CFA Level I Ethical & Professional Standards Practice Questions
Ethical & Professional Standards makes up 6 of every 50 questions on a Tigertest CFA Level I practice test. Here are 10 of the 24 questions on it, each with the answer and the reason.
Updated by the Tigertest team. Based on CFA Institute's Level I topic weights for 2027. Original questions with four choices (the real exam has three). Not affiliated with CFA Institute.
1. An analyst combines public filings, store visits and nonmaterial comments from a supplier to conclude that a retailer will miss its earnings forecast. Under the CFA Institute Standards, issuing a sell recommendation is:
- A.Allowed only with the issuer's consent
- B.Permitted under the mosaic theory
- C.A breach of Material Nonpublic Information
- D.Permitted only after the earnings release
Answer: B. The mosaic theory lets an analyst reach a conclusion from public information and nonmaterial nonpublic information. None of the pieces is material nonpublic information on its own, so Standard II(A) is not breached.
2. A CFO accidentally tells a portfolio manager about an unannounced merger. The manager's best course of action is to:
- A.Trade after waiting one business day
- B.Tell the firm's other analysts first
- C.Trade only for clients, not himself
- D.Not trade and urge public disclosure
Answer: D. Standard II(A) prohibits acting on, or causing others to act on, material nonpublic information. The manager should not trade and should encourage the company to make the information public.
3. A firm changes its rating on a stock from buy to sell. Under Fair Dealing, the change should be communicated to clients:
- A.Fairly, so none are disadvantaged
- B.In alphabetical order by name
- C.Largest accounts first, by size
- D.Only to clients who hold the stock
Answer: A. Standard III(B) requires fair, not necessarily identical, treatment. Firms may offer different service levels, but no client may be disadvantaged by when or how a recommendation change reaches them.
4. A portfolio manager wants to buy a stock for her own account on the same day she is buying it for clients. Under Priority of Transactions she should:
- A.Trade at the same time as clients
- B.Trade only if clients pay a fee
- C.Trade after the client orders
- D.Trade before the client orders
Answer: C. Standard VI(B) gives client and employer transactions priority over personal transactions. Trading ahead of clients, known as front-running, is the classic breach.
5. An adviser receives a fee from a lawyer for every client he refers. Under the Standards he must:
- A.Disclose it to the lawyer alone
- B.Report it to the regulator alone
- C.Disclose it to all parties
- D.Refuse it in every case
Answer: C. Standard VI(C), Referral Fees, requires disclosure of any compensation or benefit for a referral to the employer, clients and prospective clients so they can judge any bias.
6. A member is offered paid consulting work that could compete with her employer's business. Before accepting she needs:
- A.Written consent from her employer
- B.Approval from the client only
- C.Nothing, if done outside work hours
- D.Verbal approval from a colleague
Answer: A. Standard IV(B), Additional Compensation Arrangements, requires written consent from all parties involved, which includes the employer, before accepting outside compensation that may conflict with the employer's interest.
7. A client gives her portfolio manager tickets to a sports final as thanks for a strong year. Under Independence and Objectivity the manager should:
- A.Disclose it to the issuer's board
- B.Return the gift without comment
- C.Accept it with no disclosure
- D.Disclose the gift to his employer
Answer: D. Gifts from clients based on past performance are less likely to impair independence than gifts from issuers, so Standard I(B) allows them, but the member should disclose them to the employer.
8. A charterholder files for personal bankruptcy after a business failure, with no fraud involved. Under the Misconduct standard this is:
- A.A breach of Diligence
- B.Not by itself a violation
- C.A violation in every case
- D.A breach of Loyalty to employer
Answer: B. Standard I(D) covers dishonesty, fraud and deceit, and conduct that reflects on professional integrity. A bankruptcy without fraud does not, on its own, breach the Standards.
9. A member works in a country whose securities law is less strict than the Code and Standards. The member should follow:
- A.The law of the client's country
- B.The stricter of the two
- C.The local law in every case
- D.The Code only if clients agree
Answer: B. Under Standard I(A), Knowledge of the Law, a member follows the more strict of applicable law and the Code and Standards. Where law is stricter, the law prevails.
10. While still employed, a portfolio manager plans to start a competing firm. Which action is consistent with Loyalty to the employer?
- A.Soliciting clients before resigning
- B.Taking the firm's trading models
- C.Copying client files to a home drive
- D.Registering the new firm's name
Answer: D. Standard IV(A) allows a member to prepare to compete, such as forming the new entity, while still employed. Taking employer records or soliciting clients before leaving is a breach.
Practice all 24 ethical & professional standards questions, and the rest of the 200-question bank, in the free CFA Level I training sets. Questions you miss come back until you have mastered them.
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