Guidance for Standards I–VII

### Which of the following best describes "material nonpublic information"? - [ ] Any rumor that might boost an investor’s confidence about a security. - [x] Confidential information that, if disclosed, would affect an investor’s decision to invest. - [ ] Company information that only top executives know but will remain irrelevant indefinitely. - [ ] Data publicly released in a local newspaper regarding the company’s earnings. > **Explanation:** “Material nonpublic information” is both nonpublic and significant enough to influence an investor's decision. ### A senior analyst at a firm has overheard her manager stating, “We’re advising a firm on a huge merger deal tomorrow.” The analyst then sells her personal shares in that firm. Which Standard is potentially violated? - [ ] Standard III (Duties to Clients) - [x] Standard II (Integrity of Capital Markets) - [ ] Standard IV (Duties to Employers) - [ ] Standard VI (Conflicts of Interest) > **Explanation:** Selling shares based on material nonpublic information violates Standard II, which covers insider trading and undermines the integrity of the markets. ### A portfolio manager wants to invest in a company that her brother-in-law works for, and he sometimes slips her confidential updates. What should she do according to best practices? - [x] Disclose the relationship to compliance and refrain from trading on confidential updates. - [ ] Ignore the brother-in-law’s updates and proceed with the trade without telling anyone. - [ ] Share the information with clients immediately to maintain transparency. - [ ] Trade only a small portion of the portfolio to avoid suspicion. > **Explanation:** The correct step is to disclose and refrain from using any insider information. Not disclosing it or trading based on the updates breaches the standards. ### Under Standard I (Professionalism), which of the following represents a possible violation? - [x] Falsely claiming to have completed the CFA Program on a personal website. - [ ] Informing compliance officers about a new trading strategy. - [ ] Taking notes while performing due diligence on a bond issue. - [ ] Properly referencing third-party sources in a research report. > **Explanation:** Misrepresenting credentials is a direct violation of Standard I. The other options depict proper behavior or compliance steps. ### When is an investment professional allowed to share confidential client information? - [x] When required by law or explicitly authorized by the client. - [ ] When the professional believes it is in the client's best interest, regardless of authorization. - [x] When the client expressly instructs sharing with a designated third party. - [ ] Whenever the employer requests client details for marketing purposes. > **Explanation:** Confidential information should be protected except where law and/or explicit client permission mandates disclosure. Marketing purposes alone are insufficient for disclosure. ### According to Standard VI (Conflicts of Interest), the recommended action if a research analyst receives an expensive gift from a mutual fund wholesaler is to: - [x] Report the gift for review under the firm’s compliance policy. - [ ] Immediately return the gift without further discussion. - [ ] Keep the gift private to avoid conflict among colleagues. - [ ] Sell the gift and use the proceeds for a team lunch. > **Explanation:** The correct action involves transparency. Reporting the gift allows compliance to assess and address any conflict. ### Which of these is a best practice in preventing insider trading? - [x] Implementing restricted lists and Chinese Wall policies. - [ ] Sharing client trades among team members without restriction. - [x] Maintaining an information barrier between research and corporate finance teams. - [ ] Encouraging analysts to seek “tips” from industry contacts. > **Explanation:** Using restricted lists, erecting information barriers, and disallowing suspicious “tips” are key methods to prevent insider trading violations. ### An effective way to reduce potential front running is: - [x] Requiring employees to submit personal trades for pre-approval. - [ ] Allowing employees to trade freely as long as they notify compliance afterward. - [ ] Only monitoring client trades above $1 million. - [ ] Focusing compliance efforts solely on large institutional accounts. > **Explanation:** By requiring pre-clearance of personal trades, a firm can spot and prevent potential front running more effectively. ### If an investment firm places a stock on the restricted list, what does it typically mean? - [x] Personnel within the firm are prohibited from trading or recommending the stock until further notice. - [ ] Employees can trade freely in the stock as long as it’s for personal accounts. - [ ] The stock is recommended to high-net-worth clients only. - [ ] The stock is barred from all public trading exchanges. > **Explanation:** A restricted list generally prohibits firm employees from trading or advising on a particular stock due to conflicts or insider knowledge. ### A charterholder references the CFA designation incorrectly as “CFA Expert Analyst.” Is this a violation? - [x] True - [ ] False > **Explanation:** The CFA designation must be used as defined by CFA Institute guidelines. “CFA Expert Analyst” is a misuse and a violation of Standard VII.