CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL

CONDUCT
a. Describe the structure of the CFA Institute Professional Conduct Program and the process for the
enforcement of the Code and Standards

Question 1
Who most likely determines whether a violation of the CFA Institute Code and Standards or testing policies
has occurred and what sanction should be imposed? The:

A. Professional Conduct Staff and the Disciplinary Review Committee

B. Professional Conduct Staff
C. Disciplinary Review Committee

Page 1
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

A is correct.

Both the Professional Conduct Staff and the Disciplinary Review Committee are responsible for
determining whether a violation of the Code and Standards or testing policies has occurred and if so what
sanction should be imposed. Following their investigation, the Professional Conduct Staff may conclude the
inquiry with no disciplinary sanction, issue a cautionary letter, or continue proceedings to discipline the
member or candidate which include the charges and a proposed sanction. If that proposal is rejected by
the member or candidate, the matter is referred to a panel composed of DRC Members. The panel’s task is
to determine whether a violation of the Code and Standards or testing policies occurred and if so what
sanction should be imposed.

B is incorrect because both the Professional Conduct Staff and the Disciplinary Review Committee are
responsible for determining whether a violation of the Code and Standards or testing policies has occurred
and if so what sanction should be imposed.

C is incorrect because both the Professional Conduct Staff and the Disciplinary Review Committee are
responsible for determining whether a violation of the Code and Standards or testing policies has occurred
and if so what sanction should be imposed.

Page 2
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
a. Describe the structure of the CFA Institute Professional Conduct Program and the process for the
enforcement of the Code and Standards

Question 2
Holly Baker, CFA is explaining the CFA Institute Code of Ethics to a client. Which of the following
statements could Baker make to most likely reflect disciplinary sanctions the CFA Institute may impose?
Sanctions include:

A. fines for violations.

B. revocation of membership.
C. banishment from the industry.

Page 3
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

B is correct as the CFA Institute may revoke membership for violations of the Institute Code of Ethics.

A is incorrect because CFA Institute Bylaws do not include fines as a sanction.

C is incorrect as CFA Institute does not have the authority to ban an individual from the business and does
not always apply sanctions to every violation of its Code.

Page 4
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
a. Describe the structure of the CFA Institute Professional Conduct Program and the process for the
enforcement of the Code and Standards

Question 3
Which of the following least likely forms the basic structure for enforcement of the CFA Institute
Professional Conduct Program?

A. Bylaws
B. Rules of Procedure
C. Board of Governors

Page 5
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

C is correct. Although the Board of Governors maintains oversight and responsibility for the Professional
Conduct Program, the CFA Institute Bylaws and Rules of Procedure form the basic structure for
enforcement of the Code and Standards.

A is incorrect because although the Board of Governors maintains oversight and responsibility for the
Professional Conduct Program the CFA Institute Bylaws and Rules of Procedure form the basic structure for
enforcement of the Code and Standards.

B is incorrect because although the Board of Governors maintains oversight and responsibility for the
Professional Conduct Program the CFA Institute Bylaws and Rules of Procedure form the basic structure for
enforcement of the Code and Standards.

Page 6
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
b. State the six components of the Code of Ethics and the seven Standards of Professional Conduct

Question 4
Which of the following statements is most likely consistent with the CFA Institute Code of Ethics? CFA
Institute members and CFA candidates must:

A. promote the integrity of and uphold the rules governing capital markets.
B. practice the highest level of personal and professional integrity and always act in the best interest of
their employers.
C. maintain their professional competence and require investment professionals under their supervision
to adopt the CFA Code of Ethics.

Page 7
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

A is correct because the Code of Ethics requires CFA members and candidates to promote the integrity of
and uphold rules governing capital markets. While the Code of Ethics requires members and candidates to
act with integrity, and the interests of the client are paramount, not all requests of clients are appropriate
to follow, particularly if considered unethical or illegal. The Code of Ethics does not require members and
candidates to encourage others to pursue the CFA designation, but to improve their professional
competence.

B is incorrect because there are times when acting in the best interests of an employer may conflict with
the Code and Standards or in the best interests of clients

C is incorrect because there is no such requirement for supervisors.

Page 8
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
b. State the six components of the Code of Ethics and the seven Standards of Professional Conduct

Question 5
Which of the following statements most likely reflects one of the six components of the CFA Code of
Ethics? Candidates must:

A. place the integrity of the investment profession above their own interests.
B. promote the viability of the global capital markets for their employer’s benefit.
C. ignore unprofessional conduct displayed by others within the profession.

Page 9
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

A is correct. CFA charterholders and candidates must place the integrity of the investment profession and
the interests of clients above their own personal interests.

B is incorrect because CFA charterholders and candidates must promote the integrity and viability of the
global capital markets for the ultimate benefit of society.

C is incorrect because charterholders and candidates must practice and encourage others to participate in
a professional and ethical manner that will reflect credit on themselves and the profession. By ignoring
unprofessional conduct of others, a member or candidate is not encouraging others to behave in a manner
that reflects well on the profession.

Page 10
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
c. Explain the ethical responsibilities required by the Code and Standards, including the sub-sections of
each Standard

Question 6
Tibor Figeczky, CFA, is an equity trader at Global Investment Bank (GB). Figeczky traded the bank’s
investment portfolio profitably for the past three years and earned significant bonuses for his efforts.
Subsequently, internal auditors of GB formally accused Figeczky of exceeding his trading authority and
engaging in unauthorized trades. According to the CFA Institute Code of Ethics and Standards of
Professional Conduct, Figeczky should most likely:

A. disclose the complaint to CFA Institute.

B. refuse further bonuses until the issue is resolved.
C. request a temporary suspension of his CFA Institute membership.

Page 11
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

A is correct as members and candidates must self-disclose on the annual Professional Conduct Statement
all matters that question their professional conduct, such as involvement in civil litigation or a criminal
investigation or being the subject of a written complaint.

B is incorrect as the Code and Standards do not prohibit a member from accepting a bonus while an
investigation into his professional behavior is conducted. In this case, the member’s actions have been
questioned but he has not yet had an opportunity to defend his behavior and may in fact have acted within
his authority and earned the compensation fairly.

C is incorrect as the Code does not require a member to request a suspension of their membership while a
complaint is being investigated.

Page 12
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Standard I(B)–Independence and Objectivity

Question 7

Dilshan Kumar, CFA, is a world-renowned mining analyst based in London. Recently he received an
invitation from Cerberus Mining, a London Stock Exchange listed company with headquarters in
Johannesburg, South Africa. Cerberus asked Kumar to join a group of prominent analysts from around the
world on a tour of their mines in South Africa, some of which are in remote locations, not easily accessible.
The invitation also includes an arranged wildlife safari to Krueger National Park for the analysts. Kumar
accepts the invitation planning to visit other mining companies he covers in Namibia and Botswana after
the safari. To prevent violating any CFA Institute Standards of Professional Conduct, it is most appropriate
for Kumar to only accept which type of paid travel arrangements from Cerberus?
A. Ground transportation to Krueger National Park.
B. Economy class round trip ticket from London to Johannesburg.
C. Flights on a private airplane to the remote mining sites in South Africa.

Page 13
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

C is correct because Standard I(B)–Independence and Objectivity requires members and candidates to use
reasonable care and judgment to maintain their independence and objectivity in their professional
activities. Best practice dictates that Kumar only accept transportation to the remote mining sites in that it
is unlikely he would be able to source commercial flights to the locations and ground transport may not be
viable. As Kumar would normally visit mining sites around the world as part of his job and the fact that he
is combining this trip to other mines site in different countries, it would be inappropriate for Cerberus to
pay for the analyst’s travel expenses from London. While Kumar could go on safari with the group of
analysts, he should pay his own way so as to restrict any influence such a gift could possibly have when
making his investment recommendations on Cerberus.

A is incorrect because while Kumar could go on safari with the group of analysts, he should pay his own
way so as to restrict any influence such a gift could possibly have when making his investment
recommendations on Cerberus.

B is incorrect because Kumar would normally visit mining sites around the world as part of his job and due
to the fact that he is combining this trip to other mine sites in different countries, it would be inappropriate
for Cerberus to pay for his travel expenses from London.

Page 14
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Standard I(B)–Independence and Objectivity

Question 8

Ri Lin, CFA, is a Portfolio Manager with Dynasty Investment Management. Lin is performing research on
Titan Mining for potential inclusion in his fund. Management at Titan is interested in having a well-known
fund manager such as Lin as a shareholder. Titan pays for Lin to fly to a company retreat in Tokyo, where a
brief introductory meeting is followed by attending a sporting event and then dinner at one of the city’s
top restaurants. Lin participates after disclosing the activities to Dynasty’s compliance department. Which
standard did Lin’s actions most likely violate?
A. Disclosures of Conflicts
B. Independence and Objectivity
C. Diligence and Reasonable Basis

Page 15
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

B is correct because Lin is placing himself in a situation where his objectivity or appearance of objectivity
may be compromised, which is a violation of Standard I(B). It would have been more advisable for Lin to
decline having Titan pay for this trip.

A is incorrect because Lin does disclose the activities to Dynasty’s compliance department. If Lin
recommends the security, he may also want to disclose that he went on this company sponsored trip at
that time.

C is incorrect because participating in this trip done not prevent Lin from performing the required analysis
to make an informed investment decision.

Page 16
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Standard I(C) –Misrepresentation

Question 9

Belen Zapata, CFA, is the owner of Kawah Investments. Kawah promises investors returns of up to 12% per
year and claims to achieve this by investing in non-investment-grade bonds and other fixed-income
instruments. Over the next 12 months, bond market yields reach unprecedented lows, and Zapata finds it
impossible to achieve the returns she expected. No investments are ever made by Kawah, and clients are
completely paid back all of their original investment. Zapata most likely violated the CFA Institute
Standards of Professional Conduct because of the:
A. return of capital.
B. promised returns.
C. investment mandate.

Page 17
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

B is correct because the member has misrepresented the returns she could realistically achieve for her
clients, violating Standard I(C), which prohibits members and candidates from guaranteeing clients any
specific return on volatile investments.

A is incorrect because the member has returned investor capital, which is not a violation of the Code and
Standards. However, the member has violated Standard I(C), which prohibits members and candidates
from guaranteeing clients any specific return on volatile investments. With the return of their capital,
investors did not lose their original investment, but they did suffer an economic opportunity loss.

C is incorrect because the investment mandate is not a violation of the Code and Standards. The mandate
is very broadly defined and while it may or may not be appropriate, there is not enough information in the
vignette to make this determination. The promised, but unachieved, yield is the violation that can be
clearly identified.

Page 18
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Standard I(C) –Misrepresentation

Question 10

Bryan Barrett, CFA, runs an investment advisory service providing advice on gold and other commodities to
several large retail banks. Barrett advertises his services in widely read publications to broaden his business
to include retail clients. Because the client base for the institutions that Barrett serves is large, he is
comfortable stating in the ads that thousands of his clients have benefited from his advice. Does Barrett's
advertisement most likely violate any CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, related to Misrepresentation.
C. Yes, related to Communication with Clients.

Page 19
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

B is correct because Barrett’s client base is made up of a small number of large institutions so stating in the
advertisement that his client base is a larger number is a misrepresentation and a violation of Standard
I(C). In addition, since the advertisement focuses only on the benefits and does not mention the potential
risks of these investments it is also potentially misleading to clients.

A is incorrect since the advertisement misrepresents the size of Barrett’s client base. The advertisement is
also potentially misleading to clients as it focuses only on the benefits and does not mention the potential
risks of these investments.

C is incorrect because this Standard has not been violated.

Page 20
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Standard I(D)–Misconduct

Question 11

Which of the following is most likely found in the CFA Institute Standards of Professional Conduct, Standard
I–Professionalism? Members and candidates must:
A. not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that
reflects adversely on their professional reputation, integrity, or competence.
B. place the integrity of the investment profession and the interest of clients above their own interest.
C. maintain and improve their professional competence and strive to maintain and improve the
competence of other investment professionals.

Page 21
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

A is correct. The statement, “Members and Candidates must not engage in any professional conduct
involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional
reputation, integrity, or competence” can be found in the CFA Institute Standards of Professional Conduct,
Standard I–Professionalism (D) Misconduct.

B is incorrect because the statement, “Members and Candidates must place the integrity of the investment
profession and the interest of clients above their own interest” can be found in the CFA Institute Code of
Ethics. It is not part of the CFA Institute Standards of Professional Conduct, Standard I–Professionalism.

C is incorrect because the statement, “Members and Candidates must maintain and improve their
professional competence and strive to maintain and improve the competence of other investment
professionals” can be found in the CFA Institute Code of Ethics. It is not part of the CFA Institute Standards
of Professional Conduct, Standard I–Professionalism.

Page 22
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Standard I(D)–Misconduct

Question 12

Christina Ng, a Level I CFA candidate, defaulted on a bank loan she obtained to pay for her Master’s degree
tuition when her wedding cost more than expected. A micro finance loan company lent her money to pay
off the tuition loan in full including penalties and interest. The micro finance loan company even extended
further credit to pay for her parent’s outstanding medical bills. Unfortunately, her parent’s health
problems escalated to the point where Ng had to take extensive time away from work to deal with the
issues. She was subsequently fired and consequently defaulted on the second loan. As she was no longer
employed, Ng decided to file for personal bankruptcy. Do the loan defaults leading up to Ng’s
bankruptcy most likely violate Standard I(D)–Misconduct?
A. No.
B. Yes, with regard to the first loan default.
C. Yes, with regard to the second loan default.

Page 23
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

A is correct because while Ng’s first loan default, which played a part in the subsequent bankruptcy, is a
result of poor financial choices (i.e., paying for higher wedding costs rather than her tuition loan), neither
of the loan defaults or bankruptcy involves fraudulent or deceitful business conduct but are based on
unfortunate personal circumstances. Therefore, she would most likely not be in violation of Standard I(D)–
Misconduct.

B is incorrect because while Ng’s bankruptcy may reflect poor financial choices by paying for higher
wedding costs rather than her tuition loan, the bankruptcy does not involve fraudulent or deceitful
business conduct. Therefore, she would most likely not be in violation of Standard I(D)–Misconduct.

C is incorrect because the bankruptcy does not involve fraudulent or deceitful business conduct. Therefore,
she would most likely not be in violation of Standard I(D)–Misconduct.

Page 24
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Standard I(D)–Misconduct

Question 13

Ricardo Torres, CFA, is a well-respected telecommunications analyst for Pegasus Advisers. He is known for
his thorough analysis, including interviews with suppliers, customers, and competitors. Torres has a strong
following, and his research reports can often materially affect the market. As a result, Pegasus limits the
distribution of his reports to Pegasus clients. After losing market share to Pegasus for over two years,
Marco Rodrigo, a CFA candidate, reports Torres to the local securities regulator on suspicion of using
insider information to make share recommendations. What CFA Institute Standard of Professional Conduct
has Rodrigo most likely violated?
A. Misconduct
B. Material Nonpublic Information
C. Market Manipulation

Page 25
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

A is correct. Rodrigo has likely violated Standard I(D)–Misconduct by behaving in an unprofessional manner
that reflects adversely on his professional integrity by reporting Torres to the regulator when there is no
apparent evidence Torres is using material nonpublic information. Torres is a well-respected analyst known
for his in-depth, thorough analysis using a mosaic process. It appears Rodrigo only reported Torres to harm
his reputation in order to recapture the market share he has lost over the last two years. There is no
evidence Torres manipulated the market through his research. The research is used for the benefit of the
Pegasus clients. Although the public may consider Torres’ reports to be material because of the fact that
their release can move the market, it does not mean the report must be made available to the public prior
to the release of the report to Pegasus clients.

B is incorrect because there is no evidence Torres manipulated the market through his research. The
research is used for the benefit of the Pegasus clients.

C is incorrect because while the public may consider Torres reports to be material due to the fact that their
release can move the market, it does not mean the report must be made available to the public prior to
the release of the report to Pegasus clients.

Page 26
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Standard I(D)–Misconduct

Question 14

Nicholas Bennett, CFA, is a trader at a stock exchange. Another trader approached Bennett on the floor of
the exchange and verbally harassed him about a poorly executed trade. In response, Bennett pushed the
trader and knocked him to the ground. After investigating the incident, the exchange cleared Bennett from
any wrongdoing. Which of the following best describes Bennett’s conduct in relation to the CFA Institute
Code of Ethics or Standards of Professional Conduct? Bennett:
A. did not violate any Code or Standard.
B. violated the Professional Misconduct Standard.
C. violated both Misconduct and Integrity of Capital Markets Standards.

Page 27
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

B is correct because the CFA Institute Code of Ethics requires members to act with integrity, competence,
diligence, respect, and in an ethical and professional manner; the Standards of Professional Conduct
relating to Professional Misconduct state members and candidates must not commit any act reflecting
adversely on their professional reputation, integrity, or competence. Bennett’s actions violated the Code of
Ethics and the Standard relating to Professionalism but not the Standard relating to Integrity of Capital
Markets.

A is incorrect because Bennett’s actions violated the Code of Ethics and the Standard relating to
Professionalism.

C is incorrect because Bennett’s actions violated the Code of Ethics and the Standard relating to
Professionalism but not the Standard relating to Integrity of Capital Markets.

Page 28
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Standard I(D)–Misconduct

Question 15

Albert Nyakenda, CFA, was driving to a client’s office where he was expected to close a multi-million-dollar
deal when he was pulled over by a traffic policeman although he did not believe he had violated any traffic
laws. When Nyakenda realized the policeman planned to wrongly ticket him for speeding, he offered to
buy him “lunch” so that he could quickly get to his client’s office. The lunch would cost significantly more
than the ticket. The alternative was to go to the police station and file a complaint of being wrongly
accused that would also involve going to court the next day to present his case. Did Nyakenda most
likely violate the CFA Code of Ethics?
A. Yes.
B. No, because he was wrongly accused.
C. No, because the cost of lunch is more than the ticket.

Page 29
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

A is correct because Nyakenda was effectively trying to bribe the policeman so that he would not issue a
speeding ticket. This action violates the Code of Ethics. Despite feeling he was wrongly accused, it is only
his opinion, and may not be based on fact or in a court of law. Nyakenda has a responsibility to act with
integrity and in an ethical as required by the Code of Ethics.

B is incorrect because Nyakenda does not have the authority to determine whether he was wrongly
accused. That is his opinion, not based on fact or in a court of law. He must obey the laws of the country
within which he resides and works and act with integrity and in an ethical manner.

C is incorrect because he must obey the laws of the country within which he resides and works and does
not have the jurisdictional power to determine whether his “punishment” is just. Nyakenda must act with
integrity and in an ethical manner.

Page 30
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Standard I(D)–Misconduct

Question 16

As a condition of his employment with an investment bank, Abasi Hasina, CFA, was required to sign an
employment contract, including a non-compete clause restricting him from working for a competitor for
three years after leaving the employer. After one year, Hasina quits his job for a comparable position with
an investment bank in a country where non-compete clauses are illegal. Lawyers with whom he consulted
prior to taking the new position determined that the non-compete clause was a violation of human rights
and thus illegal. Did Hasina most likely violate the CFA Institute Code of Ethics and Standards of
Professional Conduct?
A. Yes
B. No, because the non-compete clause violates his human rights
C. No, because the non-compete clause is illegal in the new country of employment

Page 31
CFA LEVEL - 1 CODE OF ETHICS & STANDARDS OF PROFESSIONAL
CONDUCT
Solution

A is correct because by failing to adhere to the non-compete clause he agreed to abide by when signing his
employment contract, Hasina shows a lack of professional integrity toward his employer. This behavior
reflects poorly on the good reputation of members and is a violation of the Code of Ethics, which states
that members and candidates must act with integrity, and Standard I(D)–Misconduct, which states that
members and candidates must not engage in any professional conduct involving dishonesty, fraud, or
deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.
The Code of Ethics at times requires a member or candidate to uphold a higher standard than that required
by law, rule, or regulation, or in this case the strict application of the employment agreement.

B is incorrect because Hasina agreed to abide by the three-year non-compete clause when he signed the
contract.

C is incorrect because Hasina broke the contract he signed which obligated him to not work for a
competitor for three years after leaving the employment of the employer. This would be a violation of
Standard I(A)–Knowledge of the Law, which requires that in the event of conflict, Members and Candidates
must comply with the more strict law, rule, or regulation.

Page 32