According to the CFA Institute Code of Ethics, members are responsible for:

A. monitoring their firm's compliance with the Standards.

B. ensuring the professional competence of employees in their firm.
C. promoting the integrity of and upholding the rules governing capital markets.
Solution
C is correct because it is stated under the Code of Ethics guidelines, that members must promote
the integrity and viability of the global capital markets for the ultimate benefit of society. While
the answer does not match this quote exactly, it certainly captures the spirit.
A is incorrect because all CFA Institute members (including holders of the Chartered Financial
Analyst designation) and CFA candidates have the personal responsibility to embrace and uphold
the provisions of the Code and Standards and are encouraged to notify their employer of this
responsibility. Therefore, all members and candidates must abide by the Code and Standards and
are encouraged to notify their employer of this responsibility. Members can only ensure their
own compliance and are not responsible for monitoring the firm's compliance with the Code and
Standards.

B is incorrect because members must maintain and improve their professional competence and
strive to maintain and improve the competence of other investment professionals. A member is
not responsible for guaranteeing or ensuring the competence of other investment professionals,
nor all employees in their firm.

Ethical and Professional Standards

CFA0006c. explain the ethical responsibilities required by the Code and Standards, including the
sub-sections of each Standard
Anjuman Khan, CFA, manages the portfolios of several clients. One client offers Khan monetary
compensation and another client gives her two tickets to a sold-out football match in appreciation
of significantly beating their portfolio benchmarks. Khan accepts both the monetary
compensation and the tickets to the football match. She discloses only the monetary
compensation to her supervisor by text over the holiday weekend. Has Khan violated the
Standard relating to independence and objectivity?

A. No.
B. Yes, because she failed to notify her supervisor of her acceptance of the tickets to the
football match.
C. Yes, because she failed to get prior approval from her supervisor for accepting the
monetary compensation.
Solution
B is correct because Standard I(B), Independence and Objectivity requires that, when possible,
prior to accepting bonuses or gifts from clients, ”members and candidates should disclose to their
employers such benefits offered by clients.” So, Khan is in violation of the Standard as she failed
to notify her supervisor about the tickets to the football match received from one of her clients.
A is incorrect because Standard I(B),& Independence and Objectivity requires that, when
possible, prior to accepting bonuses or gifts from clients, ”members and candidates should
disclose to their employers such benefits offered by clients.” So, Khan is in violation of the
Standard as she failed to notify her supervisor about the tickets to the football match received
from one of her clients.

C is incorrect because Standard I(B), Independence and Objectivity requires that, when possible,
prior to accepting bonuses or gifts from clients, ”members and candidates should disclose to their
employers such benefits offered by clients.” So, Khan is in compliance with the Standard as she
has informed her supervisor about the monetary compensation as soon as reasonably possible.

Ethical and Professional Standards

CFA0008a. demonstrate the application of the Code of Ethics and Standards of Professional
Conduct to situations involving issues of professional integrity
Which of the following member actions is a violation of the Standard relating to market
manipulation?

Action Selling large holdings of a small-cap stock with the intent to make a profit despite
1 being aware that the transaction could significantly impact the stock price.

Action Securing a significant position in a futures contract with the intent to drive the
2 price of the underlying asset downward.

Action Acquiring a large position in an asset in one market and shorting the same asset in
3 another market with the intent to generate arbitrage profits.
A. Action 1.
B. Action 2.
C. Action 3.
Solution
B is correct because according to Standard II(B), Market Manipulation, "... manipulation
includes, but is not limited to, the following: ... securing a controlling, dominant position in a
financial instrument to exploit and manipulate the price of a related derivative and/or the
underlying asset." Therefore, Action 2 is a violation of Standard II(B).
A is incorrect because Standard II(B), Market Manipulation "... is not intended to preclude
transactions undertaken on legitimate trading strategies based on perceived market inefficiencies.
The intent of the action is critical to determining whether it is a violation of this standard." The
member's action involved selling a significant holding of a small-cap stock with an intent to take
profits. That small-cap stocks have high impact costs cannot be held against the
member. Therefore, Action 1 is not a violation despite the member being aware that
the transaction could significantly impact the stock price.

C is incorrect because Standard II(B), Market Manipulation "... is not intended to preclude
transactions undertaken on legitimate trading strategies based on perceived market inefficiencies.
The intent of the action is critical to determining whether it is a violation of this standard." The
member's action involved acquiring a large position in an asset in one market and shorting the
same asset in another market with an intent to generate arbitrage profits. Therefore, Action 3 is
not a violation of Standard II(B).

Ethical and Professional Standards

CFA0008a. demonstrate the application of the Code of Ethics and Standards of Professional
Conduct to situations involving issues of professional integrity
According to the Standard relating to loyalty, prudence, and care, members are most
likely required to:
A. vote all proxies on behalf of clients even if some proxies offer no direct client benefit.
B. avoid the use of soft dollars unless the services purchased have corresponding benefit
for the client.
C. consider each investment based solely on its characteristics, independently of other
portfolio assets.
Solution
B is correct because according to Standard III (A) Loyalty, Prudence, and Care, “Conflicts may
arise when an investment manager uses client brokerage to purchase research services, a practice
commonly called 'soft dollars' or 'soft commissions.' A member or candidate who pays a higher
brokerage commission than he or she would normally pay to allow for the purchase of goods or
services, without corresponding benefit to the client, violates the duty of loyalty to the client.”
Therefore, Standard III (A) requires members to avoid the use of soft dollars unless the services
purchased have corresponding benefit for the client.
A is incorrect because according to Standard III (A), Loyalty, Prudence, and Care, “A cost–
benefit analysis may show that voting all proxies may not benefit the client, so voting proxies
may not be necessary in all instances.” Therefore, Standard III (A) does not require members to
vote all proxies on behalf of clients even if some proxies offer no direct client benefit.

C is incorrect because according to Standard III (A), Loyalty, Prudence, and Care, “Investment
decisions must be judged in the context of the total portfolio rather than by individual investment
within the portfolio.” Therefore, Standard III (A) does not require members to consider each
investment based solely on its characteristics, independently of other portfolio assets. Rather, the
Standard requires that investment decisions must be judged in the context of the total portfolio.

Ethical and Professional Standards

CFA0008a. demonstrate the application of the Code of Ethics and Standards of Professional
Conduct to situations involving issues of professional integrity
Which of the following member actions most likely violates the Standard relating to fair dealing?
A. Providing premium service levels to clients who pay higher fees.
B. Selectively offering different service levels to prospective clients.
C. Using different communication methods to recommend investments to clients.
Solution
B is correct because according to Standard III (B), Fair Dealing, “different service levels should
be disclosed to clients and prospective clients and should be available to everyone (i.e., different
service levels should not be offered selectively).” It is therefore a violation of the Standard to
selectively offer the firm's different service levels to prospective clients.
A is incorrect because according to Standard III (B), “members and candidates may provide
more personal, specialized, or in-depth service to clients who are willing to pay for premium
services through higher management fees or higher levels of brokerage.”

C is incorrect because Standard III (B) requires investment recommendations to be

communicated fairly, but the Standard “does not state ‘equally' because members and candidates
could not possibly reach all clients at exactly the same time—whether by printed mail, telephone
(including text messaging), computer (including internet updates and e-mail distribution),
facsimile (fax), or wire.” Therefore, using different communication methods to recommend
investments to clients is permitted.

Ethical and Professional Standards

CFA0008a. demonstrate the application of the Code of Ethics and Standards of Professional
Conduct to situations involving issues of professional integrity
A member presents investment performance to potential clients. According to the Standard
relating to performance presentation, the member is permitted to omit which of the following in
his presentation?

A. Only simulated results as a source of performance data.

B. Only supporting details of recommendations if the details are made available upon
request.
C. Both simulated results as a source of performance data and supporting details of
recommendations if the details are made available upon request.
Solution
B is correct because according to Standard III (D), Performance Presentation, “If the
presentation is brief, the member or candidate must make available to clients and prospects, on
request, the detailed information supporting that communication.” Therefore, as long as
supporting details are made available upon request, this Standard is not violated by omitting
supporting details in a presentation to clients.
A is incorrect because Standard III (D), Performance Presentation, states that “When
communicating investment performance information, Members and Candidates must make
reasonable efforts to ensure that it is fair, accurate, and complete.” Further, the “Use of simulated
results should be accompanied by full disclosure as to the source of the performance data.”
Therefore, the use of simulated results must be disclosed and must not be omitted.

C is incorrect because Standard III (D), Performance Presentation, states that “When
communicating investment performance information, Members and Candidates must make
reasonable efforts to ensure that it is fair, accurate, and complete.” Further, the “Use of simulated
results should be accompanied by full disclosure as to the source of the performance data.”
Therefore, the use of simulated results must be disclosed and must not be omitted.

Ethical and Professional Standards

CFA0008a. demonstrate the application of the Code of Ethics and Standards of Professional
Conduct to situations involving issues of professional integrity
According to the Standard relating to additional compensation arrangements, a member must
refuse to accept gifts which might reasonably be expected to create a conflict with her employer's
interest unless the member obtains:
A. verbal consent from her employer only.
B. written consent from her employer only.
C. written consent from all parties involved.
Solution
C is correct because according to Standard IV (B), Additional Compensation Arrangements,
“Members and Candidates must not accept gifts, benefits, compensation, or consideration that
competes with or might reasonably be expected to create a conflict of interest with their
employer’s interest unless they obtain written consent from all parties involved.”
A is incorrect because according to Standard IV (B), Additional Compensation Arrangements,
“Members and Candidates must not accept gifts, benefits, compensation, or consideration that
competes with or might reasonably be expected to create a conflict of interest with their
employer’s interest unless they obtain written consent from all parties involved.”

B is incorrect because according to Standard IV (B), Additional Compensation Arrangements,

“Members and Candidates must not accept gifts, benefits, compensation, or consideration that
competes with or might reasonably be expected to create a conflict of interest with their
employer’s interest unless they obtain written consent from all parties involved.”

Ethical and Professional Standards

CFA0008a. demonstrate the application of the Code of Ethics and Standards of Professional
Conduct to situations involving issues of professional integrity
Vishwanath Reddy, CFA, is the CEO of a brokerage firm that offers regular and premium
services to clients. Clients can avail premium services paying a higher fee or by making referrals.
Reddy does not disclose the referral fee arrangement because prospective clients who are
referred to the firm are typically friends of existing clients. Reddy has violated the Standard(s)
relating to:

A. fair dealing only.

B. referral fees only.
C. both fair dealing and referral fees.
Solution
B is correct because according to Standard VI(C) relating to Referral Fees, "Members and
Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any
compensation, consideration, or benefit received from or paid to others for the recommendation
of products or services." Although the referral fees is not paid out in cash, clients are enjoying
benefits of premium services by making referrals and hence the arrangement needs to be
disclosed.
A is incorrect because according to Standard III(B) relating to Fair Dealing, "the different service
levels should be disclosed to clients and prospective clients and should be available to everyone
(i.e., different service levels should not be offered selectively)." Since clients can upgrade for a
service fee, this Standard is not violated.

C is incorrect because according to Standard III(B) relating to Fair Dealing, "the different service
levels should be disclosed to clients and prospective clients and should be available to everyone
(i.e., different service levels should not be offered selectively)." Since clients can upgrade for a
service fee, this Standard is not violated.

Ethical and Professional Standards

CFA0008a. demonstrate the application of the Code of Ethics and Standards of Professional
Conduct to situations involving issues of professional integrity
Kiera Anderson, CFA, plans to terminate her employment and start her own competing firm.
Before giving notice of her resignation and leaving her current employer, Anderson secures
office space for her competing business during her personal time. Has Anderson most
likely violated the Standards?
A. No.
B. Yes, the Standard relating to loyalty.
C. Yes, the Standard relating to misconduct.
Solution
A is correct because according to Standard IV (A), Loyalty, “A departing employee is generally
free to make arrangements or preparations to go into a competitive business before terminating
the relationship with his or her employer as long as such preparations do not breach the
employee's duty of loyalty.” Anderson makes arrangements to go into competing business only
on her personal time. Therefore, Anderson has not violated Standard IV (A) as she does not
breach her duty of loyalty to her employer. Also, Anderson has not violated Standard I (D),
Misconduct. According to the Standard, “Members and Candidates must not engage in any
professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects
adversely on their professional reputation, integrity, or competence.” Anderson's actions do not
involve any of the actions described; therefore, she has not violated Standard I (D).
B is incorrect because Anderson has not violated Standard IV (A), as described in the Response
Rationale for the correct answer.

C is incorrect because Anderson has not violated Standard I (D), as described in the Response
Rationale for the correct answer.

Ethical and Professional Standards

CFA0008a. demonstrate the application of the Code of Ethics and Standards of Professional
Conduct to situations involving issues of professional integrity
According to the Standard relating to responsibilities of supervisors, examining the
firm's incentive structure to determine whether the structure encourages profits and returns at the
expense of ethically appropriate conduct is the responsibility of:

A. the firm only.

B. the supervisor only.
 C. both the firm and the supervisor.
Solution
C is correct because according to Standard IV (C), Responsibilities of Supervisors,
"[s]upervisors and firms must look closely at their incentive structure to determine whether the
structure encourages profits and returns at the expense of ethically appro- priate conduct."
A is incorrect because according to Standard IV (C), Responsibilities of Supervisors, this is the
responsibility of the supervisor and the firm, as described in the response rationale for the correct
answer.

B is incorrect because according to Standard IV (C), Responsibilities of Supervisors, this is the

responsibility of the supervisor and the firm, as described in the response rationale for the correct
answer.

Ethical and Professional Standards

CFA0008a. demonstrate the application of the Code of Ethics and Standards of Professional
Conduct to situations involving issues of professional integrity
Lawrence Hall, CFA, and Nancy Bishop, CFA, began a joint research report on Stamper
Corporation. Bishop visited Stamper’s corporate headquarters for several days and met with all
company officers. Prior to the completion of the report, Bishop was reassigned to another
project. Hall utilized his and Bishop’s research to write the report but did not include Bishop’s
name on the report because he did not agree with and changed Bishop’s conclusion included in
the final report. According to the CFA Institute Standards of Practice Handbook, did Hall most
likely violate any CFA Institute Standards of Professional Conduct?
A. No
B. Yes, with respect to misrepresentation
C. Yes, with respect to diligence and reasonable basis
Solution
A is correct because members are in compliance with Standard V (A)–Diligence and
Reasonable Basis if they rely on the research of another party who exercised diligence and
thoroughness. Because Bishop’s opinion did not agree with the final report, disassociating her
from the report is one way to handle this difference between the analysts.
B is incorrect because Hall did not make any misrepresentation.

C is incorrect because Hall is allowed to rely on a third party who exercised diligence and
thoroughness.

Ethical and Professional Standards

CFA0008a. demonstrate the application of the Code of Ethics and Standards of Professional
Conduct to situations involving issues of professional integrity
Which of the following member actions is consistent with the Standard relating to
communication with clients and prospective clients?
 Action Members must disclose limitations in liquidity and capacity associated with
1 investment decisions.

Action Members should inform the clients about the use of outside advisers to manage
2 portions of clients’ assets under management.
A. Action 1 only
B. Action 2 only
C. Both Action 1 and Action 2
Solution
C is correct because according to Standard V(B), Communication with Clients and Prospective
Clients, “[m]embers and candidates must report to clients and prospective clients the existence of
limitations significant to the decision-making process. Examples of such factors and attributes
include, but are not limited to, investment liquidity and capacity.” So, Action 1 is consistent with
the Standard. Also, “[a] firm’s investment policy may include the use of outside advisers to
manage various portions of clients’ assets under management. Members and candidates should
inform the clients about the specialization or diversification expertise provided by the external
adviser(s).” So, Action 2 is also consistent with the Standard.
A is incorrect because according to Standard V(B), Communication with Clients and Prospective
Clients, “[m]embers and candidates must report to clients and prospective clients the existence of
limitations significant to the decision-making process. Examples of such factors and attributes
include, but are not limited to, investment liquidity and capacity.” So, Action 1 is consistent with
the Standard. However, Action 2 is also consistent with the Standard because “[a] firm’s
investment policy may include the use of outside advisers to manage various portions of clients’
assets under management. Members and candidates should inform the clients about the
specialization or diversification expertise provided by the external adviser(s).”

B is incorrect because according to Standard V(B), Communication with Clients and Prospective
Clients, “[a] firm’s investment policy may include the use of outside advisers to manage various
portions of clients’ assets under management. Members and candidates should inform the clients
about the specialization or diversification expertise provided by the external adviser(s).” So,
Action 2 is consistent with the Standard. However, Action 1 is also consistent with the Standard
as “[m]embers and candidates must report to clients and prospective clients the existence of
limitations significant to the decision-making process. Examples of such factors and attributes
include, but are not limited to, investment liquidity and capacity.”

Ethical and Professional Standards

CFA0008a. demonstrate the application of the Code of Ethics and Standards of Professional
Conduct to situations involving issues of professional integrity