1000 Flashcards Chartered Financial Analyst Level 1 (CFA L1) Exam
Terms in this set (1076)
Define "integrity" under the CFA Institute Code of Ethics.
Integrity refers to acting with honesty, fairness, diligence, and ethical conduct in all professional
activities. CFA candidates and members must place the integrity of capital markets and clients
above personal gain.
A portfolio manager selectively shares profitable stock recommendations only with large
institutional clients before sending them to smaller retail clients. Which Standard is violated?
This violates the Standard of Fair Dealing. CFA professionals must deal fairly and objectively
with all clients when disseminating investment recommendations or taking investment action.
What is the primary objective of the CFA Institute Code of Ethics?
The objective is to promote ethical behavior, protect investors, maintain public trust in financial
markets, and uphold the integrity of the investment profession.
Members must use reasonable care and exercise independent professional ______ when
conducting investment analysis.
Judgment. Members must exercise independent professional judgment free from bias or undue
influence.
A CFA candidate may claim partial CFA designation status after passing Level I. Explain.
False. Candidates may only state they are "Level I passed candidates" or "passed Level I of
the CFA Program." They cannot imply partial designation status because the CFA charter is
awarded only after fulfilling all requirements.
1 of 129
,1000 Flashcards Chartered Financial Analyst Level 1 (CFA L1) Exam
What does "material nonpublic information" mean?
Material nonpublic information is information that could affect the price of a security if disclosed
and has not yet been made available to the public. Trading on such information is prohibited.
An analyst overhears executives discussing an undisclosed merger in an elevator and
purchases shares afterward. Which ethical principle is violated?
The analyst violated the prohibition against trading on material nonpublic information under
Standard II(A). Even accidentally obtained confidential material information cannot be used for
trading.
Define "misrepresentation" in professional conduct.
Misrepresentation involves knowingly making false statements, guaranteeing investment
performance, plagiarizing work, or misleading clients about qualifications, services, or
investment processes.
What is the difference between independence and objectivity?
Independence means freedom from external control or influence, while objectivity means
making unbiased professional judgments based on facts and analysis rather than personal
interests.
A research analyst accepts expensive concert tickets from a brokerage firm seeking favorable
coverage. Is this permissible?
Generally no. Accepting lavish gifts may compromise independence and objectivity. Minor
customary gifts may be acceptable, but expensive benefits that could influence judgment are
prohibited.
Members must place client interests ______ their own interests.
Above. Client interests must take priority over personal or employer interests.
Define diligence in the context of professional ethics.
Diligence means acting carefully, thoroughly, and responsibly when analyzing investments,
making recommendations, or managing portfolios.
2 of 129
,1000 Flashcards Chartered Financial Analyst Level 1 (CFA L1) Exam
CFA members may guarantee a minimum investment return if historical performance strongly
supports it. Explain.
False. Members cannot guarantee investment returns unless such returns are backed by
legally guaranteed instruments and clearly disclosed. Markets are inherently uncertain.
What does Standard I(A) Knowledge of the Law require?
Members must understand and comply with all applicable laws, rules, and regulations
governing professional activities. When conflicts exist, they should follow the stricter law or
regulation.
A CFA candidate discovers her employer is manipulating client reports. What should she do?
She should dissociate from the activity, report concerns internally if appropriate, and avoid
participating in illegal or unethical conduct.
Define plagiarism in investment research.
Plagiarism is presenting another person's work, analysis, forecasts, or ideas as one's own
without proper acknowledgment or citation.
Why is maintaining confidentiality important in finance?
Confidentiality protects client trust, prevents misuse of sensitive information, and supports
ethical and legal obligations unless disclosure is authorized or legally required.
An employee uses confidential client data to market personal side-business services. Which
Standard is violated?
This violates duties to clients regarding confidentiality and loyalty because client information
cannot be used for personal benefit without consent.
What is "priority of transactions"?
Client and employer transactions must take precedence over transactions in which a member
has beneficial ownership.
3 of 129
, 1000 Flashcards Chartered Financial Analyst Level 1 (CFA L1) Exam
Soft dollar arrangements are acceptable only if they primarily benefit the ______.
Client. Any soft dollar benefits must assist the investment decision-making process for clients.
Explain the mosaic theory.
Mosaic theory allows analysts to combine public information with nonmaterial nonpublic
information to reach investment conclusions, provided material nonpublic information is not
used.
A trader executes personal trades before executing identical trades for client accounts. What is
this called?
This is front-running, which violates loyalty and fair dealing obligations because client trades
must have priority.
Define suitability in portfolio management.
Suitability requires investment recommendations and actions to align with a client's financial
situation, objectives, risk tolerance, and constraints.
What should a CFA professional do before making investment recommendations?
They should conduct thorough research, analyze risks, understand client objectives, and
ensure recommendations are suitable and adequately supported.
Verbal consent is always sufficient for discretionary account management. Explain.
False. Discretionary authority generally requires written authorization from the client before
investment decisions can be made without prior approval.
What is Standard III(B) Fair Dealing primarily concerned with?
It ensures all clients receive fair and objective treatment regarding investment
recommendations, order execution, and information dissemination.
4 of 129
Terms in this set (1076)
Define "integrity" under the CFA Institute Code of Ethics.
Integrity refers to acting with honesty, fairness, diligence, and ethical conduct in all professional
activities. CFA candidates and members must place the integrity of capital markets and clients
above personal gain.
A portfolio manager selectively shares profitable stock recommendations only with large
institutional clients before sending them to smaller retail clients. Which Standard is violated?
This violates the Standard of Fair Dealing. CFA professionals must deal fairly and objectively
with all clients when disseminating investment recommendations or taking investment action.
What is the primary objective of the CFA Institute Code of Ethics?
The objective is to promote ethical behavior, protect investors, maintain public trust in financial
markets, and uphold the integrity of the investment profession.
Members must use reasonable care and exercise independent professional ______ when
conducting investment analysis.
Judgment. Members must exercise independent professional judgment free from bias or undue
influence.
A CFA candidate may claim partial CFA designation status after passing Level I. Explain.
False. Candidates may only state they are "Level I passed candidates" or "passed Level I of
the CFA Program." They cannot imply partial designation status because the CFA charter is
awarded only after fulfilling all requirements.
1 of 129
,1000 Flashcards Chartered Financial Analyst Level 1 (CFA L1) Exam
What does "material nonpublic information" mean?
Material nonpublic information is information that could affect the price of a security if disclosed
and has not yet been made available to the public. Trading on such information is prohibited.
An analyst overhears executives discussing an undisclosed merger in an elevator and
purchases shares afterward. Which ethical principle is violated?
The analyst violated the prohibition against trading on material nonpublic information under
Standard II(A). Even accidentally obtained confidential material information cannot be used for
trading.
Define "misrepresentation" in professional conduct.
Misrepresentation involves knowingly making false statements, guaranteeing investment
performance, plagiarizing work, or misleading clients about qualifications, services, or
investment processes.
What is the difference between independence and objectivity?
Independence means freedom from external control or influence, while objectivity means
making unbiased professional judgments based on facts and analysis rather than personal
interests.
A research analyst accepts expensive concert tickets from a brokerage firm seeking favorable
coverage. Is this permissible?
Generally no. Accepting lavish gifts may compromise independence and objectivity. Minor
customary gifts may be acceptable, but expensive benefits that could influence judgment are
prohibited.
Members must place client interests ______ their own interests.
Above. Client interests must take priority over personal or employer interests.
Define diligence in the context of professional ethics.
Diligence means acting carefully, thoroughly, and responsibly when analyzing investments,
making recommendations, or managing portfolios.
2 of 129
,1000 Flashcards Chartered Financial Analyst Level 1 (CFA L1) Exam
CFA members may guarantee a minimum investment return if historical performance strongly
supports it. Explain.
False. Members cannot guarantee investment returns unless such returns are backed by
legally guaranteed instruments and clearly disclosed. Markets are inherently uncertain.
What does Standard I(A) Knowledge of the Law require?
Members must understand and comply with all applicable laws, rules, and regulations
governing professional activities. When conflicts exist, they should follow the stricter law or
regulation.
A CFA candidate discovers her employer is manipulating client reports. What should she do?
She should dissociate from the activity, report concerns internally if appropriate, and avoid
participating in illegal or unethical conduct.
Define plagiarism in investment research.
Plagiarism is presenting another person's work, analysis, forecasts, or ideas as one's own
without proper acknowledgment or citation.
Why is maintaining confidentiality important in finance?
Confidentiality protects client trust, prevents misuse of sensitive information, and supports
ethical and legal obligations unless disclosure is authorized or legally required.
An employee uses confidential client data to market personal side-business services. Which
Standard is violated?
This violates duties to clients regarding confidentiality and loyalty because client information
cannot be used for personal benefit without consent.
What is "priority of transactions"?
Client and employer transactions must take precedence over transactions in which a member
has beneficial ownership.
3 of 129
, 1000 Flashcards Chartered Financial Analyst Level 1 (CFA L1) Exam
Soft dollar arrangements are acceptable only if they primarily benefit the ______.
Client. Any soft dollar benefits must assist the investment decision-making process for clients.
Explain the mosaic theory.
Mosaic theory allows analysts to combine public information with nonmaterial nonpublic
information to reach investment conclusions, provided material nonpublic information is not
used.
A trader executes personal trades before executing identical trades for client accounts. What is
this called?
This is front-running, which violates loyalty and fair dealing obligations because client trades
must have priority.
Define suitability in portfolio management.
Suitability requires investment recommendations and actions to align with a client's financial
situation, objectives, risk tolerance, and constraints.
What should a CFA professional do before making investment recommendations?
They should conduct thorough research, analyze risks, understand client objectives, and
ensure recommendations are suitable and adequately supported.
Verbal consent is always sufficient for discretionary account management. Explain.
False. Discretionary authority generally requires written authorization from the client before
investment decisions can be made without prior approval.
What is Standard III(B) Fair Dealing primarily concerned with?
It ensures all clients receive fair and objective treatment regarding investment
recommendations, order execution, and information dissemination.
4 of 129
