Ethical & Professional Standards - 3 - Free MCQ Practice Test with solutions,

Elena Kovacs, CFA, covers pharmaceutical stocks. During a casual conversation, a physician friend who participates in an ongoing clinical trial for NovaCure Biotech's lead drug mentions that the trial has shown “unexpectedly strong results,” though no press release has been issued. Kovacs combines this comment with publicly available FDA meeting schedules and published analyst reports to form a bullish investment view on NovaCure. She subsequently recommends the stock to her buy-side clients.

Kovacs's actions are most likely:

James Okafor, CFA, is a sell-side analyst at Meridian Securities covering the retail sector. RetailCo, a company he covers, invites him on an all-expenses-paid three-day facility tour valued at approximately USD 4,200. Commercial transportation and accommodations to the facility are widely available. Okafor discloses the trip to his compliance department, which approves it. He subsequently publishes a balanced research report on RetailCo that includes both positive and negative factors.

With respect to Standard I(B) - Independence and Objectivity, Okafor's acceptance of the facility tour is most likely:

Prescott Asset Management claims compliance with GIPS. Their equity growth composite is designed to include all discretionary, fee-paying equity growth portfolios. A new client account is funded with USD 8 million and comes with a client-imposed restriction prohibiting any investment in tobacco-related equities, which comprise approximately 8% of the composite's benchmark index.

With respect to GIPS composite construction, the new restricted client account should most likely be:

Carla Mendez, CFA, manages a discretionary portfolio for retired client Thomas Harrington, age 72. Harrington's Investment Policy Statement specifies capital preservation and income generation as primary objectives, with a low risk tolerance. After reading a compelling sell-side research report on a small-cap biotech startup, Mendez allocates 25% of Harrington's portfolio to the stock without seeking Harrington's approval, believing the long-term upside will benefit him.

Mendez most likely violated which CFA Institute Standard?

Nathan Briggs, CFA, is a portfolio manager at Zenith Capital. Zenith's parent company holds a 15% equity stake in Tectron Corp. Briggs publishes a Buy recommendation on Tectron without disclosing the parent company's ownership interest in his research report. He believes the recommendation is objectively supported by his independent valuation analysis.

Briggs most likely violated Standard VI(A) - Disclosure of Conflicts because:

Sofia Park, CFA, is a sell-side analyst at Pacific Research. She completes a stock upgrade of DataStream Technologies to a Buy rating. Before distributing the written research report to all clients simultaneously, she calls three preferred institutional clients to verbally summarize the upgrade, allowing them to trade in DataStream shares ahead of the broader client base receiving the written report.

Park's actions most likely violate:

Derek Huang, CFA, manages a small-cap equity fund. To create the appearance of liquidity in a thinly traded holding, he arranges for accounts under his control to trade the stock back and forth between each other at progressively higher prices, with no genuine transfer of beneficial ownership. He subsequently distributes a client newsletter highlighting the stock's “strong recent price momentum” as a reason for optimism, without disclosing that the momentum was generated by his own coordinated trading.

Huang's conduct most likely violates which combination of CFA Institute Standards?

Clearwater Investments claims GIPS compliance. A compliance officer reviews performance calculation for a portfolio with the following data for the current year:

• Beginning portfolio value: USD 1,000,000
• External cash inflow on June 30: USD 500,000
• Ending portfolio value: USD 1,800,000
• Sub-period return (January-June): +10.0%
• Sub-period return (July-December): +5.0%

The time-weighted return (TWR) for the full year is closest to:

Grace Chen, CFA, is a portfolio manager at Arborvale Capital. On Monday morning, she identifies a compelling buy opportunity in MicroDyne Industries following her analysis of recent earnings guidance. Before placing buy orders for any client accounts, she purchases 2,000 shares of MicroDyne in her personal brokerage account. She then executes the same trade for all client accounts approximately 30 minutes later. MicroDyne's share price increased 2.1% in the intervening period.

Chen's conduct most likely violates:

Atlas Investment Management has recently completed a GIPS verification conducted by an independent accounting firm. The engagement covered the entire firm for the five-year period ending December 31, 2024. Atlas intends to reference the verification in its marketing materials and composite presentations.

Which of the following most accurately describes what GIPS verification confirms?

Oliver Strand, CFA, works for a global asset management firm headquartered in Country A, managing portfolios for clients in Country B. Country B's securities regulations are less stringent than CFA Institute Standards in the area of performance reporting. Country A's domestic regulations are stricter than Country B's in this area but remain less stringent than CFA Institute Standards.

With respect to Standard I(A) - Knowledge of the Law, which set of requirements should Strand follow for performance reporting?

Patricia Lowe, CFA, manages discretionary equity portfolios for institutional clients. She directs client brokerage commissions to Vertex Securities in exchange for access to research reports. The research reports are used exclusively to generate ideas for Lowe's personal investment club and are not used for the benefit of the clients whose brokerage commissions are being directed.

Lowe's use of client brokerage commissions to obtain research for personal use most likely violates:

Falcon Asset Management claims GIPS compliance. Their Large Cap Growth composite shows a 5-year annualized return of 14.2% versus a benchmark return of 11.8% over the same period. In marketing materials, Falcon states: “Our Large Cap Growth strategy has returned 14.2% annually over the past five years — outperforming 94% of all large cap managers.” The relative ranking is derived from a third-party database that includes only large cap managers who voluntarily submit performance data.

The claim about outperforming “94% of all large cap managers” is most likely:

Arthur Webb, CFA, sends a newsletter to all of his advisory clients containing the following statement: “MagnaCore will achieve earnings of USD 4.50 per share next fiscal year, and the stock will trade at USD 54 within 12 months.” No qualifying language, underlying assumptions, risk factors, or methodology is provided in the newsletter.

Webb's newsletter statement most likely violates Standard V(B) - Communication with Clients because:

Stonegate Capital manages both a traditional large-cap equity composite and a private equity fund. The compliance team is reviewing performance calculation methods under GIPS. For the private equity fund, all capital calls and distributions are controlled entirely by Stonegate as the general partner, not by the fund's limited partner investors.

Under GIPS, which return calculation method is most appropriate for the private equity fund?

Helen Nakamura, CFA, is preparing a research report on the banking sector. She incorporates several proprietary charts and analytical frameworks from a report published by Global Economics Institute without providing attribution. Before including the material, she modifies the charts by changing the color scheme and relabeling certain axes, but retains all original data, structure, and analytical content.

Nakamura's conduct most likely violates Standard I(C) - Misrepresentation because:

A four-person equity investment team - consisting of a lead portfolio manager and three analysts - departs Northstar Asset Management to join Horizon Capital. Three of the four team members (the lead portfolio manager and two analysts) join Horizon. The same investment process, risk parameters, and portfolio construction approach used at Northstar will be replicated at Horizon. Horizon has obtained all relevant performance records from Northstar covering the prior period.

Under GIPS, Horizon Capital may most likely port the team's prior performance record from Northstar if:

Robert Stein, CFA, is a portfolio manager at a regional asset management firm. He is convicted in a federal court of tax fraud related to his personal income tax filings, having intentionally misreported personal investment gains over a three-year period. The conviction becomes widely reported in financial media.

Stein's conduct most likely violates:

Sandra Diaz, CFA, is a buy-side analyst at Cobalt Investments. Through channel checks with industry suppliers - who share only information they confirm is in the public domain - analysis of publicly available satellite shipping data, and a review of published industry demand forecasts, Diaz constructs a mosaic indicating that Quantum Electronics will significantly miss consensus earnings estimates. She simultaneously updates all portfolio managers across all discretionary accounts at Cobalt and recommends reducing exposure. All accounts execute proportional sell orders on the same trading day.

Diaz's conduct is most consistent with which conclusion?

Summit Wealth Management claims GIPS compliance. Their compliance team is reviewing current valuation and revaluation practices. Summit currently values all fixed income securities at amortized cost rather than fair value. Additionally, Summit revalues all portfolios only at calendar month-end, regardless of the size or timing of external cash flows during the month.

Summit's current practices are least consistent with GIPS requirements because:

Marcus Tan, CFA, manages five separate equity portfolios using an identical investment strategy. Over the past three years, three portfolios generated annualized returns of 18%, 16%, and 15%, while the remaining two generated annualized returns of 6% and 4%. In the firm's marketing materials, Tan presents only the three best-performing portfolios as the “representative track record” of the strategy, omitting the two underperforming portfolios without explanation.

Tan's presentation most likely violates:

Linda Foster, CFA, is a sell-side analyst covering specialty chemicals. During the holiday season, the investor relations team of a company she covers sends her a bottle of wine valued at USD 75. Foster's firm has a written gift policy permitting gifts valued up to USD 100 from covered companies. Foster accepts the wine, does not disclose it to her supervisor, and continues to cover the company with no change to her ratings or opinions.

With respect to Standard I(B) - Independence and Objectivity, Foster's acceptance of the wine is most likely:

Ian Rhodes, CFA, is a portfolio manager at Vertex Advisors. Vertex's investment banking division has been retained by HydraNet Corp for an upcoming high-yield bond offering. Rhodes manages a fixed income composite that has historically focused on investment-grade bonds. Under pressure from the investment banking division, Rhodes purchases HydraNet's newly issued high-yield bonds for all fixed income client accounts to support the offering. In the subsequent quarterly report to clients, he discloses that “Vertex Capital may have a business relationship with HydraNet Corp.”

Rhodes most likely violated which Standards?

Pinnacle Asset Management claims GIPS compliance. Their GIPS-compliant composite presentation for the Global Bond composite includes the composite's inception date, a full benchmark description, the number and percentage of the firm's assets represented, a statement that the firm has been verified by an independent third party, and all required return statistics. However, the composite presentation does not include the composite creation date.

Pinnacle's GIPS composite presentation is most likely deficient because:

Andrew Kim, CFA, researches OmniTech Corp. He conducts channel checks with three of OmniTech's major distributors, each of whom shares shipping volume data that each individually confirms is publicly available. No single distributor's data point is considered material on its own. Kim combines these data points with publicly available satellite imagery of OmniTech's manufacturing facilities and consensus industry demand forecasts to conclude that OmniTech will report a material earnings beat next quarter. He uses this conclusion to recommend purchasing OmniTech shares for client accounts.

Kim's research process is most consistent with which conclusion?

Bridgewater Securities offers two documented service tiers: Premium (large institutional clients paying higher advisory fees) and Standard (retail clients). When analyst Yuki Tanaka, CFA, upgrades a stock to Strong Buy, Premium clients are contacted by telephone immediately upon issuance of the report. Standard clients receive the same written report via email 60 minutes later. This two-tier policy is fully and clearly disclosed in all client service agreements at account opening.

Tanaka's firm's practice of contacting Premium clients before Standard clients is most likely:

Meridian Capital manages 12 discretionary, fee-paying large-cap equity accounts and 3 model portfolios used solely for marketing demonstrations. When constructing their Large Cap Equity GIPS composite, Meridian includes all 3 model portfolios alongside the 12 actual client accounts. Their rationale is that the model portfolios have historically outperformed the actual client accounts and including them improves the “representativeness” of the composite's performance.

Meridian's composite construction most likely violates GIPS because:

Victor Lam, CFA, manages a hedge fund with a large concentrated position in a thinly traded mid-cap stock. Near the end of the quarter, with 15 minutes remaining in the trading day, Lam executes a series of progressively larger buy orders in the stock to push the reported closing price higher than it would otherwise be. This elevated closing price improves the fund's reported quarter-end NAV and consequently its reported performance in investor communications.

Lam's end-of-quarter trading strategy most likely violates:

Margaret Flynn, CFA, manages discretionary equity portfolios for a variety of institutional clients. Her firm has no written proxy voting policy. When she receives proxy ballots for securities held in client accounts, Flynn routinely votes in favor of all management proposals, regardless of the specific issues or their implications for shareholders. Her rationale is to maintain positive relationships with company management teams, upon whom she relies for access to earnings calls and one-on-one management meetings.

Flynn's proxy voting approach most likely violates:

Thomas Becker, CFA, is a portfolio manager at Atlas Capital. Atlas's parent company holds a significant equity stake in FinTech Innovations. Becker publishes a research note recommending Buy on FinTech Innovations. In the note, he states: “Atlas Capital may have a business relationship with FinTech Innovations.” He does not specify the nature or magnitude of the parent company's equity stake. Three weeks prior, Becker received a performance bonus tied in part to Atlas's equity investment portfolio returns, which increase in value as FinTech's share price rises. The bonus arrangement is not disclosed in the research note.

Becker's disclosures are most likely insufficient because: