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Guidance for Standards I–VII

5 minutes 5 Questions

In the CFA Level 3 curriculum, Standards I–VII form the cornerstone of Ethical and Professional Standards, guiding members and candidates in their professional conduct. **Standard I: Professionalism** encompasses demonstrating knowledge of the Law, independence and objectivity, and avoiding misre…

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CFA Level 3 - Guidance for Standards I–VII Example Questions

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Question 1

Alex, a CFA charterholder, is a portfolio manager at an investment firm. During a meeting with a high-net-worth client, the client expresses interest in investing in a private equity fund that Alex's firm recently launched. Alex has reviewed the fund's offering documents and believes it is a high-risk investment that may not be suitable for the client's risk tolerance and investment objectives. However, Alex's manager has set aggressive sales targets for the fund and has implied that meeting these targets will be a key factor in determining bonuses this year. Alex tells the client that while the fund is higher risk, it offers the potential for significant returns and diversification benefits. What should Alex have done differently in this situation to comply with the CFA Institute Standards of Professional Conduct?

Alex should have recommended the private equity fund to the client, as it is a new offering from his firm and likely to be a strong performer. He can justify the recommendation by highlighting the diversification benefits and the firm's expertise in managing private equity investments, even if the fund may not align with the client's risk tolerance. Alex should have provided the client with a balanced and objective assessment of the private equity fund, clearly explaining the risks and potential drawbacks, and determining whether the investment is suitable for the client's risk tolerance and investment objectives. Alex should prioritize the client's best interests over the firm's sales targets and his own potential bonus. Alex should have emphasized the potential for high returns and downplayed the risks associated with the private equity fund, as his primary responsibility is to help his firm meet its sales targets and maximize his own bonus potential. He can address any concerns the client may have about the fund's risks after the investment is made.

Correct Answer: Alex should have provided the client with a balanced and objective assessment of the private equity fund, clearly explaining the risks and potential drawbacks, and determining whether the investment is suitable for the client's risk tolerance and investment objectives. Alex should prioritize the client's best interests over the firm's sales targets and his own potential bonus.

The correct answer is that Alex should have provided the client with a balanced and objective assessment of the private equity fund, clearly explaining the risks and potential drawbacks, and determining whether the investment is suitable for the client's risk tolerance and investment objectives. Alex should prioritize the client's best interests over the firm's sales targets and his own potential bonus. As a CFA charterholder, Alex is bound by the CFA Institute Standards of Professional Conduct, which require him to place his clients' interests before his own and to provide objective and unbiased advice. By downplaying the risks of the private equity fund and emphasizing the potential returns and diversification benefits, Alex is not providing a balanced assessment of the investment and is not acting in the best interests of his client. The other two options are incorrect because they prioritize the firm's sales targets and Alex's own bonus potential over the client's best interests. It is unethical for Alex to recommend an investment that he believes is unsuitable for the client's risk tolerance and investment objectives, regardless of the potential benefits to his firm or himself.

Question 2

Olivia, a CFA charterholder, works as a financial analyst at a large investment bank. She is part of a team that is advising a client on a potential acquisition of a publicly-traded company. During the due diligence process, Olivia discovers that the target company has been engaging in aggressive accounting practices that overstate its revenue and profitability. However, her team leader, who is eager to close the deal and earn a significant commission, downplays the importance of these findings and suggests that they should not be highlighted in the final report to the client. Olivia is concerned that omitting this information could mislead the client and potentially lead to a poor investment decision. What should Olivia do in this situation to comply with the CFA Institute Standards of Professional Conduct?

Olivia should discuss her concerns with her team leader and try to persuade him to include the findings in the report. If he still refuses, she should escalate the matter to the compliance department or senior management of her firm, while continuing to work on the project as directed. This approach balances her ethical obligations with her responsibility to follow the directives of her superiors and maintain good working relationships within the team. Olivia should insist on including the findings about the aggressive accounting practices in the final report to the client, even if it risks jeopardizing the deal and her team's commission. As a CFA charterholder, Olivia has a duty to act with integrity, competence, and respect, and to place the interests of clients above her own or her employer's interests. Omitting material information that could impact the client's investment decision would be a violation of these principles. Olivia should focus on completing the report as instructed by her team leader, prioritizing the timely and efficient completion of the project. She can document her concerns about the accounting practices in her own files and raise them internally after the report is submitted if any issues arise. As a relatively junior member of the team, it is not her responsibility to make decisions about what information to include or exclude from the final deliverable to the client.

Correct Answer: Olivia should insist on including the findings about the aggressive accounting practices in the final report to the client, even if it risks jeopardizing the deal and her team's commission. As a CFA charterholder, Olivia has a duty to act with integrity, competence, and respect, and to place the interests of clients above her own or her employer's interests. Omitting material information that could impact the client's investment decision would be a violation of these principles.

The best course of action for Olivia is to insist on including the findings about the aggressive accounting practices in the final report to the client. As a CFA charterholder, Olivia is bound by the CFA Institute Standards of Professional Conduct, which require her to act with integrity, competence, and respect, and to place the interests of clients above her own or her employer's interests. Omitting material information that could impact the client's investment decision would be a violation of these principles. It is Olivia's ethical duty to ensure that the client has all the relevant information to make an informed decision, even if it risks jeopardizing the deal and her team's commission. The other two options are not appropriate because they prioritize either maintaining good working relationships within the team or the timely completion of the project over the ethical obligation to provide accurate and complete information to the client. As a professional, Olivia's primary responsibility is to uphold the highest standards of integrity and protect the interests of her client.

Question 3

Lisa, a CFA charterholder, is a portfolio manager at an investment firm. During a meeting with a prospective client, Lisa presents the historical performance of a mutual fund she manages, highlighting its strong returns over the past 5 years. The client asks about the fund's risk profile, and Lisa assures them that the fund has a lower standard deviation than its benchmark. However, Lisa neglects to mention that the fund's outperformance is primarily due to a significant overweight position in a single stock that has experienced remarkable growth. What would be the most appropriate course of action for Lisa to comply with the CFA Institute Standards of Professional Conduct?

Lisa should provide additional context about the fund's risk profile, including the significant single-stock position that has contributed to its strong performance. She should ensure the client fully understands the potential risks associated with the fund's concentrated exposure. Lisa has provided accurate information about the fund's historical performance and risk metrics. She can proceed with recommending the fund to the client, as the CFA Institute Standards of Professional Conduct do not require disclosing specific portfolio holdings or concentration risks. Lisa should end the meeting and inform her supervisor about the client's inquiries. It is the responsibility of the firm's compliance department to decide what information should be disclosed to prospective clients regarding portfolio risks and holdings.

Correct Answer: Lisa should provide additional context about the fund's risk profile, including the significant single-stock position that has contributed to its strong performance. She should ensure the client fully understands the potential risks associated with the fund's concentrated exposure.

The most appropriate course of action for Lisa is to provide additional context about the fund's risk profile, including the significant single-stock position that has contributed to its strong performance. She should ensure the client fully understands the potential risks associated with the fund's concentrated exposure. As a CFA charterholder, Lisa is bound by the CFA Institute Standards of Professional Conduct, which require her to act with integrity, competence, diligence, respect, and in an ethical manner. This includes providing fair and complete information when communicating with clients about investment products and services. By failing to mention the fund's significant overweight position in a single stock, Lisa is not providing a complete picture of the fund's risk profile. This omission could mislead the client into believing that the fund's outperformance is solely due to superior investment management, rather than the concentration risk associated with the single-stock position. The other two options are not appropriate because: - Simply providing accurate historical performance and risk metrics is not sufficient if material information about the fund's risk profile is omitted. - Ending the meeting and deferring to the compliance department is not necessary, as Lisa should be able to provide the relevant information about the fund's risk profile herself, in line with her ethical obligations as a CFA charterholder.

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