2019 CFA level 3 qbank r 1 2 CFA ins code of ethics and standards of prof conduct standards I–VII 1 answers

10/11/2018

Learning Management System

Question #1 of 181
Sandra Bulow, CFA, is responsible for updating her employing rm's website to include changes
in analysis techniques and trading procedures. She is often very delinquent in making these
changes, despite working extensive hours. She is aware clients are using the website to make
investment decisions, and has received complaints from the sales department as the
information on the website if often di erent from what is presented in sales meetings. Bulow is

most likely:

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A) in violation of Standard I(C) "Misrepresentation."

C) not in violation of any Standard.
Explanation

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B) in violation of Standard III(B) "Fair Dealing."

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Bulow is most likely in violation of Standard I(C) "Misrepresentation." The web site
information is erroneous, and needs to be updated to match the rm's current practices.

(Study Session 1, Module 2.2, LOS 2-I.(C))
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SchweserNotes - Book 1

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Question #2 of 181

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He

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places trades for the fund with River City Brokerage. River City presents Calaveccio with a bottle
of inexpensive wine at Christmas each year. Calaveccio does not disclose this fact in the
prospectus of the small cap venture fund. This action is:

A) in violation of the Standard concerning disclosure of con icts to clients and
prospects.
B) in violation of the Standard concerning disclosure of additional compensation
arrangements.
C) not in violation of the Code and Standards.
Explanation

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Under Standard I(B) Independence and Objectivity, members are advised to "use reasonable
care" in order to maintain independence. While it is clearly understood that gifts from various
entities have the potential to a ect a member's independence and objectivity, a member can
accept token gifts as long as they are not intended to in uence or reward.
(Study Session 1, Module 2.1, LOS 2-I.(B))
Related Material
SchweserNotes - Book 1

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Question #3 of 181
Betsy Fox is an investment advisor who has a client, Don Gordon, who is an employment

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lawyer. At lunch, Fox noticed Gordon and the Chief Financial O cer of Blue Star Company at
the next table. She overhears them talking and ascertains that Blue Star is about to announce
higher than expected earnings. Before the earnings release, Gordon contacts Fox and asks her

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to purchase 3,000 shares for his portfolio. Fox:

A) can only purchase shares for her personal account after informing all of her clients
about the potential of the increase in earnings.
B) must refuse to purchase shares for Gordon.

C) can purchase shares for Gordon, but cannot ever purchase shares for her personal

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Explanation

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account.

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According to Standard II(A), Material Nonpublic Information, Fox cannot act or cause others
to act on material nonpublic information until the information is made public. The
information overheard at lunch was material and nonpublic; therefore, Fox must wait until
the information is made public before accepting Gordon's order.
(Study Session 1, Module 2, LOS 2.a)
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SchweserNotes - Book 1

Question #4 of 181

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According to CFA Institute Standards of Professional Conduct, which of the following
statements about the prohibition against plagiarism is most correct? The prohibition against
plagiarism applies to written materials:

A) and oral communications only.
B) only.
C) oral communications, and telecommunications.
Explanation
The prohibition against plagiarism applies to all three areas.

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(Study Session 1, Module 2.2, LOS 2-I.(C))
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Question #5 of 181

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SchweserNotes - Book 1

Which of the following activities would be following a component of the Code of Ethics
explicitly?

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A) Attending continuing education seminars on investing and inviting colleagues to
come along.

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B) Consulting with colleagues about opinions you reach in your research.

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C) Maintaining a list of colleagues who have violated the CFA Institute standards.
Explanation

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The Code states that a member shall "Maintain and improve their professional competence
and strive to maintain and improve the competence of other investment professionals."
None of the other answers qualify.
(Study Session 1, Module 1.1, LOS 1.b)

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SchweserNotes - Book 1

Question #6 of 181
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The CFA Institute Code of Ethics speci es that CFA Institute Members and Candidates must do
all of the following EXCEPT:

A) use reasonable care and exercise independent professional judgment when
engaging in professional activities.
B) refrain from any conduct that compromises the reputation or integrity of the CFA
designation.
C) act with integrity, competence, diligence, respect, and in an ethical manner.
Explanation

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Not compromising the reputation or integrity of the CFA designation is a part of the
Standards of Professional Conduct, but is not speci cally mentioned the Code of Ethics.

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(Study Session 1, Module 1.1, LOS 1.b)
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Question #7 of 181

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SchweserNotes - Book 1

Which of the following is a component of the Code of Ethics?

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rules, or regulations.

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A) Members shall not knowingly participate or assist in any violation of such laws,

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B) Members shall not engage in any professional conduct involving dishonesty, fraud,
deceit, or misrepresentation or commit any act that re ects adversely on their

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C) Members shall use reasonable care and exercise independent professional
judgment.
Explanation
This is a component of the Code of Ethics. Others pertain to the Standards of Professional
Conduct.
(Study Session 1, Module 1.1, LOS 1.b)
Related Material
SchweserNotes - Book 1

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Question #8 of 181
Susan Nielsen, CFA, is an equity research analyst on a fact- nding property tour with 6 other
analysts to learn about Just Kittens, Inc. Just Kittens sells tungsten ball-bearings and has 16
warehouses, and 20 manufacturing, research, and wholesale sales outlets scattered over 8
countries – mostly emerging markets. Because of the remote location of some of the facilities,
commercial travel is e ectively unavailable. Just Kittens charters a jet and various busses to
take the research analysts to the properties. If Nielsen accepts these accommodations, she is

most likely:

commercial travel is e ectively unavailable.

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B) in violation of Standard I(B) "Independence and Objectivity."

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A) not in violation of Standard I(B) "Independence and Objectivity" because

C) not in violation of Standard I(B) "Independence and Objectivity" because best
practices dictate that better access to company executives is likely to lead to more
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Explanation

Nielsen is not in violation of Standard I(B) "Independence and Objectivity" because
commercial travel is e ectively unavailable.
(Study Session 1, Module 2.1, LOS 2-I.(B))

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SchweserNotes - Book 1

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Question #9 of 181

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The Securities and Exchange Board of India (SEBI) has just enacted a new stock-trading rule.
SEBI will give brokers a 10-day grace period, during which violators of the rule will be
immediately noti ed and given a chance to remedy their situation to comply with the new rule.
If a CFA Institute member located in India or doing business in India unknowingly violates the
rule and then remedies the situation within the 10-day grace period, has the member violated
Standard I(A)?

A) No, because the member remedied the situation.
B) Yes, because the member did not maintain knowledge and know of the rule.
C) No, because the member unknowingly broke the rule.

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Explanation
Standard I(A) explicitly says that a member shall maintain knowledge and comply with laws,
rules, and regulations. By not knowing of the rule, the member broke the standard.
(Study Session 1, Module 2.1, LOS 2-I.(A))
Related Material
SchweserNotes - Book 1

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Question #10 of 181

A) exploiting di erences in market ine ciencies.

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All of the following are violations of Standard II(B) Market Manipulation EXCEPT:

B) securing a controlling interest in an equity security in order to in uence the price of
a related derivative instrument.

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C) disseminating misleading information about the development of new products and

technologies.
Explanation

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Standard II(B) Market Manipulation prohibits practices that distort prices or arti cially in ate
trading volumes with the intent to mislead market participants. The Standard is not intended
to prohibit legitimate trading strategies that exploit di erences in market ine ciencies.

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(Study Session 1, Module 2.3, LOS 2-II.(B))

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SchweserNotes - Book 1

Question #11 of 181

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The following information involves two research analysts at a brokerage rm.
Erik Bagenot, CFA, is preparing a research report on Global Enterprises, Inc. In preparing
the report, he uses materials from many sources. For example, he uses factual
information published by Standard & Poor's Corporation without acknowledging the
source. He also uses excerpts from a research report prepared by another analyst.
Bagenot makes only a slight change in wording for these excerpts, but acknowledges the
source.
Sally Wain, who is currently enrolled in the CFA program, is preparing a research report
on Manson Telecommunications. She attends a conference in which several investment
experts provide their views about the future prospects of this company. Wain cites

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several quotations from these investment experts in her report without speci c

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reference.

According to CFA Institute Standards of Professional Conduct involving prohibition against
plagiarism, which of the following statements is CORRECT?

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A) Bagenot violated the Standards, but Wain did not.

B) Both Bagenot and Wain violated the Standards.

C) Wain violated the Standards, but Bagenot did not.
Explanation

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Bagenot complied with Standard I(C), which permits publishing factual information from
Standard & Poor's without acknowledgment and using excerpts with acknowledgment. Wain
committed plagiarism because she failed to give speci c references for the quotations that
she used.

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(Study Session 1, Module 2.2, LOS 2-I.(C))
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SchweserNotes - Book 1

Question #12 of 181
CFA Institute members are required to do all of the following, EXCEPT:

A) disclose, in writing, all observed violations of security laws and regulations to the
proper regulatory authorities.
B) inform their employer, clients, and potential clients of bene ts received for

recommending products or services.
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C) receive permission from both their employer and outside clients to engage in
investment consulting outside the rm.
Explanation
Members are not required to report violations of others to regulatory authorities, either
verbally or in writing, but such reporting may be prudent.
(Study Session 1, Module 2, LOS 2.a)
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SchweserNotes - Book 1

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Question #13 of 181

According to the Code of Ethics, a member re ects credit on the profession when a member:

A) places the clients rst.

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B) consults with other members on a regular basis.
C) practices in a professional and ethical manner.
Explanation

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Component four of the Code says that a member shall "Practice and encourage others to
practice in a professional and ethical manner that will re ect credit on members and the
profession." Neither of the other choices are implied by the Code.
(Study Session 1, Module 1.1, LOS 1.b)

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SchweserNotes - Book 1

Question #14 of 181
According to the Code of Ethics, when practicing in a professional and ethical manner the goal
is to:

A) increase membership in CFA Institute.
B) resolve con icts between clients and employers.
C) re ect credit on members and the profession.

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Explanation
The Code states that a member shall "Practice and encourage others to practice in a
professional and ethical manner that will re ect credit on members and their profession."
(Study Session 1, Module 1.1, LOS 1.b)
Related Material
SchweserNotes - Book 1

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Question #15 of 181
Michael Malone, CFA, is an investment analyst for a large brokerage rm in New York who

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covers the airlines industry. After hours in his personal time, Malone maintains an online blog
on which he expresses his personal opinions about various investment opportunities, including,
but not limited to, the airlines industry. On his blog, he posts a very negative investment

opinion about WestAir stock. Malone knows that WestAir's stock will be downgraded to a "sell"

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by his rm next week. Malone has most likely violated:

A) Standard VI(B) Priority of Transactions.

B) violated Standard II(A) Material Nonpublic Information.

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C) violated Standard IV(A) Loyalty.
Explanation

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By expressing his investment analysis on his personal blog ahead of his employer, Malone
deprived his employer of the bene ts of his skills and abilities and therefore violated
Standard IV(A) Loyalty. Malone did not possess material nonpublic information about WestAir
and no transactions have taken place.

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(Study Session 1, Module 1.1, LOS 1.b)

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SchweserNotes - Book 1

Question #16 of 181
An analyst is told by his supervisor that when he feels he should write a buy recommendation
he is free to do so, and when he feels he should write a sell recommendation he should check
with the supervisor rst. This practice is most likely:
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A) consistent with the Code of Ethics and Standards of Professional Conduct.
B) in violation of Standard I(B) Independence and Objectivity.
C) in violation of Standard V(B), Communications with Clients and Prospective Clients.
Explanation
The policy dictated by the supervisor would infringe upon the analyst's independence and
objectivity. It may discourage the analyst from making sell recommendations and,
furthermore, present the opportunity for the supervisor to try and change the analyst's mind.
(Study Session 1, Module 2.1, LOS 2-I.(B))
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SchweserNotes - Book 1

Question #17 of 181

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Jennifer Gates is an individual portfolio manager who only uses mutual funds for her clients;
she has therefore never created a portfolio of stocks. She enters an Internet chat room on
investments and starts answering questions about investments. She states in the chat room
that she has a CFA designation. One woman in particular is interested and questions her about
the viability of creating her own stock portfolio. Gates feels that this would be a mistake

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because she only has $150,000 to invest, and states, "I have experience creating stock

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portfolios, and it does not make sense to do so with only $150,000." The woman she has

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chatted with sends her an e-mail and eventually becomes a client of hers. Gates has:

A) not violated the Standards.

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B) violated the Standards by misrepresenting her experience.
C) violated the Standards by soliciting business over the Internet.
Explanation
One cannot misrepresent their experience, even over the Internet.
(Study Session 1, Module 2, LOS 2.a)
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SchweserNotes - Book 1

Question #18 of 181
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A government committee has concluded that investment company fees should be disclosed to
clients each quarter and has proposed new legislation to require this. Currently, the legal
requirement is to report such data annually. In compliance with current legal requirements,
Dolphin Investments discloses its fees annually. Eugene Shin, CFA, Dolphin's compliance o cer,
learns of the proposed changes but does not convert Dolphin's reporting to a quarterly basis.
Shin's decision not to act:

A) is not a violation of the Code and Standards.
B) is a violation of his duty to employer as de ned in the Code and Standards.
C) constitutes professional misconduct as de ned in the Code and Standards.

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Explanation

(Study Session 1, Module 2.1, LOS 2-I.(A))
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Question #19 of 181

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SchweserNotes - Book 1

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The potential change in the law is only a proposal at this stage. There is no violation as long
as Dolphin is following the regulations currently in force.

Which of the following statements about the responsibilities of CFA charterholders is CORRECT?

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CFA charterholders:

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A) are only obligated to comply with securities laws in the U.S.
B) must comply with the laws and rules governing their profession and must not

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engage in any individual behavior that re ects adversely on the entire profession.
C) need not comply with the laws and rules governing their profession or must not
engage in any individual behavior that re ects adversely on the entire profession.
Explanation
CFA charterholders must comply with the laws and rules governing their profession and must
not engage in any individual behavior that re ects adversely on the entire profession. While
they should act honorably and follow U.S. securities laws, they are obligated to more than
that, as set forth in the Code and Standards.
(Study Session 1, Module 2.1, LOS 2-I.(A))
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SchweserNotes - Book 1
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Question #20 of 181
Andrea Waters is an investment analyst who has accumulated and analyzed several pieces of
nonpublic information through her contacts with drug rms. Although no one piece of the
information she collected is "material," Waters correctly concluded that the earnings of one of
the drug companies would be unexpectedly high in the coming year. According to CFA Institute

Standards of Professional Conduct, Waters:

A) can use the information to make investment recommendations and decisions.

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B) may use the information, but only after approval from a compliance o cer or
supervisor.

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C) cannot legally invest or make recommendations based on this information.
Explanation

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Members who can piece together items of nonmaterial nonpublic information with public
information can, based upon the mosaic theory, use such information for trading purposes.
(Study Session 1, Module 2.3, LOS 2-II.(A))
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SchweserNotes - Book 1

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Question #21 of 181

Mark Williamson is "bearish" on ABC Manufacturing Company. Williamson is so convinced that

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ABC is overpriced, two weeks ago, he shorted 100,000 shares. Today, Williamson is "sur ng"
several popular investment bulletin boards on the internet and posting false derogatory
comments about company management. According to Standard II(B), Market Manipulation,
Williamson has engaged in:

A) both transaction-based manipulation and information-based manipulation.
B) transaction-based manipulation, but not information-based manipulation.
C) information-based manipulation, but not transaction-based manipulation.
Explanation

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Williamson is in violation of Standard II(B), Market Manipulation, by engaging in informationbased manipulation. Information-based manipulation includes, but is not limited to,
spreading false rumors about a rm in order to induce others to trade.
(Study Session 1, Module 2.3, LOS 2-II.(B))

Related Material
SchweserNotes - Book 1

Question #22 of 181

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Steve Reese, CFA, an equity analyst for Bison Investments, has just completed his extensive
research on the long-term prospects of ThetaCorp, a small technology rm that creates medical

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software for hospitals and other medical clinics. Reese has determined that the economic
outlook for ThetaCorp warrants issuing a buy recommendation and has re ected this long-term
view in his report which is being reviewed by Bison's compliance department. The head of
Bison's investment banking department, Mark Hazel, CFA, learned of the report and called

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Reese to suggest that he increase his recommendation to a strong-buy in an e ort to support
Bison's bid to be retained as the lead underwriter for an upcoming bond issue by ThetaCorp.
Hazel explained that the level of risk that Reese has assigned to ThetaCorp is too high and that
with a slight downward adjustment, a strong-buy recommendation would be justi ed. Reese

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agreed to the adjustment and updated his report which he then resubmitted to the compliance

department which gave its o cial approval for distribution. According to CFA Institute

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Standards of Professional Conduct, which of the following is CORRECT? Reese has:

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A) not violated the Standards since he has reasonable basis to support a strong-buy
recommendation.

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B) violated the Standards by failing to deal fairly with all of Bison Investments’ clients.
C) violated the Standards by failing to maintain his independence and objectivity.
Explanation
According to Standard I(B) – Independence and Objectivity, members and candidates must
not allow other entities to compromise the independence and objectivity of their professional
activities. Reese has allowed Hazel to materially in uence his research report. Hazel is the
head of Bison's investment banking department which may have interests at odds with the
equity research department. Ideally, the rm would build a rewall to prevent such
communication between departments.
(Study Session 1, Module 2.1, LOS 2-I.(B))
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SchweserNotes - Book 1

Lin Liu, a Level III candidate, sat for the CFA examination in June in Hong Kong. Liu was very
nervous before and during the exam because she did not study the material as well as she had
planned. She feels particularly weak in the use of complex derivatives to modify portfolio risk
and return and hopes the exam will not have many questions on that topic.
Liu arrived at the exam center very early and planned to do some last minute studying in the
exam room. She had a large backpack with her that contained all of her study notes. When she
arrived at the exam center, the proctor who was checking candidates in at the door told Liu that

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she could not bring her backpack or study notes into the exam room but would need to leave
them somewhere outside the exam center. Liu left the exam room and continued to study until

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the very last minute. She didn't know where to leave her backpack. She remembered that there
was a small closet in the Ladies Lavatory, which was just outside the exam room. She decided
to leave her backpack and notes hidden there.

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Liu showed her current passport and approved calculator to the proctor and was sent to her

assigned seat. She was seated at the end of a row with another candidate to her right. Wang
Chou, lead proctor, read the opening statement to candidates as the exam booklets were
distributed. Wang cautioned candidates not to open the exam booklet until he instructed them

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to do so.

When Masako Yamasaki, the section proctor, distributed the exam booklets, Liu quickly opened

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hers and began to read the rst question. Yamasaki rushed over and told Liu to close her exam

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booklet until Wang instructed candidates to open the booklets. Liu closed her book and waited
patiently for Wang to make his announcement. When instructed to open her booklet, Liu
quickly began taking the exam. Liu's actions at the start of the exam cause Yamasaki to pay

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close attention to her during the exam.
About 50 percent of the morning session consisted of questions about derivatives. Liu became
increasingly nervous about her ability to answer these questions correctly. She remembered
that she had left her notes in the Ladies Lavatory and decided she had nothing to lose by going
to the lavatory and looking at her notes. She raised her hand and received permission from
Yamasaki to go to the lavatory. She retrieved her notes from the closet where she had hidden
them when Yamasaki entered the lavatory and found her with her notes. Yamasaki informed

Liu that she would con scate the notes and inform the CFA Institute of Liu's actions in a proctor
report. Liu then gathered her belongings and left the exam center.

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Question #23 of 181
Are CFA candidates subject to the same disciplinary action for violations of the CFA Institute
Code of Ethics and Standards of Professional Conduct (Code and Standards) for their actions
during the CFA examination as other members of the CFA Institute?

A) Yes, CFA candidates are subject to the same disciplinary action for violations of the
CFA Institute Code and Standards for their actions during the CFA examination.
B) No, CFA candidates are not subject to the same disciplinary action for violations of
the CFA Institute Code and Standards during the exam since they are not members

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C) No, CFA candidates are not subject to the same disciplinary action for violations of
the CFA Institute Code and Standards during the exam but other sanctions may still
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Explanation

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Standard VII(A) Conduct as Participants in CFA Institute Programs speci cally references
candidate's responsibility not to engage in any conduct or commit any act that compromises
the integrity of the CFA designation or the integrity or validity of the examinations leading to
the award of the right to use the CFA designation. Candidates' actions at the exam site or
while taking the exam are covered by this standard. Candidates are subject to disciplinary
action, including expulsion from candidacy in the CFA program.
(Study Session 1, Module 1.1, LOS 1.a)

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SchweserNotes - Book 1

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Question #24 of 181
Several weeks after the exam, Liu received a letter from the Professional Conduct sta of the
CFA Institute's Professional Conduct Program concerning Liu's use of notes during the exam.
When a proctor (complaining party) informs the CFA Institute Professional Conduct Program of
a potential violation of the Code and Standards during the examination, the CFA Institute's
Rules of Procedure permit the Professional Conduct sta to do all of the following EXCEPT:

A) disclose the name, address and phone number of the proctor (complaining party)
to the candidate regardless of the complaining party's wishes.
B) designate another person to act on his or her behalf.

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C) provide the candidate with a notice of inquiry explaining the nature of the
investigation.
Explanation
Under the CFA Institute Rules of Procedure, the identity of the complaining party may be kept
con dential at the complaining party's request. During the CFA exam, proctors and other
exam administration personnel are the complaining parties when they complete proctor
reports on suspected violations of the CFA Institute Code of Ethics and Standards of
Professional Conduct or the examination rules.
(Study Session 1, Module 1.1, LOS 1.a)

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SchweserNotes - Book 1

Question #25 of 181

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After conducting an investigation into Liu's actions, including reviewing proctor reports,
speaking with proctors, and reviewing Liu's notes, the Professional Conduct sta noti ed Liu
they were proposing the following sanction: voiding of exam results and a permanent
expulsion from participation in the CFA program. Liu is devastated and determines to appeal
the proposed sanction.

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Which of the following best describes the option open to Liu to appeal the Professional

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Conduct sta proposed sanction?

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A) Liu may admit wrongdoing and enter into a stipulation agreement with the
Designated O cer for a lesser sanction.

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B) Liu may reject the proposed sanction.
C) Liu may request a panel review.
Explanation
After the Professional Conduct sta proposes a sanction for violation of the CFA Institute
Code and Standards during an examination, the candidate can accept or reject the proposed
sanction. If the candidate rejects the proposed sanction the matter is referred to a panel
consisting of members of the Disciplinary Review Committee.
(Study Session 1, Module 1.1, LOS 1.a)
Related Material
SchweserNotes - Book 1

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Question #26 of 181
Liu rejected the charges and a panel was convened to review the proposed sanction. The panel
was convened by telephone and panel members heard testimony from Liu and Yamasaki. Liu
admitted that she had reviewed her notes, recognized her error and expressed remorse and a

commitment to avoid violations of the Code and Standards in the future.
A panel review has the authority to issue all of the following decisions with respect to sanctions
EXCEPT:

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A) refer the matter back for further review.

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B) impose a lesser sanction.
C) reverse the sanction.
Explanation

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The member or candidate may reject the charges brought against them and the matter is
then referred to a panel review. The panel, composed of Disciplinary Review Committee
members, determines whether or not a violation of the Code and Standards or testing
policies has occurred and if so what sanction should be imposed. Sanctions include public
censure, suspension of membership and use of the CFA designation, revocation of the CFA
charter, and prohibiting candidates from further participation in the CFA Program. There is
no further appeal process once the panel review is concluded.

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(Study Session 1, Module 1.1, LOS 1.a)

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Question #27 of 181
Throughout the investigation and appeal processes, Liu was concerned that her friends and
colleagues would learn that she was under investigation and might be expelled from the CFA
Program.
Which of the following circumstances would permit the CFA Institute Professional Conduct
Program to disclose information about a professional conduct investigation to external parties?

A) Criminal activity is uncovered.

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B) A complaining party wants to know what the Professional Conduct Program is

doing to investigate his complaint.
C) The Professional Conduct sta receives a call from a journalist about a case under
investigation.
Explanation

(Study Session 1, Module 1.1, LOS 1.a)
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Question #28 of 181

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SchweserNotes - Book 1

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The Professional Conduct sta must maintain strict con dentiality regarding complaints,
investigations, proceedings and records. Exceptions to the con dentiality policy will only be
made in the following circumstances: (a) failure to disclose the ndings has the potential to
cause serious harm to the profession, (b) criminal activity is uncovered, (c) con dentiality is
waived by the member or candidate, and (d) disclosure is required by law. However, if a
public censure, timed or permanent suspension of membership and the right to use the CFA
designation is imposed on a covered person, the CFA Institute may publish the covered

person's name and information about the violation. This information is usually published in
the CFA Magazine for violations regarding professional practice and in the Candidate Bulletin
for exam-related violations.

After she received the Notice of Inquiry from the Professional Conduct sta , Liu had fully

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cooperated with the investigation into her actions during the CFA Exam. If a member or

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candidate receives a Notice of Inquiry about an alleged violation of the CFA Institute Code and
Standards and fails to cooperate fully with the investigation, which of the following sanctions

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are the Professional Conduct sta likely to impose?

A) Suspension or prohibited from further participation in the CFA Program.
B) 1-year Timed Suspension.
C) Private Censure.
Explanation
The Professional Conduct sta is likely to suspend and prohibit a candidate from further
participation in the CFA Program for failure to cooperate with a professional conduct
investigation. Other sanctions may include public censure, suspension of membership and
use of the CFA designation.
(Study Session 1, Module 1.1, LOS 1.a)
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SchweserNotes - Book 1

Question #29 of 181
Greg Allen is a security analyst and visits David Dawson, the Chief Financial O cer of Edmonds
Company. Dawson reveals a great deal of nonmaterial nancial data to Allen, data that Dawson
routinely reveals to all security analysts who visit him. From this data and other industry
information, Allen conjectures that Edmonds is likely to make a tender o er for another

company. Allen:

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A) can publish his conclusion in a research report.

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company in the industry, a fact that if true would be considered material to the value of the

B) should send a copy of the report to Dawson for veri cation before disseminating
the report to clients.

tender o er is announced.
Explanation

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C) must not disseminate the information or use it for trading purposes until the

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While the information that Allen received from the Edmonds CEO may be non-public, we are
also told that it is non-material. Because Allen has reached his investment conclusion
through an analysis of public information together with items of non-material non-public
information (ie. "mosaic theory"), publishing this conclusion is not a violation of the Code and
Standards.

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(Study Session 1, Module 2, LOS 2.a)
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SchweserNotes - Book 1

Question #30 of 181

An analyst preparing a report needs to cite which of the following?

A) A recent quote from the Federal Reserve Chairman.
B) The individual who developed a chart from the same rm.
C) Estimates of betas provided by Standard & Poor's.
Explanation
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Statistics provided by a recognized agency, such as Standard and Poor's, do not need to be
cited. Charts, quotes, and algorithms developed by the rm would need to be cited when
they are used but the individual(s) who developed the materials within the rm do not need
to be cited.
(Study Session 1, Module 2.2, LOS 2-I.(C))
Related Material
SchweserNotes - Book 1

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Question #31 of 181
Marc Randall, CFA, is an investment analyst. During a meeting with a potential client, Randall's

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boss states that, "You can be sure our investments will always outperform Treasury Bonds
because of our ne research sta members, like Marc." Randall knows that this statement is:

A) a violation of the Standard concerning prohibition against misrepresentation.

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B) not in violation of the Code and Standards.

C) a violation of duciary duties owed to clients under the Standards.
Explanation

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Under Standard I(C), members are forbidden from guaranteeing a speci c rate of return on
volatile investments. Therefore, the statement is in violation of the Standard.

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(Study Session 1, Module 2.2, LOS 2-I.(C))

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SchweserNotes - Book 1

Question #32 of 181
If an analyst suspects a client or a colleague of planning or engaging in ongoing illegal activities,
which of the statements about the actions that the analyst should take is most correct?
According to the CFA Institute Standards of Professional Conduct, the analyst should:

A) consult counsel to determine the legality of the activity and disassociate from any
illegal or unethical activity if the member has reasonable grounds to believe that
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B) disassociate from any illegal or unethical activity if the member has reasonable
grounds to believe that the activity is illegal or unethical.
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C) consult counsel to determine the legality of the activity.
Explanation
According to the procedures for compliance involving Standard I(A), CFA Institute members
should determine legality and disassociate from any illegal or unethical activity.
(Study Session 1, Module 2.1, LOS 2-I.(A))
Related Material
SchweserNotes - Book 1

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Question #33 of 181

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A CFO who is a CFA Institute member is careful to make his press releases— some of them
containing material and previously undisclosed information—clear and understandable to his
readers. While writing a new release, he often has his current intern proofread rough drafts. He
also sends electronic copies to his brother, an English teacher, to get suggestions concerning

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style and grammar. With respect to Standard II(A), Material Nonpublic Information, the CFO is:

A) only in violation by e-mailing the pre-release version to his brother but not the
intern, because the intern is in essence an employee of the rm.

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B) not in violation of the Standard.

C) violating the standard by either showing the pre-release version to his intern or

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Explanation

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sending it to his brother.

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Standard II(A), Material Nonpublic Information, says that a member must be careful about
handling material non-public information. As a member of CFA Institute, the CFO must limit
the people who see important information before it is released. It would not be appropriate
to involve an intern or a relative in the process.
(Study Session 1, Module 2.3, LOS 2-II.(A))
Related Material
SchweserNotes - Book 1

Question #34 of 181
A CFA charterholder who comes to work intoxicated is:
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A) not in violation of the standards.
B) in violation of Standard I(D) concerning professional misconduct.
C) in violation of Standard IV(A) concerning duties to employer.

Explanation
Being intoxicated at work is poor personal behavior. It is a violation of Standard I(D), which
covers professional competence and integrity.
(Study Session 1, Module 2.2, LOS 2-I.(D))
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SchweserNotes - Book 1

Question #35 of 181

Which of the following is a CORRECT statement of a member's duty under the Code and

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Standards?

A) A member who trades securities in a foreign securities market where no applicable
local laws or stock exchange rules regulate the use of material nonpublic
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B) A member is required to comply only with applicable local laws, rules, regulations,

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or customs even though the CFA Institute Code and Standards may impose a higher

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b
C) In the absence of speci c applicable law or other regulatory requirements, the Code

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and Standards govern the member's actions.
Explanation

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The Code and Standards represent a minimum level of guidance for members' actions, not a
maximum level. The key to remember here is that whether the local area does or does not
have standards governing member's actions, one must follow the stricter standard
environment.

(Study Session 1, Module 2.1, LOS 2-I.(A))
Related Material
SchweserNotes - Book 1

Question #36 of 181
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A CFA charterholder gathers the closing prices of a security from a widely read publication. The
charterholder uses the data as part of a report she is preparing and fails to report the data
source in the report. This is:

A) a violation of Standard I(C).
B) not a violation of Standard I(C) if the data can be gathered from several public
sources.
C) not a violation of Standard I(C) if the data cannot be gathered from several public
sources.
Explanation

(Study Session 1, Module 2.2, LOS 2-I.(C))
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Question #37 of 181

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SchweserNotes - Book 1

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Since the security prices represent factual information that can be veri ed from several
sources, there is no violation. It could have been a violation had the information been
exclusively published by the source.

Steve Waters, a Level I CFA candidate, has decided to enter into a long position of Farmco stock.

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Since Farmco is thinly traded, Waters is concerned the order will overwhelm the liquidity of

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Farmco and the price will surge. Waters engages in a series of block trades in order to
accomplish the purchase. According to Standard II(B), Market Manipulation, Waters has

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engaged in:

A) both transaction-based manipulation and information-based manipulation.
B) transaction-based manipulation, but not information-based manipulation.
C) neither transaction-based manipulation nor information-based manipulation.
Explanation
Waters is not in violation of Standard II(B), Market Manipulation. Transaction-based
manipulation includes, but is not limited to, transactions that arti cially distort prices or
volume. Information-based manipulation includes, but is not limited to, spreading false
rumors about a rm in order to induce others to trade.
(Study Session 1, Module 2.3, LOS 2-II.(B))
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SchweserNotes - Book 1

Question #38 of 181
Mary White, CFA, sits on the board of directors of XYZ Manufacturing, Inc. She discovers that
management has knowingly participated in an activity she knows is illegal. According to the CFA
Institute Standards of Professional Conduct, White is least likely to be required to:

A) seek legal advice to determine what actions should be taken.

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B) report the violation to the CFA Institute Professional Conduct Program.

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C) disassociate herself from the activity.
Explanation

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Members are encouraged -- but not required -- to report violations of others. Standard I(A),
Knowledge of the Law. Prohibition against knowingly practicing or assisting in violation of
laws, rules, and regulations. If White knows that someone has engaged in a possible illegal
activity, she should: (1) report the nding to the appropriate supervisory person at her rm,
(2) if the situation is not remedied, disassociate herself from the situation, and (3) seek legal
advice to see what other actions, such as notifying the proper regulatory agency, should be
taken.

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SchweserNotes - Book 1

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(Study Session 1, Module 2.1, LOS 2-I.(A))

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Question #39 of 181
In accordance with Standard III (A) Loyalty, Prudence and Care, which of the following
statements is least accurate? Members and Candidates should:

A) utilize client brokerage to the sole bene t of the client.
B) submit to clients, at least quarterly, itemized statements detailing all of the period’s
transactions.
C) vote all proxies on behalf of clients in a responsible manner.
Explanation

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Because of the time and expense involved in voting a proxy, Members and Candidates are
not required to vote every proxy. A cost bene t analysis can be performed to determine if it
is necessary to vote a proxy.
(Study Session 1, Module 1.1, LOS 1.b)
Related Material
SchweserNotes - Book 1

Question #40 of 181

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CFA Institute believes:

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A) that a minimum level of professional responsibility and conduct dictates that

members be aware of and comply with laws, rules, and regulations governing their
d
B) that rms should comply with all domestic laws and regulations and that these laws
also govern behavior in foreign markets, regardless of foreign laws and

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C) that a maximum level of professional responsibility and conduct dictates that
members be aware of and comply with laws, rules, and regulations governing their
d
Explanation

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CFA Institute's Code and Standards dictate a minimum level of conduct. Standards should not
be based on ethics of upper management and the board of directors of a company. Firms
must comply with the strictest applicable standards, whether they be foreign or domestic
laws and regulations.
(Study Session 1, Module 2.1, LOS 2-I.(A))
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SchweserNotes - Book 1

Question #41 of 181

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