Ethical & Professional Standards

CFA® Level III, published weight 10–15%. The Standards plus the Asset Manager Code — which appears only at Level III.

What the outline covers

Code of Ethics and Standards of Professional Conduct
Guidance for Standards I–VII (seven separate modules)
Application of the Code and Standards: Level III
Asset Manager Code of Professional Conduct

Sample questions

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Question 1

A firm wishes to state that it complies with the Asset Manager Code. It may do so only if it:

A. Adopts the provisions it considers relevant to its business
B. Adopts the Code in its entirety
C. Obtains CFA Institute pre-approval of its policies
D. Employs at least one CFA charterholder

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B. The Asset Manager Code must be adopted in full. Partial adoption cannot be claimed, and this is the single most examinable fact in the reading.

Reading: Ethics — Asset Manager Code of Professional Conduct

Question 2

A manager directs client brokerage to a broker that provides research used across all client portfolios. Under Standard III(A) this is:

A. Prohibited in all circumstances
B. Permitted, provided best execution is sought and the benefit accrues to clients
C. Permitted only if the client pre-approves each trade
D. Permitted only for institutional clients

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B. Client brokerage is a client asset. It may purchase research that benefits clients, subject to the duty to seek best execution.

Reading: Standard III(A) — Loyalty, Prudence and Care

Question 3

A firm materially changes its investment process without informing existing clients. This most likely violates:

A. Standard V(B) Communication with Clients
B. Standard III(C) Suitability
C. Standard VI(C) Referral Fees
D. Standard IV(C) Responsibilities of Supervisors

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A. Standard V(B) requires prompt disclosure of material changes to the investment process to all clients, not only prospective ones.

Reading: Standard V(B) — Communication with Clients

Question 4

At Level III, suitability under Standard III(C) is assessed:

A. Security by security in isolation
B. In the context of the client’s total portfolio
C. Only at the time the IPS is written
D. By reference to the benchmark alone

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B. A security that is risky in isolation may be entirely suitable within a diversified total portfolio. Suitability is a portfolio-level judgement.

Reading: Standard III(C) — Suitability

Question 5

A manager uses a proprietary risk model with known limitations in stressed markets and does not mention them to clients. This is best described as:

A. Acceptable, since the model is proprietary
B. A violation of Standard V(B), which requires disclosure of significant limitations
C. A violation of Standard I(B) Independence
D. Acceptable if the model is independently validated

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B. Standard V(B) requires disclosure of the basic process and its significant limitations and inherent risks. Proprietary status does not exempt that duty.

Reading: Standard V(B) — Communication with Clients

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