Ethics Application

### A portfolio manager receives a tip from a friend about a soon-to-be-announced acquisition. According to the CFA Institute Code of Ethics and Standards, which principle is most directly at risk? - [ ] Fair Dealing under Standard III(B) - [x] Prohibition against trading on Material Nonpublic Information under Standard II(A) - [ ] Misrepresentation under Standard I(C) - [ ] Responsibilities as a CFA Institute Member or Candidate under Standard VII(A) > **Explanation:** The scenario describes potential insider trading. Standard II(A) specifically addresses the prohibition on acting or causing others to act on material nonpublic information. ### An equity analyst is told by their boss to recommend a stock that the company’s investment banking arm is underwriting, despite the analyst’s concerns about the stock’s fundamentals. What ethical challenge does this scenario primarily represent? - [x] Conflict of interest between the research function and investment banking - [ ] Breach of client confidentiality - [ ] Lack of a reasonable basis for the recommendation - [ ] Unfair dealing toward a specific client > **Explanation:** This scenario depicts a conflict where the analyst is pressured to recommend a stock underwritten by the same firm—creating a risk of compromised objectivity and a conflict of interest with investor needs. ### A junior analyst overhears her supervisor discussing nonpublic details of a company’s earnings with a friend at a restaurant. The analyst considers using this info in a research report. The correct course of action is: - [ ] Include the info, since it is “publicly overheard” - [ ] Ask a friend to trade on your behalf - [x] Refrain from using it and report the incident to compliance - [ ] Place a personal trade quietly before the next market session > **Explanation:** Any nonpublic company earnings data is material and must not be used in overt or covert ways. The best action is to refrain from using it and to inform compliance. ### Which of the following best describes a “professional reflex” in ethics application? - [x] An instinctive, well-trained reaction to ethical dilemmas that aligns with established standards - [ ] A spontaneous emotional reaction that disregards regulations - [ ] A formal written policy covering all possible ethical situations - [ ] An annual training that teaches employees about compliance > **Explanation:** Having a professional reflex means you automatically sense and respond to ethical pitfalls due to consistent training and familiarity with the Code of Ethics and Standards of Professional Conduct. ### A large institutional client demands daily, exclusive insights into new investment decisions, pressuring the manager to provide them. The manager wonders if it violates Fair Dealing. Which steps should the manager take? - [x] Consult compliance or legal counsel, document the decision, and ensure equitable treatment of all clients - [ ] Provide the client the information to maintain their business - [x] Offer a standardized daily update to all clients to ensure fairness - [ ] Charge a higher fee for this service if it’s above standard practice > **Explanation:** Meeting the fairness principle means either providing the same level of detail to all clients or refusing to single out one client for privileged information. Consulting compliance is an additional protective measure. ### If a professional discovers they inadvertently used outdated or incomplete data in an investment recommendation, the best remedial action is to: - [x] Issue a corrected or updated recommendation as soon as possible - [ ] Do nothing, since the data was used in good faith - [ ] Delete all records of the previous recommendation - [ ] Continue using the outdated data to remain consistent > **Explanation:** Prompt disclosure of the error and issuing an updated recommendation with current data is the most ethical and transparent course of action. ### A firm’s culture emphasizes “whatever it takes to close the deal” above everything else, including compliance. Which actions help mitigate ethical breaches in such an environment? - [x] Encouraging open communication and anonymous reporting channels - [ ] Hiding any wrongdoing from regulators - [x] Educating employees about conflicts of interest and potential repercussions - [ ] Keeping a rigid hierarchy where only top executives review ethical issues > **Explanation:** Building a robust ethical culture involves encouraging transparency, providing proper training, and granting employees safe ways to report concerns without retaliation. ### In evaluating a potential breach, an investment professional should: - [x] Identify the specific standard(s) involved, seek guidance if unclear, and document the process - [ ] Keep decisions private and avoid discussions with compliance - [ ] Always exit the firm immediately if in doubt - [ ] Provide client information to friends for “feedback” > **Explanation:** A structured approach involves identifying the applicable standard, seeking advice from compliance or legal teams, and thoroughly documenting the situation and resolution. ### Which of the following best illustrates remedial action after a confirmed ethical breach involving inaccurate performance data? - [x] Correcting and reissuing performance reports, plus implementing checks to avoid future errors - [ ] Maintaining the original report to avoid embarrassment - [ ] Hiding the breach until an internal audit reveals it - [ ] Blaming a third-party data vendor in a public statement > **Explanation:** Correcting the mistake and adopting stronger internal review procedures is the appropriate remedial action. Taking responsibility and preventing future errors are central to solid ethical conduct. ### In the context of the CFA Institute Code and Standards, it is true that ethical violations can undermine public trust and the integrity of capital markets. - [x] True - [ ] False > **Explanation:** Ethical violations erode investor confidence and can harm the broader financial system. Upholding strong ethical practices supports market efficiency and fairness.