CAIA STANDARDS & ETHICS|| 170+ QUESTIONS AND
ANSWERS GRADED A+
1. Standard 1: Professionalism
2. 1A - Knowledge of the Law: Members must understand and comply with all
applicable laws, rules, and regulations of any government, regulatory organization,
licensing agency, or professional association governing their professional activities.
3. Compliance - Knowledge of the Law: In event of conflict, members much
comply with the MORE STRICT LAW, rule or regulation.
4. More Strict Law: Law that imposes greater restrictions on the action of the
member or calls for the member to exert a greater degree of action that protects
the interests of investors.
5. CAIA members and candidates must adhere to the following principles: 1.
Must comply with applicable laws related to their professional activities
2. Must NOT engage in conduct that constitutes a violation of the Code and Stan-
dards, even if it is otherwise legal.
3. In the absence of any applicable law or regulation or when the Code and
Standards impose a higher degree of responsibility than the applicable laws, adhere
to the Code.
6. Procedures for Compliance (Knowledge of Law) - Personal: Stay Informed
Review Procedures
Maintain current files
7. Procedures for Compliance-Knowledge of Law - Firm: Develop and adopt a
code of ethics
Provide info on applicable laws
Establish procedures for reporting violations
8. Ex. Michael Allen works for a brokerage firm and is responsible for an under-
writing of securities. A company official gives Allen information indicating that
the financial statements Allen filed with the regulator overstate the issuer's
earnings. Allen seeks the advice of the brokerage firm's general counsel,
who states that it would be difficult for the regulator to prove that Allen has
,been involved in any wrongdoing.: Comment: Although it is recommended that
members and candidates seek the advice of legal counsel, the reliance on such
advice does not absolve a member or candidate from the requirement to comply
with the law or regulation. Allen should report this situation to his supervisor, seek an
independent legal opinion, and determine whether the regulator should be notified
of the error.
9. Example 2 (Dissociating from a Violation):
Lawrence Brown's employer, an investment banking firm, is the principal
underwriter for an issue of convertible debentures by the Courtney Com-
pany. Brown discovers that the Courtney Company has concealed severe
third-quarter losses in its foreign operations. The preliminary prospectus has
,already been distributed.: Comment: Knowing that the preliminary prospectus is
misleading, Brown should report his findings to the appropriate supervisory persons
in his firm. If the matter is not remedied and Brown's employer does not dissociate
from the underwriting, Brown should sever all his connections with the underwriting.
Brown should also seek legal advice to determine whether additional reporting or
other action should be taken.
10. Example 3 (Dissociating from a Violation):
Kamisha Washington's firm advertises its past performance record by show-
ing the 10-year return of a composite of its client accounts. Washington
discovers, however, that the composite omits the performance of accounts
that have left the firm during the 10-year period, whereas the description of
the composite indicates the
inclusion of all firm accounts. This omission has led to an inflated performance
figure. Washington is asked to use promotional material that includes the erro-
neous performance number when soliciting business for the firm.: Comment:
Misrepresenting performance is a violation of the Code and Standards. Although
she did not calculate the performance herself, Washington would be assisting in
violating Standard I(A) if she were to use the inflated performance number when
soliciting clients. She must
dissociate herself from the activity. If discussing the misleading number with the
person responsible is not an option for correcting the problem, she can bring the
situation to the attention of her supervisor or the compliance department at her firm.
If her firm is unwilling to recalculate performance, she must refrain from using the
misleading promotional material and should notify the firm of her reasons. If the
firm insists that she use the material, she should consider whether her obligation to
dissociate from the activity requires her to seek other employment.
11. Example 4 (Following the Highest Requirements):
James Collins is an investment analyst for a major Wall Street brokerage firm.
He works in a developing country with a rapidly modernizing economy and a
growing capital market. Local securities laws are minimal—in form and con-
tent—and include no punitive prohibitions against insider trading.: Comment:
Collins must abide by the requirements of the Code and Standards, which might be
more strict than the rules of the developing country. He should be aware of the risks
that a small market and the absence of a fairly regulated flow of information to the
market represent
to his ability to obtain information and make timely judgments. He should include this
factor in formulating his advice to clients. In handling material nonpublic information
that accidentally comes into his possession,
he must follow Standard II(A)-Material Nonpublic information.
, 12. Example 5 (Following the Highest Requirements):
Laura Jameson works for a multinational investment adviser based in the
United States. Jameson lives and works as a registered investment adviser
in the tiny, but
wealthy, island nation of Karramba. Karramba's securities laws state that no
investment adviser registered and working in that country can participate in
initial public
offerings (IPOs) for the adviser's personal account. Jameson, believing that,
as a US citizen working for a US-based company, she should comply only with
US law, has
ignored this Karrambian law. In addition, Jameson believes that as a charter-
holder, as long as she adheres to the Code and Standards requirement that
she disclose her
participation in any IPO to her employer and clients when such ownership
creates a conflict of interest, she is meeting the highest ethical requirements.-
: Comment: Jameson is in violation of Standard I(A). As a registered investment
adviser in Karramba, Jameson is prevented by Karrambian securities law from ar-
ticipating in IPOs regardless of the law of her home country. In addition, because the
law of the country where she is working is stricter than the Code and Standards, she
must follow the stricter requirements of the local law rather than the requirements of
the Code and Standards.
13. Standard 1B-Independence and objectivity: members and candidates must
use reasonable care and judgment to achieve and maintain independence and
objectivity in their professional activities. M&C must not offer, solicit, or accept any
gift, benefit compensation, or consideration that could be expected to compromise
their or another's independence and objectivity
14. Best Practice of Independence & objectivity: Reject any offer of gift or enter-
tainment that could be expected to threaten their independence and objectivity
15. Maintain independence & objectivity: You are personally responsible when
preparing research reports, making investment recommendations, and taking in-
vestment action on behalf of clients
16. Buy-Side Client Pressure: Pressure from the Portfolio Manager or Buy-side
client that an analyst is researching could affect the analyst's objectivity and respon-
sibility to produce honest research.
17. Firewalls: In order to minimize conflicts of interest, these walls are built to
separate the research side from the investment banking side.
18. Recommended Procedures for Compliance-Independence & Objectivity: -
Protect integrity of opinions, create a restricted list, restrict special cost arrange-
ANSWERS GRADED A+
1. Standard 1: Professionalism
2. 1A - Knowledge of the Law: Members must understand and comply with all
applicable laws, rules, and regulations of any government, regulatory organization,
licensing agency, or professional association governing their professional activities.
3. Compliance - Knowledge of the Law: In event of conflict, members much
comply with the MORE STRICT LAW, rule or regulation.
4. More Strict Law: Law that imposes greater restrictions on the action of the
member or calls for the member to exert a greater degree of action that protects
the interests of investors.
5. CAIA members and candidates must adhere to the following principles: 1.
Must comply with applicable laws related to their professional activities
2. Must NOT engage in conduct that constitutes a violation of the Code and Stan-
dards, even if it is otherwise legal.
3. In the absence of any applicable law or regulation or when the Code and
Standards impose a higher degree of responsibility than the applicable laws, adhere
to the Code.
6. Procedures for Compliance (Knowledge of Law) - Personal: Stay Informed
Review Procedures
Maintain current files
7. Procedures for Compliance-Knowledge of Law - Firm: Develop and adopt a
code of ethics
Provide info on applicable laws
Establish procedures for reporting violations
8. Ex. Michael Allen works for a brokerage firm and is responsible for an under-
writing of securities. A company official gives Allen information indicating that
the financial statements Allen filed with the regulator overstate the issuer's
earnings. Allen seeks the advice of the brokerage firm's general counsel,
who states that it would be difficult for the regulator to prove that Allen has
,been involved in any wrongdoing.: Comment: Although it is recommended that
members and candidates seek the advice of legal counsel, the reliance on such
advice does not absolve a member or candidate from the requirement to comply
with the law or regulation. Allen should report this situation to his supervisor, seek an
independent legal opinion, and determine whether the regulator should be notified
of the error.
9. Example 2 (Dissociating from a Violation):
Lawrence Brown's employer, an investment banking firm, is the principal
underwriter for an issue of convertible debentures by the Courtney Com-
pany. Brown discovers that the Courtney Company has concealed severe
third-quarter losses in its foreign operations. The preliminary prospectus has
,already been distributed.: Comment: Knowing that the preliminary prospectus is
misleading, Brown should report his findings to the appropriate supervisory persons
in his firm. If the matter is not remedied and Brown's employer does not dissociate
from the underwriting, Brown should sever all his connections with the underwriting.
Brown should also seek legal advice to determine whether additional reporting or
other action should be taken.
10. Example 3 (Dissociating from a Violation):
Kamisha Washington's firm advertises its past performance record by show-
ing the 10-year return of a composite of its client accounts. Washington
discovers, however, that the composite omits the performance of accounts
that have left the firm during the 10-year period, whereas the description of
the composite indicates the
inclusion of all firm accounts. This omission has led to an inflated performance
figure. Washington is asked to use promotional material that includes the erro-
neous performance number when soliciting business for the firm.: Comment:
Misrepresenting performance is a violation of the Code and Standards. Although
she did not calculate the performance herself, Washington would be assisting in
violating Standard I(A) if she were to use the inflated performance number when
soliciting clients. She must
dissociate herself from the activity. If discussing the misleading number with the
person responsible is not an option for correcting the problem, she can bring the
situation to the attention of her supervisor or the compliance department at her firm.
If her firm is unwilling to recalculate performance, she must refrain from using the
misleading promotional material and should notify the firm of her reasons. If the
firm insists that she use the material, she should consider whether her obligation to
dissociate from the activity requires her to seek other employment.
11. Example 4 (Following the Highest Requirements):
James Collins is an investment analyst for a major Wall Street brokerage firm.
He works in a developing country with a rapidly modernizing economy and a
growing capital market. Local securities laws are minimal—in form and con-
tent—and include no punitive prohibitions against insider trading.: Comment:
Collins must abide by the requirements of the Code and Standards, which might be
more strict than the rules of the developing country. He should be aware of the risks
that a small market and the absence of a fairly regulated flow of information to the
market represent
to his ability to obtain information and make timely judgments. He should include this
factor in formulating his advice to clients. In handling material nonpublic information
that accidentally comes into his possession,
he must follow Standard II(A)-Material Nonpublic information.
, 12. Example 5 (Following the Highest Requirements):
Laura Jameson works for a multinational investment adviser based in the
United States. Jameson lives and works as a registered investment adviser
in the tiny, but
wealthy, island nation of Karramba. Karramba's securities laws state that no
investment adviser registered and working in that country can participate in
initial public
offerings (IPOs) for the adviser's personal account. Jameson, believing that,
as a US citizen working for a US-based company, she should comply only with
US law, has
ignored this Karrambian law. In addition, Jameson believes that as a charter-
holder, as long as she adheres to the Code and Standards requirement that
she disclose her
participation in any IPO to her employer and clients when such ownership
creates a conflict of interest, she is meeting the highest ethical requirements.-
: Comment: Jameson is in violation of Standard I(A). As a registered investment
adviser in Karramba, Jameson is prevented by Karrambian securities law from ar-
ticipating in IPOs regardless of the law of her home country. In addition, because the
law of the country where she is working is stricter than the Code and Standards, she
must follow the stricter requirements of the local law rather than the requirements of
the Code and Standards.
13. Standard 1B-Independence and objectivity: members and candidates must
use reasonable care and judgment to achieve and maintain independence and
objectivity in their professional activities. M&C must not offer, solicit, or accept any
gift, benefit compensation, or consideration that could be expected to compromise
their or another's independence and objectivity
14. Best Practice of Independence & objectivity: Reject any offer of gift or enter-
tainment that could be expected to threaten their independence and objectivity
15. Maintain independence & objectivity: You are personally responsible when
preparing research reports, making investment recommendations, and taking in-
vestment action on behalf of clients
16. Buy-Side Client Pressure: Pressure from the Portfolio Manager or Buy-side
client that an analyst is researching could affect the analyst's objectivity and respon-
sibility to produce honest research.
17. Firewalls: In order to minimize conflicts of interest, these walls are built to
separate the research side from the investment banking side.
18. Recommended Procedures for Compliance-Independence & Objectivity: -
Protect integrity of opinions, create a restricted list, restrict special cost arrange-
