CFA Level 1 - Book 1 Exam || Questions
& 100% Accurate Solutions
Ethics:
The ______________ of the CFA BoD has overall the Professional Conduct Program
and enforcement of the Code and Standards
Several circumstances can prompt an inquiry from the ________________ (through the
Professional Conduct staff), such as: (4 things).
The Officer may decide one of 3 decides upon investigation. - ANSWER-Disciplinary
Review Committee
CFA Institute Designated Officer
*SWPP*
-*Self* Disclosure by members / candidates on their professional Conduct Statements of
involvement in a civil / criminal complaint.
-*Written* Complaints about a member or candidate's professional conduct received by
the staff
-Evidence of misconduct received through *public* sources (media)
-CFA exam *proctor* report of a violation
i) that no disciplinary sanctions are appropriate,
ii) to issue a cautionary letter, or
iii) to discipline the member or candidate
Code of Ethics - 6 pillars - ANSWER-*A PUPPI*
■ *Act* with integrity, competence, diligence, respect, and in an ethical manner with the
public, clients, prospective clients, employers, employees, colleagues in the investment
profession, and other participants in the global capital markets.
■ *Place* the integrity of the investment profession and the interests of clients above
their own personal interests.
■ *Use* reasonable care and exercise independent professional judgment when
conducting investment analysis, making investment recommendations, taking
investment actions, and engaging in other professional activities.
■ *Practice* and encourage others to practice in a professional and ethical manner that
will reflect credit on themselves and the profession.
■ *Promote* the integrity of and uphold the rules governing capital markets.
■ Maintain and *improve* their professional competence and strive to maintain and
improve the competence of other investment professionals.
,Standards of Professional Conduct - ANSWER-*PC DESIRE*
- *P*rofessionalism.
- Integrity of *C*apital Markets.
- *D*uties to Clients.
- Duties to *E*mployers.
- Investment Analysi*S*, Recommendations, and Action.
- Conflicts of *I*nterest.
- *Re*sponsibilities as a CFA Institute Member or CFA Candidate.
*P*rofessionalism. - ANSWER-*KIMM*el
a. Knowledge of the Law / Code. Members understand and comply with all laws -
KVIOA
i. Know laws in *all countries* in which they trade securities.
ii. Responsible for violations in which they *knowingly* participate.
iii. If *illegal* actions of client, customer or personal Code Violation - Must dissociate.
iv. If violation of Code by fellow member - strongly encourage to report. No requirement
to report unless law.
v. When going with the 'applicable law' - Code vs country of residence vs. country of
business... go with the strictest! But if 'law of locality' is stated, then go with that. (Ie.
Member resides in MS (more strict than Code) country, does business in LS (less strict
than Code) country; MS law applies, but can state that law of locality where business is
conducted governs.) Member must adhere to the Code and Standards. Not the MS
laws.
b. Independence and Objectivity. (GSBPT)
i. Modest gifts and entertainment are acceptable. Must be disclosed. If from client, must
be disclosed to employer (if contingent of future perform.. see ACA need consent too)
ii. Sell side analysts. Need effective firewalls bw investment banking. No buy side
influence allowed (if they have position in the security and try to convince you to issue
favorable report).
iii. Fund Manager Relationships (Secondary Fund Managers giving gifts for hiring, etc)
iv. Public Companies - can't engage in retaliatory practices by restricting access to
managers / conference calls, etc...
v. Travel Funding - use commercial travel options when talking to executives, unless
have to use charter
c. Misrepresentation.
i. Investing through outside managers - must disclose their intended use of external
managers and must not represent those managers' investment practices as their own.
ii. Guarantees are misleading bc there is some risk.
,Integrity of Capital Markets - ANSWER-*M&M*
a. Material Nonpublic Information - illegal - all rest is good. Have to wait a little bit until
trading. **** ONLY APPLIES TO NON-PUBLIC INFO ABOUT THE ISSUER (ie analyst
that is influential can trade on own name). **** failing to prevent transfer of info is a
violation.
i. Mosiac Theory - analysts get their information from a wide variety of sources - public /
non-public.
b. Market Manipulation
i. No Spreading false rumors. No non-fact based report during quiet period.
ii. Transaction-Based Manipulation. Trading a position between intercompany positions
to create the illusion of a price rise.
Duties to Clients - ANSWER-*PRoSPECt*
a. Loyalty, *P*rudence, and Care.
i. Follow IMAs / Govering Docs. COST BENEFIT FOR VOTING PROXIES. ALSO VOTE
IN BEST INTEREST FOR BENEFICIARIES NOT SPONSOR
ii. Recommend submitting at least quarterly statement.
iii. Disclose conflicts of interest - ie you use a broker that pays your utility bill in
exchange for using them.
b. Fai*R* Dealing
i. Not necessary equal treatment of clients but should not advantage / disadvantage any
clients against another client. Make premium levels of service available. MUST
DISTRIBUTE 'HOT' SHARES ON A WEIGHTED / PRO RATA BASIS.
ii. Investment Recommendations - Advise clients of changes in recommendations.
Shorten timeframe from decision to dissemination. IF ORDER COMES IN INFORM
THAT CHANGE MADE EVEN IF IT IS BEFORE OTHERS.. IE MAILED OUT.
iii. No participation in OVERSUBSCRIBED equity IPO
c. *S*uitability
i. Reasonable inquiry into client's investment experience.
ii. Determine that an investment is suitable to the client's financial situation / context of
the client's total portfolio. UPDATE INFO REGULARLY. IF EXECUTING UNSUITABLE
INV. FOR CLIENT, GET AFFIRMATIVE STATEMENT
iii. Management capacity - make sure investments made in line with objectives /
constraints.
d. *Pe*rformance Presentation - *Past misleading gross terminator eliminated*
i. No misleading *performance* indicators. Should not indicate the ability to achieve a
ROR similar to that achieved in the *past*. Brief presentations - indicate that the
presentations have offered *limited* information.
, ii. Include all *terminated* accounts in performance. Include disclosures (*gross of
fee*s).
e. *C*onfidentiality: Unless
i. Illegal
ii. Disclosure required
iii. Disclosure permitted
Duties to Employers - ANSWER-LiAR
a. Loyalty
i. From Employers - give all employees handbook and no unethical incentives
ii. From Employees - must act in best interest until resignation. Cant keep any firm
materials / client lists on home computer etc... However, general names of clients
worked with isn't confidential.
iii. Independent practice - allowed if employee discloses compensation, duration and
nature AND employer agrees before it begins.
b. Additional Compensation Arrangements
i. Must obtain written consent from employer (email OK).
c. Responsibility of Supervisors
i. Must take actions to prevent violations from employees violating. Not enough to speak
and receive assurances
ii. Must make reasonable effort to detect violations
iii. If compliance system inadequate, must bring to the attention of management. MUST
DECLINE supervisory responsibilities until addressed.
Investment Analysis, Recommendations and Actions - ANSWER-DCR
a. Dilligence and Reasonable Basis
i. Independence for making decision / must be thorough and documented.
ii. Must be able to explain the basic nature of it, consider alternate negative scenarios.
iii. Make sure external advisors have adequate compliance and IC / don't deviate from
strategies
iv. Group Decisions - can disagree but not remove your name bc there is some basis in
the decision.
b. Communication
i. Disclose the basic format used to analyze
ii. Use reasonable judgment - identify the important factors for clients.
(RECOMMENDATIONS DON'T NEED ALL RESEARCH, JUST MAINTAIN)
iii. Distinguish between fact & opinion
iv. REMEMBER: The argument that clients 'won't care' could also be interpreted as
'theres no reason NOT to disclose'
& 100% Accurate Solutions
Ethics:
The ______________ of the CFA BoD has overall the Professional Conduct Program
and enforcement of the Code and Standards
Several circumstances can prompt an inquiry from the ________________ (through the
Professional Conduct staff), such as: (4 things).
The Officer may decide one of 3 decides upon investigation. - ANSWER-Disciplinary
Review Committee
CFA Institute Designated Officer
*SWPP*
-*Self* Disclosure by members / candidates on their professional Conduct Statements of
involvement in a civil / criminal complaint.
-*Written* Complaints about a member or candidate's professional conduct received by
the staff
-Evidence of misconduct received through *public* sources (media)
-CFA exam *proctor* report of a violation
i) that no disciplinary sanctions are appropriate,
ii) to issue a cautionary letter, or
iii) to discipline the member or candidate
Code of Ethics - 6 pillars - ANSWER-*A PUPPI*
■ *Act* with integrity, competence, diligence, respect, and in an ethical manner with the
public, clients, prospective clients, employers, employees, colleagues in the investment
profession, and other participants in the global capital markets.
■ *Place* the integrity of the investment profession and the interests of clients above
their own personal interests.
■ *Use* reasonable care and exercise independent professional judgment when
conducting investment analysis, making investment recommendations, taking
investment actions, and engaging in other professional activities.
■ *Practice* and encourage others to practice in a professional and ethical manner that
will reflect credit on themselves and the profession.
■ *Promote* the integrity of and uphold the rules governing capital markets.
■ Maintain and *improve* their professional competence and strive to maintain and
improve the competence of other investment professionals.
,Standards of Professional Conduct - ANSWER-*PC DESIRE*
- *P*rofessionalism.
- Integrity of *C*apital Markets.
- *D*uties to Clients.
- Duties to *E*mployers.
- Investment Analysi*S*, Recommendations, and Action.
- Conflicts of *I*nterest.
- *Re*sponsibilities as a CFA Institute Member or CFA Candidate.
*P*rofessionalism. - ANSWER-*KIMM*el
a. Knowledge of the Law / Code. Members understand and comply with all laws -
KVIOA
i. Know laws in *all countries* in which they trade securities.
ii. Responsible for violations in which they *knowingly* participate.
iii. If *illegal* actions of client, customer or personal Code Violation - Must dissociate.
iv. If violation of Code by fellow member - strongly encourage to report. No requirement
to report unless law.
v. When going with the 'applicable law' - Code vs country of residence vs. country of
business... go with the strictest! But if 'law of locality' is stated, then go with that. (Ie.
Member resides in MS (more strict than Code) country, does business in LS (less strict
than Code) country; MS law applies, but can state that law of locality where business is
conducted governs.) Member must adhere to the Code and Standards. Not the MS
laws.
b. Independence and Objectivity. (GSBPT)
i. Modest gifts and entertainment are acceptable. Must be disclosed. If from client, must
be disclosed to employer (if contingent of future perform.. see ACA need consent too)
ii. Sell side analysts. Need effective firewalls bw investment banking. No buy side
influence allowed (if they have position in the security and try to convince you to issue
favorable report).
iii. Fund Manager Relationships (Secondary Fund Managers giving gifts for hiring, etc)
iv. Public Companies - can't engage in retaliatory practices by restricting access to
managers / conference calls, etc...
v. Travel Funding - use commercial travel options when talking to executives, unless
have to use charter
c. Misrepresentation.
i. Investing through outside managers - must disclose their intended use of external
managers and must not represent those managers' investment practices as their own.
ii. Guarantees are misleading bc there is some risk.
,Integrity of Capital Markets - ANSWER-*M&M*
a. Material Nonpublic Information - illegal - all rest is good. Have to wait a little bit until
trading. **** ONLY APPLIES TO NON-PUBLIC INFO ABOUT THE ISSUER (ie analyst
that is influential can trade on own name). **** failing to prevent transfer of info is a
violation.
i. Mosiac Theory - analysts get their information from a wide variety of sources - public /
non-public.
b. Market Manipulation
i. No Spreading false rumors. No non-fact based report during quiet period.
ii. Transaction-Based Manipulation. Trading a position between intercompany positions
to create the illusion of a price rise.
Duties to Clients - ANSWER-*PRoSPECt*
a. Loyalty, *P*rudence, and Care.
i. Follow IMAs / Govering Docs. COST BENEFIT FOR VOTING PROXIES. ALSO VOTE
IN BEST INTEREST FOR BENEFICIARIES NOT SPONSOR
ii. Recommend submitting at least quarterly statement.
iii. Disclose conflicts of interest - ie you use a broker that pays your utility bill in
exchange for using them.
b. Fai*R* Dealing
i. Not necessary equal treatment of clients but should not advantage / disadvantage any
clients against another client. Make premium levels of service available. MUST
DISTRIBUTE 'HOT' SHARES ON A WEIGHTED / PRO RATA BASIS.
ii. Investment Recommendations - Advise clients of changes in recommendations.
Shorten timeframe from decision to dissemination. IF ORDER COMES IN INFORM
THAT CHANGE MADE EVEN IF IT IS BEFORE OTHERS.. IE MAILED OUT.
iii. No participation in OVERSUBSCRIBED equity IPO
c. *S*uitability
i. Reasonable inquiry into client's investment experience.
ii. Determine that an investment is suitable to the client's financial situation / context of
the client's total portfolio. UPDATE INFO REGULARLY. IF EXECUTING UNSUITABLE
INV. FOR CLIENT, GET AFFIRMATIVE STATEMENT
iii. Management capacity - make sure investments made in line with objectives /
constraints.
d. *Pe*rformance Presentation - *Past misleading gross terminator eliminated*
i. No misleading *performance* indicators. Should not indicate the ability to achieve a
ROR similar to that achieved in the *past*. Brief presentations - indicate that the
presentations have offered *limited* information.
, ii. Include all *terminated* accounts in performance. Include disclosures (*gross of
fee*s).
e. *C*onfidentiality: Unless
i. Illegal
ii. Disclosure required
iii. Disclosure permitted
Duties to Employers - ANSWER-LiAR
a. Loyalty
i. From Employers - give all employees handbook and no unethical incentives
ii. From Employees - must act in best interest until resignation. Cant keep any firm
materials / client lists on home computer etc... However, general names of clients
worked with isn't confidential.
iii. Independent practice - allowed if employee discloses compensation, duration and
nature AND employer agrees before it begins.
b. Additional Compensation Arrangements
i. Must obtain written consent from employer (email OK).
c. Responsibility of Supervisors
i. Must take actions to prevent violations from employees violating. Not enough to speak
and receive assurances
ii. Must make reasonable effort to detect violations
iii. If compliance system inadequate, must bring to the attention of management. MUST
DECLINE supervisory responsibilities until addressed.
Investment Analysis, Recommendations and Actions - ANSWER-DCR
a. Dilligence and Reasonable Basis
i. Independence for making decision / must be thorough and documented.
ii. Must be able to explain the basic nature of it, consider alternate negative scenarios.
iii. Make sure external advisors have adequate compliance and IC / don't deviate from
strategies
iv. Group Decisions - can disagree but not remove your name bc there is some basis in
the decision.
b. Communication
i. Disclose the basic format used to analyze
ii. Use reasonable judgment - identify the important factors for clients.
(RECOMMENDATIONS DON'T NEED ALL RESEARCH, JUST MAINTAIN)
iii. Distinguish between fact & opinion
iv. REMEMBER: The argument that clients 'won't care' could also be interpreted as
'theres no reason NOT to disclose'
