Ethical and Professional Standards

• Topic 01

  Overview of the Code of Ethics and Standards of Professional Conduct

  21 questions
• Topic 02

  Standard I(A): Knowledge of the Law

  30 questions
• Topic 03

  Standard I(B): Independence and Objectivity

  27 questions
• Topic 04

  Standards I(C) and I(D): Misrepresentation and Misconduct

  24 questions
• Topic 05

  Standard III(A): Loyalty, Prudence and Care

  24 questions
• Topic 06

  Standards III(B) and III(C): Fair Dealing and Suitability

  24 questions
• Topic 07

  Standard II(A): Material Nonpublic Information

  24 questions
• Topic 08

  Standards II(B) and VI: Market Manipulation and Conflicts of Interest

  24 questions
• Topic 09

  Standards V(A) and V(B): Diligence, Reasonable Basis and Communication

  21 questions
• Topic 10

  Global Investment Performance Standards (GIPS)

  21 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. Under Standard I(B), a buy-side portfolio manager asks the firm's research analyst to write a positive note on a company the fund holds a large position in, arguing that internal research should reflect the fund's investment thesis. What should the analyst do?

   • A
     The analyst should write the positive note because supporting the portfolio manager's thesis is part of the buy-side analyst's role
   • B
     The analyst should consult the fund's legal counsel before writing the note and follow whatever guidance is provided
   • C
     The analyst should base the research note solely on independent analysis and must resist pressure to shape conclusions to support the fund's existing position
     Correct answer
   • D
     The analyst should refuse to write any research on companies where the fund holds a position to eliminate all independence risk
   Explanation

   Standard I(B) requires buy-side analysts to maintain independence from portfolio managers who have a financial interest in particular research conclusions. A portfolio manager asking for research that supports an existing position is creating internal pressure on analyst independence — precisely the type of pressure I(B) is designed to resist. The analyst must conduct independent analysis and reach conclusions based on merit. Adding a disclosure does not cure the independence problem if the conclusion has been shaped by the pressure rather than by analytical reasoning.

2. A member discovers that a colleague is systematically falsifying client trade confirmations. The member raises the matter with her supervisor, who dismisses the concern and tells her to focus on her own work. The internal escalation channel appears blocked. Under Standard I(A), what is the member's most appropriate next step?

   • A
     Continue working normally to avoid drawing attention while gathering additional evidence of the violation
   • B
     Dissociate by refusing to participate and escalate through other available internal channels — compliance department, legal counsel, or senior management above the supervisor who dismissed the concern
     Correct answer
   • C
     Document the concern and take no further action, having satisfied the dissociation obligation by raising it with the supervisor
   • D
     Inform the affected clients directly about the falsification of their trade confirmations
   Explanation

   Standard I(A) requires members to dissociate from violations: first by attempting to stop the activity through appropriate internal channels. When the immediate supervisor dismisses the concern, the member must escalate to other internal channels — the compliance department, legal counsel, or senior management — before concluding that internal channels are truly exhausted. Immediate resignation is a last resort, not the required first step. Reporting to external regulators is not required by I(A) unless mandated by applicable law; however, it is permissible. The obligation is to dissociate from the activity, not to remain passive.

3. Under GIPS, which portfolios must be included in at least one composite?

   • A
     Only fee-paying portfolios whose performance exceeds the relevant benchmark
   • B
     All actual, discretionary, fee-paying portfolios managed according to a similar investment strategy
     Correct answer
   • C
     Only portfolios explicitly designated by the firm as representative of its investment strategy
   • D
     All discretionary portfolios, including non-fee-paying proprietary accounts managed for the firm's own benefit
   Explanation

   GIPS requires that all actual, discretionary, fee-paying portfolios be included in at least one composite. Discretionary means the manager has authority to make investment decisions without client approval of each transaction. Non-discretionary portfolios (where the client retains decision-making authority) are excluded from composites. Non-fee-paying portfolios may be included but are not required to be; if included, the percentage of composite assets represented by non-fee-paying accounts must be disclosed.