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

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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."

Question #2 of 181

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C) not in violation of any Standard.

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

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

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

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prospectus of the small cap venture fund. This action is:

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A) in violation of the Standard concerning disclosure of con icts to clients and prospects.

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B) in violation of the Standard concerning disclosure of additional compensation
arrangements.

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C) not in violation of the Code and Standards.

Question #3 of 181
Betsy Fox is an investment advisor who has a client, Don Gordon, who is an employment
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
to purchase 3,000 shares for his portfolio. Fox:
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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
account.

Question #4 of 181

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According to CFA Institute Standards of Professional Conduct, which of the following

plagiarism applies to written materials:

A) and oral communications only.
B) only.

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statements about the prohibition against plagiarism is most correct? The prohibition against

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Question #5 of 181

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C) oral communications, and telecommunications.

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explicitly?

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

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

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along.

B) Consulting with colleagues about opinions you reach in your research.
C) Maintaining a list of colleagues who have violated the CFA Institute standards.

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

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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.

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

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Question #7 of 181

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

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 honesty,

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Question #8 of 181

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C) Members shall use reasonable care and exercise independent professional judgment.

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Susan Nielsen, CFA, is an equity research analyst on a fact- nding property tour with 6 other

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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,

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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:

A) not in violation of Standard I(B) "Independence and Objectivity" because commercial
travel is e ectively unavailable.
B) in violation of Standard I(B) "Independence and Objectivity."
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 accurate and
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Question #9 of 181
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.

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C) No, because the member unknowingly broke the rule.

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B) Yes, because the member did not maintain knowledge and know of the rule.

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Question #10 of 181

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

A) exploiting di erences in market ine ciencies.

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

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related derivative instrument.

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technologies.

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

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.

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

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Question #12 of 181

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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

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regulatory authorities.

B) inform their employer, clients, and potential clients of bene ts received for
recommending products or services.
C) receive permission from both their employer and outside clients to engage in
investment consulting outside the rm.

Question #13 of 181

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

A) places the clients rst.
B) consults with other members on a regular basis.
C) practices in a professional and ethical manner.

Question #14 of 181

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According to the Code of Ethics, when practicing in a professional and ethical manner the goal

A) increase membership in CFA Institute.

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is to:

B) resolve con icts between clients and employers.

Question #15 of 181

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C) re ect credit on members and the profession.

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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,

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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.
C) violated Standard IV(A) Loyalty.

Question #16 of 181

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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:

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.

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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

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the viability of creating her own stock portfolio. Gates feels that this would be a mistake
because she only has $150,000 to invest, and states, "I have experience creating stock
portfolios, and it does not make sense to do so with only $150,000." The woman she has
chatted with sends her an e-mail and eventually becomes a client of hers. Gates has:

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A) not violated the Standards.

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B) violated the Standards by misrepresenting her experience.

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C) violated the Standards by soliciting business over the Internet.

Question #18 of 181
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.
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C) constitutes professional misconduct as de ned in the Code and Standards.

Question #19 of 181
Which of the following statements about the responsibilities of CFA charterholders is CORRECT?
CFA charterholders:

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 engage in

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any individual behavior that re ects adversely on the entire profession.

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C) need not comply with the laws and rules governing their profession or must not engage

Question #20 of 181

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in any individual behavior that re ects adversely on the entire profession.

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

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information she collected is "material," Waters correctly concluded that the earnings of one of

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the drug companies would be unexpectedly high in the coming year. According to CFA Institute

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Standards of Professional Conduct, Waters:

A) can use the information to make investment recommendations and decisions.
B) may use the information, but only after approval from a compliance o cer or

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supervisor.

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

Question #21 of 181

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

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C) information-based manipulation, but not transaction-based manipulation.

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Question #22 of 181

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
Reese to suggest that he increase his recommendation to a strong-buy in an e ort to support

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Bison's bid to be retained as the lead underwriter for an upcoming bond issue by ThetaCorp.

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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:

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

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

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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
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
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

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to leave her backpack and notes hidden there.
Liu showed her current passport and approved calculator to the proctor and was sent to her

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

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

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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

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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

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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.

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?
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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 of the
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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 be
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Question #24 of 181

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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

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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.

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Question #25 of 181
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.
Which of the following best describes the option open to Liu to appeal the Professional
Conduct sta proposed sanction?

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.

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

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commitment to avoid violations of the Code and Standards in the future.

EXCEPT:

A) refer the matter back for further review.

C) reverse the sanction.

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Question #27 of 181

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B) impose a lesser sanction.

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A panel review has the authority to issue all of the following decisions with respect to sanctions

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Throughout the investigation and appeal processes, Liu was concerned that her friends and

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colleagues would learn that she was under investigation and might be expelled from the CFA
Program.

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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.
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.

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Question #28 of 181
After she received the Notice of Inquiry from the Professional Conduct sta , Liu had fully
cooperated with the investigation into her actions during the CFA Exam. If a member or
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
are the Professional Conduct sta likely to impose?

A) Suspension or prohibited from further participation in the CFA Program.
B) 1-year Timed Suspension.

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C) Private Censure.

Question #29 of 181

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

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company. Allen:

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A) can publish his conclusion in a research report.

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

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

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o er is announced.

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.
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Question #31 of 181
Marc Randall, CFA, is an investment analyst. During a meeting with a potential client, Randall's
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.
B) not in violation of the Code and Standards.

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

Question #32 of 181

If an analyst suspects a client or a colleague of planning or engaging in ongoing illegal activities,

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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 the activity is

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B) disassociate from any illegal or unethical activity if the member has reasonable grounds

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to believe that the activity is illegal or unethical.

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C) consult counsel to determine the legality of the activity.

Question #33 of 181
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
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 sending
it to his brother.

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.

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Question #35 of 181

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C) in violation of Standard IV(A) concerning duties to employer.

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

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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 information

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B) A member is required to comply only with applicable local laws, rules, regulations, or

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

Question #36 of 181
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).
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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.

Question #37 of 181
Steve Waters, a Level I CFA candidate, has decided to enter into a long position of Farmco stock.
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.

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Question #38 of 181

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C) neither transaction-based manipulation nor information-based manipulation.

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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

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Institute Standards of Professional Conduct, White is least likely to be required to:

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A) seek legal advice to determine what actions should be taken.
B) report the violation to the CFA Institute Professional Conduct Program.
C) disassociate herself from the activity.

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.
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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.

Question #40 of 181
CFA Institute believes:

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

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be aware of and comply with laws, rules, and regulations governing their conduct.

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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 requirements.
C) that a maximum level of professional responsibility and conduct dictates that members

Question #41 of 181

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be aware of and comply with laws, rules, and regulations governing their conduct.

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Greg Allen is a security analyst and visits David Dawson, the Chief Financial O cer of Edmonds

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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

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information, Allen conjectures that Edmonds is likely to make a tender o er for another
company in the industry, a fact that if true would be considered material to the value of the

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company. Allen:

A) should send a copy of the report to Dawson for veri cation before disseminating the
report to clients.
B) can publish his conclusion in a research report.
C) must not disseminate the information or use it for trading purposes until the tender
o er is announced.

Question #42 of 181
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Michael Bellow, CFA, CAIA, is an investment banker who is involved with an initial public
o ering (IPO) of NewCo. Because this is Bellow's rst involvement in an IPO, he reports to an
experienced supervisor. While reviewing past nancial statements provided by NewCo, Bellow
suspects that NewCo deliberately overstated its earnings for the past several quarters. Bellow
seeks the advice of his rm's highly competent general counsel and follows the advice given
without deviation. Based on the general counsel's advice, Bellow consults his immediate
supervisor about the suspected overstatement of earnings. After reviewing the situation,
Bellow's supervisor explains why NewCo's calculations of its earnings are correct. Bellow
realizes that his inexperience and exuberance initially led him to an incorrect conclusion about
NewCo's earnings.

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the law, and Standard I(C), Misrepresentation, is CORRECT? Bellow:

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Which of the following statements about Bellow's actions involving Standard I(A), Knowledge of

A) violated Standard I(A) but did not violate Standard I(C).
B) did not violate either Standard I(A) or Standard I(C).

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Question #43 of 181

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C) violated both Standard I(A) and Standard I(C).

Timothy Hooper, CFA, is a security analyst at an investment rm. In his spare time, Hooper

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serves as a volunteer for City Pride, which collects clothes for the homeless. Hooper has

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occasionally given some of the clothes to his friends or sold the clothes instead of returning all
of the clothing to City Pride. City Pride discovers what he has been doing and dismisses him.
Later, City Pride learns that other volunteer organizations have dismissed Hooper for similar

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actions. Has Hooper violated Standard I(D) on professional misconduct in the CFA Institute
Standards of Professional Conduct?

A) No, because Hooper's conduct is unrelated to his professional activities as a security
analyst.
B) Yes.

C) No, because Hooper volunteers his services to City Pride.

Mary Montpier, CFA, is an equity analyst located in the Malaysia o ce of World Class Advisers.
The rm provides investment advice and nancial-planning services globally to institutional and
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retail clients. The Malaysia o ce was opened last year to provide additional international
investment opportunities for U.S. clients. Montpier covers small-cap stocks in the region.
Montpier's supervisor, Rick Reynolds, CFA, works in New York.
Jim Taylor is an analyst in New York who works at World Class Broker-Dealer, a sister company
of World Class Advisers. Taylor covers health-care and biotech stocks for the rm. Taylor
recently completed Level I of the CFA examination and is registered for the Level II examination
next year. Taylor works for John James, CFA.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of
material, nonpublic information is common practice in analyst research reports and

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recommendations, and is not prohibited by law in Malaysia. Montpier has acquired material,
nonpublic information on the research pipeline of Circuit Secrets, a Malaysian semiconductor

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company. The nonpublic information makes the company seem like a ne investment. After
extensive research through traditional means, Circuit Secrets appeared to be fully valued
relative to its growth potential – until Montpier found the nonpublic information.

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In preparation for a client meeting, James asks Taylor to prepare a research report on attractive
companies in the health-care industry. Since Taylor is busy preparing for company conference
calls, James tells him to "throw something together." To meet James' request, Taylor obtains
reports on Immune Health Care and Remedy Corp., two companies that he likes, but has not
researched in depth. Taylor takes the original reports, which were prepared by a small

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brokerage rm in the Netherlands, adds some general industry information, incorporates
World Class's proprietary earnings-growth model, and submits "strong buy" recommendations

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to James for the stocks. Although written procedures require James to review all analyst reports

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prior to release, time constraints consistently prevent him from reviewing the reports prior to
distribution.

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Montpier is proud of her CFA charter. In fact, she often boasts that she is one of the elite
members of the CFA Institute that passed all three exams consecutively without failing. Taylor
is also proud of the CFA program. He told his friends and family the CFA designation is globally
recognized in the eld of investment management and research. Furthermore, Taylor states
that he believes the program will enhance his portfolio management skills and further his
career development.
In her free time, Montpier has begun consultation for members of a local investment club. The
club is in the process of developing an appropriate compensation package for her services,
which to date have included nancial-planning activities and investment research. Montpier
informs the investment club that she has a full-time job at World Class Advisers, which o ers

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similar services. The investment club gave Montpier written permission to consult for them
despite her full-time work.
To gain insight on biotech stocks, Taylor registers for an upcoming asthma study conducted by
Breakthrough Corp., through which he and others will be the subject of testing for the e cacy
of several new drugs. On his application, longtime asthma su erer Taylor indicates that he has
the appropriate medical condition for the study and signs a con dentiality agreement. During
the study, a researcher shows Taylor a spreadsheet detailing the progress of Breakthrough's
research pipeline. Two of the new drugs on which Breakthrough is awaiting regulatory approval
have serious negative side e ects in patient testing. This information con rms suspicions
Taylor had developed after extensive research and conversations with company executives

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regarding nonmaterial, nonpublic information, though he was not certain about the names of
the drugs until he saw the spreadsheet. At the conclusion of the study, Taylor releases a report

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detailing the drugs' side e ects and recommends that clients "sell" Breakthrough Corp.
Over the next two weeks, Breakthrough releases information that the drugs in question have

than 30 percent on the news.

Question #44 of 181

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been held up by a regulatory agency pending additional investigation. The stock plunges more

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Which of the following is a violation of the Code and Standards?

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A) Taylor sends out a resume referring to himself as a Level II CFA candidate and indicating
his intention to take the Level II test in June.

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B) James has dinner with Taylor and promises to provide Taylor with three weeks o in
May to study for the CFA exam and o er some test-taking tips.

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C) Reynolds approves Montpier’s report on Circuit Secrets immediately, but tells his
traders to wait a week before buying the stock themselves.

Question #45 of 181
Which of the following statements about Montpier's analysis of Circuit Secrets is CORRECT?

A) Montpier’s best course of action is to initiate coverage of Circuit Secrets as a “hold,” and
attempt to get the company to disclose the nonpublic information.

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B) If Montpier prepares a research report for all World Class clients recommending Circuit
Secrets as a Buy, but does not reveal the nonpublic information, she has still violated
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C) Montpier could satisfy the requirements of Standard II(A): Material Nonpublic
Information by producing a research report on Circuit Secrets for Malaysian clients, but
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Question #46 of 181

Program:

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A) Montpier is not in compliance, and Taylor is in compliance.

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With regard to Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA

B) Montpier is in compliance, and Taylor is in compliance.

Question #47 of 181

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C) neither Montpier nor Taylor is in compliance.

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Misrepresentation?

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Which of the following actions could Taylor take to ensure he is not in violation of Standard I(C):

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A) Just use excerpts from the original reports, rather than copying the whole reports.
B) Base his report on information from Value Line and Standard & Poor’s reports rather
than research from rival analysts.

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C) Initiate coverage of Immune Health Care and Remedy Corp. as holds, not strong buys,
until he has time to do further research.

Question #48 of 181

Which of the following statements regarding Standard IV(A): Loyalty to Employer is CORRECT?

A) By accepting compensation for his role in the medical study, Taylor is violating the
Standard.
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B) Despite getting written permission from her client to consult, Montpier is not in
compliance with the Standard.
C) Neither Taylor nor Montpier is in violation of the Standard.

Question #49 of 181
Taylor's actions regarding Breakthrough Corp.:

A) did not violate Standard I(D): Misconduct because he did not misappropriate the

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information.

in the public domain.

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B) violate Standard II(A): Material Nonpublic Information because the information was not

C) do not violate Standard II(A): Material Nonpublic Information because he was only

Question #50 of 181

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con rming what he already suspected.

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Which of the following does NOT violate Standard I(D), Misconduct? Roland Lawson, a nancial

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analyst:

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A) is arrested for participating in a nonviolent protest.
B) drinks excessively during business meetings with clients and returns to work under the

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in uence of alcohol.

C) committed perjury in connection with a lawsuit against his rm.

Question #51 of 181
The rst component of the Code of Ethics does NOT explicitly say that a CFA Institute member
will act with which of the following?

A) Integrity.
B) Competence.
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C) Solemnity.

Question #52 of 181
Mega Securities, a multinational investment advisor based in the United States, employs the
following analysts who practice in multiple jurisdictions.
Melissa Black, CFA, resides in Country N, which has no securities laws or regulations, but
does business in Country L, which has securities laws and regulations that are less strict

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than the Code and Standards.

Tom White, a CFA Institute member, resides in Country L, but does business in Country S,

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which has securities laws and regulations that are stricter than the Code and Standards.
According to the CFA Institute Code and Standards, which of the following statements about
Black and White is CORRECT?

B) law of

law of
Country L

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Country N

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Standards

law of
Country S

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A) Code and

White must
adhere to

the

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Black must
adhere to
the

C) law of

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Country L

law of
Country S

Question #53 of 181
A copyrighted technique for measuring the downside risk of an investment has just been
revealed to the public. If an analyst adopts the technique, he must cite the use of the technique
in all research reports in which the technique is used EXCEPT:

A) Neither of these answers provide grounds for an exception.

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B) if the analyst uses reasonable care and veri es that the technique provides superior
results.
C) if the analyst does not modify the technique at all.

Question #54 of 181
Regarding non-public information, which one of the following statements is NOT correct?

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A) An analyst may use some types of non-public information.
B) Disclosing material non-public information would have an impact on the price of a

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security or be of interest to a reasonable investor.

C) A member can be summarily suspended for having received material non-public

Question #55 of 181

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information.

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CFA Institute members should encourage their employers to do all of the following EXCEPT:

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A) make clear that dishonest personal behavior re ects poorly on the profession.
B) conduct background checks on potential employees to ensure that they are of good

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character and eligible to work in the investment industry.

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C) require employees to write personal ethics statements.

Question #56 of 181
A stockbroker who is a member of CFA Institute has a part-time housekeeper who also works
for the CEO of Festival, Inc. One day the housekeeper mentions to the broker that she saw the
CEO of Festival having a conversation at his home with John Tater, who is a nationally known
corporate lawyer and consultant. The stockbroker is restricted from trading on this
information:

A) for both of the reasons listed here.
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B) if the housekeeper says the meeting concerned a tender o er and the broker knows
that it is non-public information.
C) only if the broker knows that the meeting is non-public information.

Question #57 of 181
According to the CFA Institute Standards of Professional Conduct, Standard I(A), Knowledge of
the Law, members shall not knowingly participate or assist in any violations of laws, rules, or

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regulations. An analyst:

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A) is held responsible for participating in illegal acts when the law is evident to anyone
knowing the law and is held responsible for violations by others when the analyst is
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B) is held responsible for participating in illegal acts when the law is evident to anyone
knowing the law and can participate in a violation by having knowledge of the violation

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C) must report all legal violations to the proper regulatory commission and is held
responsible for participating in illegal acts when the law is evident to anyone knowing

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Question #58 of 181

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Which of the following statements about the CFA Institute Code and Standards is most
accurate? The Code and Standards:

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A) do not require that members report legal violations to the appropriate governmental or

regulatory organization.
B) prohibit members from accepting gifts that create a con ict with their employer's
interest.
C) require members to persuade the perpetrator to cease illegal activities.

Question #59 of 181

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