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Ethical and Professional Standards

Guidelines for ethical behavior and professional conduct in the investment industry.

Ethical and professional standards are the guidelines and principles that govern the behavior and conduct of investment professionals. These standards promote integrity, transparency, and fairness in the investment industry and protect the interests of clients and the public. Analysts must adhere to ethical codes, such as the CFA Institute Code of Ethics and Standards of Professional Conduct, and maintain high standards of competence, diligence, and professionalism in their work.
5 minutes 5 Questions

Concepts covered: Application of the Code and Standards: Level II, Guidance for Standards I–VII, Code of Ethics and Standards of Professional Conduct

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CFA Level 2 - Ethical and Professional Standards Example Questions

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Question 1

According to the CFA Institute Code of Ethics and Standards of Professional Conduct, which of the following actions by a CFA charterholder is most likely to violate the Standard regarding Priority of Transactions?

Correct Answer: Buying shares of a thinly traded stock for a discretionary client account immediately before buying a larger quantity of shares for a personal account.

Buying shares of a thinly traded stock for a personal account immediately after buying shares for a client account is most likely to violate the CFA Institute's Standard regarding Priority of Transactions. This standard requires that client transactions take precedence over personal transactions. Investing a small portion of personal assets in a well-diversified mutual fund that is also held in some client accounts, after receiving written consent from the employer, does not violate the standard as long as the personal transaction does not disadvantage the client. Selling shares from a personal account and then investing the proceeds in a different security on the firm's recommended list that is not currently held in any client accounts also does not violate the standard, as the personal transaction is not related to any current client holdings or transactions.

Question 2

According to the CFA Institute Code of Ethics and Standards of Professional Conduct, which of the following actions by a CFA charterholder would MOST likely be considered a violation of the standard relating to material nonpublic information?

Correct Answer: Using material nonpublic information about a company to trade securities for a personal account before the information becomes public.

Using material nonpublic information to trade securities for personal gain before the information becomes public is a clear violation of the CFA Institute's standards regarding the use of material nonpublic information. Discussing material nonpublic information with colleagues who are bound by confidentiality to analyze the potential impact on securities is generally permitted, as long as the information is not used for personal trading. Accidentally overhearing material nonpublic information and subsequently trading based on a thoughtful analysis of public information is not necessarily a violation, as the trading decision is based on public information and not the overheard nonpublic information.

Question 3

Michael, a CFA Institute member, works as a financial advisor at a large investment firm. During a review of client accounts, he discovers that one of his colleagues, also a CFA charterholder, has been engaging in front-running, a practice involving trading on client information for personal gain before executing client orders. When Michael confronts his colleague about this unethical behavior, his colleague insists that it's a common practice in the industry and that Michael should not report it to maintain good relations within the firm. According to the CFA Institute Standards of Professional Conduct, what should Michael do?

Correct Answer: Report the violation to his firm's compliance department and the CFA Institute, as the Standards require members to place the integrity of the profession above personal interests or loyalty to their employer.

The correct action for Michael is to report the violation to his firm's compliance department and the CFA Institute. The CFA Institute Standards of Professional Conduct require members to place the integrity of the profession above personal interests or loyalty to their employer. The other two options are incorrect because they involve compromising ethical standards and allowing the unethical behavior to continue. Discussing the situation further with the colleague to reach a compromise that allows them to continue the practice is not an acceptable solution, as it still enables unethical conduct. Similarly, simply informing the colleague that the practice is unethical and monitoring their behavior, but refraining from reporting the violation, does not align with the CFA Institute's standards. As a CFA charterholder, Michael has a responsibility to uphold the highest ethical standards and maintain the integrity of the profession. Reporting the violation is the only appropriate course of action in this situation, even if it may lead to personal or professional difficulties.

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