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EXAMPLES CFA Level 1, Section 1. Ethics & Standards Questions and Answers 100% Solved
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EXAMPLES CFA Level 1, Section 1. Ethics & Standards
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EXAMPLES CFA Level 1, Section 1.Ethics & Standards
What are the types of exam questions you can expect regarding applying Standard I-A?
- answer Since Standard I-A covers laws, rules and regulations, the situations
presented to test knowledge of the Standard (and whether the Standard has been
violated) will likely involve some possible violation of the law, and how a CFA Member
or Candidate should proceed. The following questions may apply:
Did the Member seek the advice of counsel?
Consulting an attorney is typically seen as a good defense against an alleged violation
of Standard I-A. Many cases involve someone who works for a firm that has violated the
law (made misleading statements on a prospectus, for example). In these cases, look to
see if the CFA member or candidate sought and followed the advice of counsel.
Did the member report the violation, and to whom did the member report it?
For any potential violation of a law, rule or regulation, if the situation suggests that the
member either went along with it, did nothing, tried to cover it up or was afraid to say
anything for fear of losing his or her job that is a clear sign that the Standard has been
violated. In any example, look for evidence that the CFA member tried to do the right
thing. If that person's firm is potentially guilty of violating a law or regulation, he or she
needs to start by reporting this situation to his or her supervisor and/or compliance
officer. If the situation is not remedied, he or she should distance him or herself from the
potential violation and seek the advice of counsel.
For multinational operations, which country's laws apply to the situation at hand?
In the real world, it can be ambiguous if an advisor is domiciled in one country and
operates in another. For the purposes of the CFA Level I exam, the candidate isn't
expected to be a lawyer and make a judgment - the exam will indicate which country's
laws apply to the situation. If a broker or advisor oper
How can you comply with Standard I-A? - answerThe Standards of Practice Handbook
makes a number of suggestions to avoid violating Standard I-A.
•Establish Files - These files would cover all applicable laws, rules, regulations, statutes
and important cases that might be relevant to any potential business situation involving
the firm. Files must be readily accessible, and a process to manage, distribute and
interpret such material should be in place.
•Stay Informed - Laws, rules and regulations frequently change, and key employees in a
firm must be informed continually of such changes. CFA members and candidates are
,obligated to establish, or encourage others to establish, a procedure by which everyone
in a firm is kept informed and applicable changes are disseminated in a timely manner.
Usually, this procedure is the domain of the firm's counsel or compliance department,
but every situation is different. There are a number of real-world cases in which
everyone just assumed that a certain person or department was taking care of it.
•Distribution Area Laws - In an increasingly global marketplace, members and
candidates must make every effort to understand the laws of the country or region in
which they operate, including those where their products or services are distributed
across borders.
•Legal or Illegal? - Certain conduct may not in fact be a violation. Members should
consult counsel in ambiguous situations.
•Disassociate - This is such a good word and a worthwhile course of action that the CFA
Institute decided to include it when it recently revised this Standard. It is good advice: it
may have been OK at some time in the past to do nothing if one witnessed illegal or
unethical conduct, but in today's environment, the Standards have changed. One must
now disassociate from any illegal activity and actively urge the firm (either an immediate
supe
What is Standard I-B? - answerMembers and Candidates must use reasonable care
and judgment to achieve and maintain independence and objectivity in their
professional activities. Members and Candidates must not offer, solicit, or accept any
gift, benefit, compensation, or consideration that reasonably could be expected to
compromise their own or another's independence and objectivity.
"Independence & Objectivity: maintain integrity and avoid conflicts of interest"
What are the types of exam questions you can expect regarding applying Standard I-B?
- answerApplying Standard I-B, Complying with standards of independence and
objectivity seems simple and straightforward in theory, but in practice there are many
scenarios that could potentially conflict with one's objectivity - or create the appearance
of doing so. In many cases it is not so easy to define the proper course of action. Here
are some of the situations that are more likely to appear on the exam:
•A company sponsors an analyst conference and picks up all the expenses. Consider a
situation where a firm invites all Wall Street analysts who are actively covering its
company to go on an all-expenses-paid trip to tour facilities, play golf, stay in a swanky
resort and so forth, all in the hopes of promoting itself and earning more favorable
coverage. For analysts bound by the Code and Standards, would this sort of outing
compromise their objectivity? The answer is that it just might. This Standard requires
CFA members to assess if such an outing is possible while still maintaining objectivity -
would they still be able to write an unfavorable opinion, if warranted by independent
analysis? Many firms have created policies that require attendance at such affairs to be
paid by the firm and require the itinerary to be substantially business-related as a
, condition of attending. No specific checklist of right and wrong is written into this
Standard, but the mere appearance of conflict is a real issue in today's environment and
one must be sensitive to perception.
•A financial firm promises to provide research coverage of a company's stock in return
for a potential business relationship. This agreement is acceptable so long as there is
absolutely no requirement to make the recommendation a favorable one. This standard
requires that any conclusions be made in an independent and objective manner.
•In the previous ex
How can you comply with Standard I-B? - answerThe Standards of Practice Handbook
provides a number of operational suggestions that one should recommend for adoption
by the compliance department.
•Highlight the integrity of the research - Establish that research opinions reflect
unbiased opinions, and include this wording on all written reports. Salary and bonuses
should be independent of any factors that might compromise the degree of
independence - i.e. don't tie a quarterly bonus to the fees collected from corporate
relationships (which can be affected by a stock recommendation).
•Disclose conflicts of interest - For example, a directorship in a public company would
need to be acknowledged by the employer, as this fact may affect research opinions of
that company and of competitors. Research reports should disclose whether the analyst
owns shares in a company and whether the analyst's firm makes a market in that
security or has underwritten the security.
•Limit direct investments in equity or equity-related IPOs - Investment firms should
establish formal policies relative to employee purchase of equity and equity-related
IPOs and require prior approval.
•Report holdings - Report holdings in all personal accounts, those of one's immediate
family and those over which the analyst has formal discretion (e.g. trusts).
•Establish a restricted list - This is to limit research on those firms that have a business
relationship with that company. If an adverse opinion would hurt this business
relationship, the company stock should be restricted from the research universe, and
only factual information on the company should be disseminated.
•Cost reimbursement procedures - Identify what is acceptable and what is unacceptable
practice in order to avoid the appearance of a conflict. While there is no specific
checklist in the Standards, the general rule of t
What is Standard I-C? - answerMembers and Candidates must not knowingly make any
misrepresentations relating to investment analysis, recommendations, actions, or other
professional activities.
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