CFA Level I Ethical and Professional Standards Practice Questions
Question 1
An analyst is leaving her firm and, absent any specific employment agreement or applicable law addressing the issue, wants to take copies of the research work papers she personally created to support past recommendations. Under Standard V(C), Record Retention, what is the general guidance?
- A. She may freely take the records because she personally created the analysis
- B. Absent a specific agreement or regulatory requirement stating otherwise, such records are generally considered the property of the firm, and she should leave them behind
- C. Record retention rules under the Standards apply only to client account statements, not internal research work papers
- D. She must destroy the records upon leaving in order to protect client confidentiality
Show answer and explanation
Correct answer: B. Absent a specific agreement or regulatory requirement stating otherwise, such records are generally considered the property of the firm, and she should leave them behind
Standard V(C) treats records substantiating investment analyses and recommendations as generally belonging to the firm, not the individual analyst, absent an employment agreement or law providing otherwise.
- A. Personal authorship of the analysis doesn't establish personal ownership — work created within the scope of employment is generally the firm's property absent an agreement stating otherwise.
- B. Absent a specific employment agreement or law saying otherwise, research work papers created during employment are generally deemed firm property under Standard V(C), so she should leave them behind.
- C. Standard V(C) record retention guidance applies broadly to supporting research and investment records, not solely to client account statements.
- D. The Standard doesn't require destruction of firm records on departure — the guidance is that such records stay with the firm, not that they must be destroyed.
Question 2
A CFA charterholder supervises a team of research analysts. She learns that one analyst — who reports directly to a different manager on a matrixed team — has been sharing draft earnings estimates with a small group of favored clients before the estimates are finalized and distributed firm-wide, a practice that appears to violate the firm's fair-dealing policy. She takes no action, reasoning that supervisory responsibility for that analyst belongs to his direct manager, not to her. Which best describes her compliance with Standard IV(C) Responsibilities of Supervisors?
- A. She has not violated the Standard, because supervisory responsibility rests solely with the analyst's direct line manager.
- B. She has violated the Standard, because a person with knowledge of a violation and the authority or ability to act must make reasonable efforts to detect and prevent it, regardless of whether another manager holds the formal reporting relationship.
- C. She has not violated the Standard, because Standard IV(C) applies only to individuals with hiring and firing authority over the employee in question.
- D. She has violated the Standard, but only if the analyst's conduct is later shown to have caused demonstrable client harm.
Show answer and explanation
Correct answer: B. She has violated the Standard, because a person with knowledge of a violation and the authority or ability to act must make reasonable efforts to detect and prevent it, regardless of whether another manager holds the formal reporting relationship.
Standard IV(C) obligates members with supervisory authority to exercise reasonable oversight to prevent violations of laws, regulations, or the Code and Standards by those subject to their supervision or oversight. Awareness of a violation combined with the practical ability to act (even without being the formal line manager) triggers an obligation to escalate, investigate, or otherwise intervene. Inaction premised on 'it's someone else's direct report' does not discharge that duty, and the violation exists independent of whether client harm can later be proven.
- A. Incorrect — formal reporting lines don't extinguish the duty to act on known violations within one's sphere of oversight.
- B. Correct — knowledge plus ability to act creates an obligation under Standard IV(C), independent of the org chart.
- C. Incorrect — the Standard is not limited to those with hire/fire authority; it extends to anyone with supervisory or oversight responsibility.
- D. Incorrect — the failure to act on known misconduct is itself the violation; a separate showing of client harm is not a prerequisite.
Question 3
A manager relies on a third-party quantitative screen that recently began rating illiquid microcap stocks as low-risk. The vendor refuses to describe how its model handles missing price observations. The manager wants to recommend the top-ranked funds immediately. Which response best satisfies reasonable basis and diligence?
- A. Recommend the funds, since using an established vendor shifts responsibility for the screen's accuracy to that vendor.
- B. Recommend the funds and tell clients the screen is proprietary and its methodology is confidential.
- C. Ask clients to sign a waiver of the diligence requirement in their advisory agreements.
- D. Independently evaluate the model's limitations and data quality before relying on its output, and document the findings.
Show answer and explanation
Correct answer: D. Independently evaluate the model's limitations and data quality before relying on its output, and document the findings.
A recommendation needs a reasonable and adequately supported basis. Using a vendor does not outsource that duty, so the manager must understand the model's assumptions and data quality, especially when stale prices can understate risk.
- A. Professional responsibility for a recommendation stays with the manager even when a vendor supplies the analysis.
- B. Calling the screen proprietary neither supports the recommendation nor discloses the known weakness in how it treats illiquid securities.
- C. Diligence and reasonable-basis duties cannot be waived by clients.
- D. Independently testing the model and its data before relying on it establishes the reasonable basis the standard requires.
Considering a career as an advisor?
Explore careers at ParsonexQuestion 4
A new analyst joins a firm and wants to show a track record produced entirely at her former employer. What should she do first?
- A. Present the record as the current firm's performance because she personally made the decisions at her former firm
- B. Remove losing quarters to avoid confusing prospective clients
- C. Confirm that the record is properly attributable and the presentation makes the former firm's role clear
- D. Show returns without a reference to either firm if calculations are correct
Show answer and explanation
Correct answer: C. Confirm that the record is properly attributable and the presentation makes the former firm's role clear
Prior performance may be presented with clear attribution and verifiable support, but it must not be represented as the new firm's record.
- A. Personal involvement does not make the record the new firm's; presenting it that way misrepresents performance.
- B. Omitting losing periods makes the record misleading and not fairly representative.
- C. Confirming attribution and clearly identifying the former firm's role keeps the presentation accurate.
- D. Leaving out the source firms obscures where the record came from, even when the math is correct.