for enforcement of the Code and Standards.
C is incorrect. The Professional Conduct Division works with the DRC to establish and review professional
conduct policies and is also responsible for enforcing testing policies of other CFA Institute education
programs as well as the professional conduct of Certificate in Investment Performance Measurement
(CIPM) certificants.
Ian O'Sullivan, CFA, is the owner and sole employee of two companies, a public relations firm and a
financial research firm. The public relations firm entered into a contract with Mallory Enterprises to
provide public relations services, with O'Sullivan receiving 40,000 shares of Mallory stock in payment for
his services. Over the next 10 days, the public relations firm issued several press releases that discussed
Mallory's excellent growth prospects. O'Sullivan, through his financial research firm, also published a
research report recommending Mallory stock as a "buy." According to the CFA Institute Standards of
Professional Conduct, O'Sullivan is most likely required to disclose his ownership of Mallory stock in the:
press releases only.
research report only.
both the press release and the research report. ANS -C is correct because members should disclose all
matters that reasonably could be expected to impair the member's objectivity [Standard I(B), Standard
VI(A)].
A is incorrect because both the press release and the research report should disclose any potential
conflict of interest.
A research analyst is facing a moral dilemma and decides to use an ethical decision-making framework.
After looking at the facts at hand and identifying the situational influences, he still cannot make a
decision on the best course of action. His least appropriate next step is to: ANS -decide, act, monitor,
and reflect. Solution
B is correct. The least appropriate action would be for the decision maker to go ahead and make a
decision based on insufficient information. By doing so, the decision maker could cause harm and make
the situation worse. The ethical decision-making framework is iterative, and users can move between
phases rather than undertaking them in any one order. If a decision maker is not yet ready to make a
decision, the most appropriate course of action would be to ask someone else to give guidance and
determine what additional information is needed to clarify the situation.
A is incorrect. If a decision maker is not yet ready to make a decision the most appropriate course of
action would be to ask someone else to give guidance and determine what additional information is
needed to clarify the situation.
C is incorrect. If a decision maker is not yet ready to make a decision the most appropriate course of
action would be to ask someone else to give guidance and determine what additional information is
needed to clarify the situation.
Jimmy Lan, CFA, is a technology analyst at Pacific Securities, Inc., and is a leading authority on Japanese
technology companies. Lan's clients include many leading Japanese equity managers. While still
employed at Pacific, Lan makes plans during weekends to start a new company, JL Consulting. His plans
consist of contracting office space, interviewing potential employees, and purchasing office equipment.
Once he feels ready to launch his new firm, Lan provides Pacific with his resignation notice. After
leaving, Lan constructs earnings models of the technology companies he previously covered, using the
knowledge and experience gained while at Pacific. He then contacts former clients by using public
sources and encourages them to become clients of his new firm. Are Lan's actions in compliance with
the Code and Standards?
Yes, assuming he is not in breach of any non-compete agreement signed while at Pacific Securities. ANS
-FOCUS ON THE QUESTION : PUBLIC SOURCE.
A is correct because Lan's actions do not violate Standard IV(A)-Duties to Employers. Lan does not use
company time to make arrangements for his new venture, nor does he misappropriate any information
(financial models or client contacts) from his former employer. All of the actions performed by Lan are
permissible under Standard IV(A).
B in incorrect because members and candidates are not prohibited from making arrangements for a new
venture while still employed providing they do so on their own time and do not inappropriately use
company property.
,C is incorrect because general skills and experience gained while employed are not considered
confidential or privileged information. Likewise, simple knowledge of the names and existence of former
clients is generally not considered confidential information under Standard IV(A).
Andrew Smith, CFA, works for Granite, a commercial bank that also has a sizeable sell side research
division. Smith is presenting financing solutions to a potential business client, Dynamic Materials Corp.
As part of his presentation, Smith mentions that Granite will initiate research coverage on Dynamic. Is
Smith's arrangement most likely appropriate with regards to the CFA Standards?
Yes.
No, because Smith cannot offer to provide research coverage on a company if they become a corporate
finance client.
No, because Granite cannot provide research coverage on a corporate finance client as this constitutes a
violation of research independence. ANS -A is correct because under Standard I(B) members and
candidates must protect their independence and objectivity. Agreeing to provide objective research
coverage of a company does not constitute a violation of this standard provided the analyst writing the
report is free to come up with their own independent conclusion. Smith can agree to provide research
coverage but cannot commit Granite's research department to providing a favorable recommendation.
B is incorrect because providing research coverage in this situation does not constitute a violation of the
Code and Standards as long as the independence of this research is not compromised.
C is incorrect because providing research coverage in this situation does not constitute a violation of the
Code and Standards as long as the independence of this research is not compromised.
Who most likely determines whether a violation of the CFA Institute Code and Standards or testing
policies has occurred and what sanction should be imposed? The:
Professional Conduct Staff and the Disciplinary Review Committee
Professional Conduct Staff
Disciplinary Review Committee ANS -Solution
A is correct. Both the Professional Conduct Staff and the Disciplinary Review Committee are responsible
for determining whether a violation of the Code and Standards or testing policies has occurred and if so
what sanction should be imposed. Following their investigation, the Professional Conduct Staff may
conclude the inquiry with no disciplinary sanction, issue a cautionary letter, or continue proceedings to
discipline the member or candidate which include the charges and a proposed sanction. If that proposal
is rejected by the member or candidate, the matter is referred to a panel composed of DRC Members.
The panel's task is to determine whether a violation of the Code and Standards or testing policies
occurred and if so what sanction should be imposed.
, B is incorrect. Both the Professional Conduct Staff and the Disciplinary Review Committee are
responsible for determining whether a violation of the Code and Standards or testing policies has
occurred and if so what sanction should be imposed.
C is incorrect. Both the Professional Conduct Staff and the Disciplinary Review Committee are
responsible for determining whether a violation of the Code and Standards or testing policies has
occurred and if so what sanction should be imposed.
Which of the following groups is most likely responsible for maintaining oversight and responsibility for
the Professional Conduct Program (PCP)?
CFA Institute Board of Governors
Disciplinary Review Committee
Professional Conduct Division ANS -A is correct. All CFA Institute members and candidates enrolled in
the CFA Program are required to comply with the Code and Standards. The CFA Institute Board of
Governors maintains oversight and responsibility for the Professional Conduct Program (PCP).
B is incorrect. The Disciplinary Review Committee (DRC) works in conjunction with the PCP and is
responsible for enforcement of the Code and Standards.
C is incorrect. The Professional Conduct Division works with the DRC to establish and review professional
conduct policies and is also responsible for enforcing testing policies of other CFA Institute education
programs as well as the professional conduct of Certificate in Investment Performance Measurement
(CIPM) certificants.
Ian O'Sullivan, CFA, is the owner and sole employee of two companies, a public relations firm and a
financial research firm. The public relations firm entered into a contract with Mallory Enterprises to
provide public relations services, with O'Sullivan receiving 40,000 shares of Mallory stock in payment for
his services. Over the next 10 days, the public relations firm issued several press releases that discussed
Mallory's excellent growth prospects. O'Sullivan, through his financial research firm, also published a
research report recommending Mallory stock as a "buy." According to the CFA Institute Standards of
Professional Conduct, O'Sullivan is most likely required to disclose his ownership of Mallory stock in the:
press releases only.
research report only.
both the press release and the research report. ANS -C is correct because members should disclose all
matters that reasonably could be expected to impair the member's objectivity [Standard I(B), Standard
VI(A)].
A is incorrect because both the press release and the research report should disclose any potential
conflict of interest.
