Ethical and Professional Standards

• Topic 01

  Applying the Standards: Case-Study Analysis

  34 questions
• Topic 02

  Standard I: Professionalism — Complex Scenarios

  30 questions
• Topic 03

  Standard II: Integrity of Capital Markets

  27 questions
• Topic 04

  Standard III: Duties to Clients

  24 questions
• Topic 05

  Standard IV: Duties to Employers

  24 questions
• Topic 06

  Standard V: Investment Analysis

  24 questions
• Topic 07

  Standard VI: Conflicts of Interest

  27 questions
• Topic 08

  GIPS Advanced Application

  24 questions

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

1. Which of the following most accurately identifies a major structural change introduced by the GIPS 2020 edition relative to the 2010 edition?

   • A
     GIPS 2020 eliminated the requirement for composite time-weighted returns and permitted money-weighted returns for all strategies without restriction.
   • B
     GIPS 2020 separated requirements and recommendations for asset managers from those for asset owners, creating distinct provisions for each type of firm rather than a single unified framework.
     Correct answer
   • C
     GIPS 2020 reduced the minimum composite history requirement from ten years to five years and eliminated the requirement to link pre-GIPS performance.
   • D
     GIPS 2020 introduced mandatory third-party verification as a requirement for all GIPS-compliant firms, whereas the 2010 edition made verification optional.
   Explanation

   The most significant structural change in GIPS 2020 was the explicit differentiation between asset managers (investment managers who manage portfolios on behalf of clients) and asset owners (entities such as pension funds, endowments, and sovereign wealth funds that manage assets for their own beneficiaries). Prior editions addressed asset managers only. GIPS 2020 created separate chapters with tailored requirements for asset owners, recognising that their reporting context and audience differs fundamentally from that of third-party investment managers. Composites remain required for asset managers, and time-weighted returns remain the primary methodology.

2. A departing portfolio manager has a non-compete agreement restricting her from working for a competitor for 12 months. After three months, she joins a direct competitor, arguing that the non-compete is unenforceable under local employment law. Under Standard IV(A), which of the following best describes her obligations?

   • A
     The member satisfies her obligations by notifying her former employer of her new role before starting
   • B
     Standard IV(A) only requires compliance with legally binding contractual obligations, so an unenforceable clause creates no ethics obligation
   • C
     No ethics obligation exists once local employment law has determined the non-compete is unenforceable
   • D
     Even if local law renders the non-compete unenforceable, Standard IV(A) requires the member to honour employer loyalty obligations; the contract's legal enforceability does not eliminate the ethical obligation under the Standards
     Correct answer
   Explanation

   Standard IV(A) employer loyalty obligations are not limited to legally binding contractual requirements. The Standards require members to honour employer obligations including non-compete agreements regardless of whether they are legally enforceable under local law. The CFA Standards may be stricter than local employment law. A member who violates a non-compete arrangement — even one found unenforceable by a local court — may still violate the spirit of Standard IV(A) by acting in a manner that conflicts with the interests of a former employer.

3. A corporate pension fund seeks GIPS compliance under the 2020 edition. Under the new provisions specifically introduced for asset owners, which of the following requirements differs materially from those applicable to third-party investment managers?

   • A
     Asset owners under GIPS 2020 must construct composites in exactly the same way as asset managers, grouping similar mandates together and presenting returns on a composite basis.
   • B
     Asset owners under GIPS 2020 are exempt from all performance presentation requirements because they manage their own assets rather than third-party client assets.
   • C
     Asset owners under GIPS 2020 report total fund performance rather than constructing composites of similar portfolios, and may use money-weighted returns where appropriate to reflect cash flow significance in illiquid asset classes.
     Correct answer
   • D
     Asset owners under GIPS 2020 may use any return calculation methodology they choose, because GIPS does not specify a required return metric for asset owner performance reporting.
   Explanation

   GIPS 2020 recognised that asset owners — such as pension funds and endowments — have a fundamentally different reporting context from third-party asset managers competing for mandates. Asset owners typically report their total fund performance to a board or sponsor, not to prospective external clients in the same commercial sense. GIPS 2020 therefore allows asset owners to report total fund performance without constructing composites and permits money-weighted returns where the asset class (such as private equity or infrastructure) makes MWR the more economically meaningful measure. This flexibility reflects the reality that large, illiquid cash flows in pension portfolios are controlled by the fund itself rather than an external client.