I85PREP
⌘ K
CMA Securities & Investment study materials
CMA Securities & Investment study resources

CMA Securities & Investment practice questions

One question at a time. Build your CMA Securities & Investment understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Regulatory environment and compliance

Under Japan's Financial Instruments and Exchange Act (FIEA), which activity generally requires registration as a Type I Financial Instruments Business Operator?

  1. Publishing a monthly newsletter summarizing public company disclosures
  2. Soliciting and executing orders for listed shares on a client's behalf Correct answer.
  3. Introducing clients to an insurer for a commission on insurance policies
  4. Providing general market commentary to retail clients without trade execution

Explanation

The FIEA classifies brokerage and dealing in securities, including order solicitation and execution for listed shares, as Type I Financial Instruments Business. Advisory or publishing activities without trade execution fall outside that category, and insurance intermediation is regulated separately. Registration is the gatekeeper rule that underpins the entire compliance framework.

Question 2Regulatory environment and compliance

A company wishes to sell newly issued shares to more than 50 investors in Japan in a public offering. Which statutory filing is normally required?

  1. An internal compliance memo retained at head office
  2. A quarterly report filed within 45 days of the offering
  3. A securities registration statement filed with the authority before the offering Correct answer.
  4. An extraordinary report only after the shares start trading

Explanation

A public offering to a large number of investors triggers the disclosure regime, requiring a securities registration statement before solicitation begins. The document must be available to investors during the offering period. Post-offering reports do not substitute for the pre-offering registration.

Question 3Regulatory environment and compliance

Which body is responsible for administering the securities registration and inspection regime under Japan's FIEA?

  1. The Bank of Japan
  2. The Japan Securities Dealers Association
  3. The Financial Services Agency Correct answer.
  4. The Tokyo Stock Exchange listing department

Explanation

The Financial Services Agency is the primary regulator administering the FIEA, including securities registration and inspections. The Bank of Japan conducts monetary policy, and the exchange and industry association exercise self-regulatory functions. Keeping these roles distinct is fundamental to compliance mapping.

Question 4Regulatory environment and compliance

A firm's compliance officer is designing controls for customer asset segregation. Which principle best reflects the client asset protection rules?

  1. Client cash may be netted against the firm's operating expenses
  2. Client securities may be pledged as collateral for the firm's own borrowing
  3. Client assets must be segregated from the firm's own assets and reconciled regularly Correct answer.
  4. Client assets may be pooled with proprietary trading positions if disclosed

Explanation

Client asset protection rules require segregation of customer securities and cash from the firm's own assets, with periodic reconciliation. Commingling or pledging client assets for the firm's own obligations breaches the trust underpinning the brokerage relationship. Segregation is a core compliance control, not a disclosure matter.

Question 5Regulatory environment and compliance

Which of the following best describes the purpose of a suitability assessment when recommending a financial product?

  1. To ensure the recommendation matches the client's knowledge, experience, and financial situation Correct answer.
  2. To calculate the firm's commission on the proposed transaction
  3. To confirm the client's identity for anti-money-laundering purposes
  4. To determine whether the product is listed on a regulated exchange

Explanation

Suitability requires that a recommendation be appropriate for the specific client's knowledge, experience, investment objectives, and financial position. It is distinct from identity verification and from product listing status. The obligation protects clients from products they cannot understand or afford to lose.

Question 6Regulatory environment and compliance

A sales representative cold-calls a retail prospect and recommends an unlisted equity fund. Which obligation is most directly engaged at the point of solicitation?

  1. Providing the prospect with a pre-contract document explaining risks and fees before contract conclusion Correct answer.
  2. Obtaining exchange approval for the fund's marketing materials
  3. Reporting the call to the central bank within 24 hours
  4. Filing a securities registration statement for the fund before the call

Explanation

Solicitation for specified financial products requires delivery of a pre-contract document setting out risks, fees, and key terms before the client concludes the contract. This gives the investor a basis for informed consent. Exchange approval and central bank reporting are not part of this solicitation duty.

Question 7Regulatory environment and compliance

Which statement correctly distinguishes a self-regulatory organization from the statutory regulator in the Japanese securities market?

  1. A self-regulatory organization has no role in supervising member conduct
  2. A self-regulatory organization sets and enforces market conduct rules for its members under regulatory oversight Correct answer.
  3. A self-regulatory organization enforces the FIEA with the same authority as the regulator
  4. A self-regulatory organization issues securities registration statements on behalf of issuers

Explanation

Self-regulatory organizations such as exchanges and industry associations set and enforce conduct rules for their members, operating alongside the statutory regulator. They do not exercise the same statutory authority as the Financial Services Agency. This division of responsibilities shapes how compliance obligations are monitored.

Question 8Regulatory environment and compliance

Which activity most clearly falls within the definition of market abuse under securities regulation?

  1. Trading on material non-public information about an upcoming takeover Correct answer.
  2. Executing a client order at the best available price on an exchange
  3. Publishing a research report that contains a negative view of a listed company
  4. Rebalancing a fund according to its published index methodology

Explanation

Insider trading on material non-public information is a classic form of market abuse because it undermines market fairness and price integrity. Legitimate research and ordinary order execution are not abuse. Index rebalancing follows disclosed rules and is likewise outside the prohibition.

Question 9Regulatory environment and compliance

A firm discovers that an employee has been front-running client orders. Which immediate compliance response is most appropriate?

  1. Refund the affected clients without any internal record
  2. Wait for the annual regulatory inspection before acting
  3. Escalate internally, restrict the employee's activity, and assess reporting obligations to the regulator Correct answer.
  4. Quietly transfer the employee to a different desk

Explanation

Front-running is serious misconduct requiring prompt internal escalation, containment of the employee's activity, and assessment of whether the matter must be reported to the regulator. Delay or concealment aggravates the breach. A documented response is essential to demonstrate effective compliance.

Question 10Regulatory environment and compliance

Which of the following best explains why Chinese walls are maintained between a firm's corporate finance and sales desks?

  1. To satisfy exchange listing requirements for the issuer client
  2. To prevent material non-public information from flowing to trading staff who could misuse it Correct answer.
  3. To ensure that research analysts are paid from trading revenue
  4. To reduce the firm's tax liability on proprietary trading profits

Explanation

Information barriers keep confidential deal information away from staff who trade or advise, reducing insider trading and conflicts risk. They are an internal control, not a tax or listing device. Payment of analysts from trading revenue is a conflict the barriers are meant to counter, not a reason for them.

Question 11Regulatory environment and compliance

A portfolio manager wants to allocate a hot new issue across client accounts. Which allocation practice is consistent with fair treatment obligations?

  1. Allocating to accounts managed by the portfolio manager's relatives first
  2. Allocating based on which clients promise future business
  3. Allocating the entire issue to the largest fee-paying client
  4. Allocating according to a pre-disclosed, non-discriminatory policy applied consistently Correct answer.

Explanation

Fair allocation requires a pre-defined, disclosed policy applied consistently across comparable clients, with records of the rationale. Preferential allocation to favored clients or insiders breaches the duty of fair dealing. Consistency and documentation are what make the allocation defensible.

Question 12Regulatory environment and compliance

Under anti-money-laundering rules, when must a securities firm conduct enhanced due diligence on a customer?

  1. Whenever the customer trades listed equities
  2. When the customer is a politically exposed person or presents higher risk indicators Correct answer.
  3. Only when the account balance exceeds the firm's average
  4. Only when the customer requests a margin account

Explanation

Enhanced due diligence applies to higher-risk relationships, including politically exposed persons, complex ownership structures, and unusual cross-border activity. It involves deeper identity verification and source-of-funds checks. Ordinary retail equity trading does not automatically trigger enhanced measures.

Question 13Regulatory environment and compliance

A firm's research analyst is invited to join a roadshow for an investment banking client the firm is advising. Which control best manages the resulting conflict?

  1. Allowing the analyst to attend freely because research is independent
  2. Prohibiting all contact between research and banking permanently
  3. Requiring review of the analyst's participation and restricting content that could compromise objectivity Correct answer.
  4. Having the banking team approve the analyst's published ratings

Explanation

Contacts between research and investment banking must be controlled and reviewed so that research remains objective and not used to promote a deal. Blanket prohibition is impractical, and letting banking approve ratings inverts the independence requirement. Documented review of participation and content is the accepted safeguard.

Question 14Regulatory environment and compliance

Which of the following is the primary purpose of best execution obligations?

  1. Guaranteeing clients a profit on each trade
  2. Ensuring orders are executed on terms most favorable to the client given the circumstances Correct answer.
  3. Maximizing the firm's spread on each transaction
  4. Restricting clients to a single execution venue

Explanation

Best execution requires firms to take reasonable steps to obtain the best possible result for clients, considering price, cost, speed, and likelihood of execution. It is an obligation of process, not a guarantee of profit. It does not require routing to one venue or maximizing the firm's spread.

Question 15Regulatory environment and compliance

A client complains that a recommended product was unsuitable. Which record is most important for the firm's defense?

  1. The marketing brochure used in the campaign
  2. The exchange's trading volume statistics
  3. The firm's annual financial statements
  4. The documented suitability assessment and client profile at the time of recommendation Correct answer.

Explanation

A contemporaneous suitability assessment tied to the client's profile is the key evidence that the recommendation was appropriate when made. Brochures and market statistics do not show what the firm knew about the client. Documenting the assessment at the point of sale is a core compliance control.

Question 16Regulatory environment and compliance

Which statement about the handling of customer complaints is most consistent with regulatory expectations?

  1. Complaints should be logged, investigated promptly, and resolved with documented outcomes Correct answer.
  2. Complaints should be handled verbally to avoid creating records
  3. Complaints should be discarded if the client does not follow up
  4. Complaints should be forwarded directly to the exchange without internal review

Explanation

Regulators expect firms to maintain a complaint-handling process with logging, timely investigation, fair resolution, and documented outcomes. Records support root-cause analysis and supervisory review. Discarding or avoiding records undermines accountability and can breach record-keeping rules.

Question 17Regulatory environment and compliance

A firm plans to outsource its order management system to a third-party vendor. Which compliance consideration is most important?

  1. Assessing and managing operational risk, including oversight and exit arrangements Correct answer.
  2. Requiring the vendor to register as a financial instruments business
  3. Transferring regulatory responsibility for the system to the vendor
  4. Ensuring the vendor's fee is below the industry average

Explanation

Outsourcing does not transfer regulatory responsibility; the firm remains accountable and must assess vendor risk, maintain oversight, and plan for exit or disruption. Cost is secondary to operational resilience and control. Requiring the vendor to register is generally unnecessary for a technology provider.

Question 18Regulatory environment and compliance

Which practice would most likely be treated as market manipulation?

  1. Hedging currency exposure using listed derivatives
  2. Selling shares to rebalance a portfolio
  3. Placing orders with no intent to execute in order to create a false impression of demand Correct answer.
  4. Buying shares based on published analyst research

Explanation

Spoofing, or entering orders without intent to execute to mislead other participants about supply or demand, is manipulative. Legitimate trading based on research, rebalancing, or hedging reflects genuine intent. Intent to create a false market impression is the distinguishing element.

Question 19Regulatory environment and compliance

A registered representative receives a gift of substantial value from a client whose account the representative manages. Which response best aligns with conflict-of-interest rules?

  1. Accept the gift and keep it confidential from the firm
  2. Accept the gift and reciprocate with investment tips
  3. Accept the gift only if it is paid in cash
  4. Decline or disclose the gift according to the firm's gift and entertainment policy Correct answer.

Explanation

Gifts from clients can create conflicts and are governed by firm policies requiring limits, disclosure, or refusal. Concealment breaches those policies, and cash gifts are typically prohibited outright. Reciprocating with tips compounds the conflict.

Question 20Regulatory environment and compliance

A firm's proprietary trader holds shares and then publishes aggressive research through an affiliated analyst to lift the price. Which violation is most directly implicated?

  1. Breach of client asset segregation
  2. Market manipulation through a misleading research-driven scheme Correct answer.
  3. Inadequate anti-money-laundering monitoring
  4. Failure to file a quarterly report

Explanation

Using research to move a price for the benefit of proprietary positions is a manipulative scheme and also breaches research independence. The conduct deceives the market about the basis of the recommendation. Segregation, periodic reporting, and AML rules address different obligations.

Question 21Regulatory environment and compliance

An issuer learns of a leak of material non-public information about an earnings revision. Under timely disclosure principles, what is the most appropriate action?

  1. Wait until the scheduled earnings release date
  2. Disclose the material information promptly through the prescribed channel Correct answer.
  3. Deny the information until the next annual report
  4. Disclose only to selected institutional investors

Explanation

When material information leaks, timely disclosure principles require prompt public disclosure through the prescribed channel to prevent selective access. Selective disclosure to favored investors is prohibited. Delay until the scheduled date defeats the purpose of equal access.

Question 22Regulatory environment and compliance

A firm uses a risk-based approach to AML compliance. Which outcome best demonstrates that the approach is operating effectively?

  1. Applying identical monitoring intensity to every customer regardless of risk
  2. Closing all accounts with any foreign connection
  3. Directing greater monitoring and review resources to higher-risk relationships and documenting the rationale Correct answer.
  4. Relying solely on software alerts without human review

Explanation

A risk-based approach allocates more scrutiny to higher-risk customers and activities, with documented reasoning that supports supervisory review. Uniform intensity wastes resources and ignores risk differences. Automated alerts still require human assessment and escalation.

Question 23Regulatory environment and compliance

An investment adviser directs client trades to a broker that provides the adviser with research services. Which condition must be satisfied for this arrangement to be acceptable?

  1. The arrangement must be disclosed and must benefit the client, with best execution still achieved Correct answer.
  2. The client must waive all rights to trade confirmations
  3. The broker must charge the highest available commission
  4. The research must benefit the adviser's own trading account primarily

Explanation

Soft-dollar or research arrangements are acceptable only where they are disclosed, benefit the client rather than the adviser's own account, and do not compromise best execution. Using client commissions primarily for the adviser's benefit is a conflict that must be controlled. Waiving confirmation rights is unrelated and improper.

Question 24Regulatory environment and compliance

A firm's compliance function reports to the head of sales and its budget is approved by the sales director. Which governance weakness does this present?

  1. Duplication of the internal audit function
  2. Insufficient independence of compliance, impairing its ability to challenge business conduct Correct answer.
  3. Excessive independence of compliance from business lines
  4. Overstaffing of the compliance function

Explanation

Compliance must be sufficiently independent of business lines to challenge conduct and escalate concerns objectively. Reporting and budgeting through sales creates pressure to soften findings. Independence is a structural safeguard, not a matter of headcount.

Question 25Regulatory environment and compliance

A cross-border firm markets a fund into Japan from abroad. Which principle determines whether Japanese registration and solicitation rules apply?

  1. Whether the marketing constitutes solicitation in Japan toward Japanese residents Correct answer.
  2. The currency in which the fund is denominated
  3. The nationality of the fund's investors only
  4. The location of the fund's administrator

Explanation

Territorial application turns on whether the activity amounts to solicitation directed at residents in Japan, regardless of where the firm or fund is established. Currency and administrator location are not determinative. Firms must assess the substance of the marketing activity against local rules.

Question 26Regulatory environment and compliance

Under Japanese securities regulation, which document must be delivered to a retail client before or at the time of concluding a contract for a solicited securities transaction?

  1. A quarterly performance report of the recommended fund
  2. A written explanation of the trade and a document describing the nature and risks of the product (contract conclusion document) Correct answer.
  3. A copy of the firm's internal compliance manual section on sales conduct
  4. A tax withholding certificate for the current fiscal year

Explanation

The Financial Instruments and Exchange Act requires a financial instruments business operator to deliver a document explaining the nature and risks of the product (shohin setsumeisho) before contract conclusion and a contract conclusion document (keiyaku shikkou shomen) at or after conclusion for solicited transactions. These delivery obligations give retail clients a clear record of the product and the agreed terms. Internal manuals and tax certificates are not substitutes for these statutory documents.

Question 27Regulatory environment and compliance

A securities firm's compliance officer is reviewing the firm's segregation of client assets. Which arrangement best meets the regulatory requirement for protecting client money and securities?

  1. Client assets are transferred to the firm's parent bank and recorded as an intercompany receivable
  2. Client assets are pooled with proprietary assets but insured against loss by a commercial policy
  3. Client assets are segregated from the firm's proprietary assets and kept in a trust or separate custody account with clear records Correct answer.
  4. Client assets are held in the firm's own trading account and reconciled monthly by the finance team

Explanation

Japanese securities regulation requires client assets to be segregated from the firm's own assets and held under trust or separate custody arrangements, with accurate records enabling return to clients. Commingling with proprietary assets exposes clients to the firm's insolvency risk and is not cured by insurance. The segregated arrangement must be auditable and clearly documented.

Question 28Regulatory environment and compliance

A sales manager instructs a representative to recommend a structured note to an elderly client with a small pension income and no prior derivatives experience, because the branch needs to hit its monthly revenue target. Which compliance concern is most directly raised by this instruction?

  1. The recommendation is permitted because structured notes are exchange-traded and therefore transparent
  2. The recommendation may breach suitability and customer-oriented conduct duties because the product's risk does not match the client's profile Correct answer.
  3. The recommendation is permitted because the branch revenue target is a legitimate business objective
  4. The recommendation is acceptable because the client signed a general risk disclosure at account opening

Explanation

Suitability rules require that a recommendation be consistent with the client's knowledge, experience, financial situation, and investment objectives. Recommending a complex structured note to an elderly client with limited income and no derivatives experience, driven by revenue targets, conflicts with the customer-oriented conduct principle. A general risk disclosure at account opening does not cure an unsuitable recommendation.

Question 29Regulatory environment and compliance

A firm's compliance department is designing its record-keeping framework for telephone orders. Which approach is most consistent with Japanese securities regulatory expectations for order records?

  1. Retain only the final trade confirmations sent to clients, since these capture the executed terms
  2. Retain records for one month after settlement, because the trade is then complete
  3. Retain recordings or logs of order receipt sufficient to reconstruct the order, including time, client identity, and instructions, for the required retention period Correct answer.
  4. Delegate record retention entirely to the client, who receives the confirmation

Explanation

Regulatory expectations require firms to keep records that allow reconstruction of the order and its handling, including the time of receipt, client identity, and instructions, for the prescribed retention period. Final confirmations alone may not capture how the order was received and transmitted. Retention periods are set by regulation and cannot be shortened to one month or delegated to the client.

Question 30Regulatory environment and compliance

A firm's compliance committee is reviewing a proposal to have the head of the sales division also serve as the firm's chief compliance officer. Which governance analysis is most consistent with regulatory expectations for an effective compliance function?

  1. The arrangement creates a conflict because compliance must be independent of revenue-generating functions and able to escalate concerns objectively Correct answer.
  2. The arrangement is acceptable if the sales division's revenue target is approved by the board
  3. The arrangement is acceptable because combining roles reduces cost and improves communication
  4. The arrangement is acceptable if the individual holds a professional compliance certification

Explanation

An effective compliance function must be independent of revenue-generating activities so that it can identify, escalate, and challenge conduct without conflicts of interest. Combining the chief compliance officer role with sales leadership compromises that independence and weakens the firm's control environment. Certification or cost savings do not remove the structural conflict.

Question 31Ethics and professional standards

Under the CFA Institute Code of Ethics, when a member's local law is stricter than the Code and Standards, which standard must the member follow?

  1. The local law, because it takes precedence over the Code
  2. The Code and Standards, because they always override local law
  3. Whichever standard the member's employer has adopted in writing
  4. The stricter of the two requirements, which in this case is local law Correct answer.

Explanation

The Code and Standards require members to comply with the stricter of applicable law or the Code itself. Where local law is stricter, the member must follow local law. The Code is a floor, not a ceiling, so it never permits conduct that local law prohibits.

Question 32Ethics and professional standards

A portfolio manager accepts a luxury weekend trip from a broker who executes trades for her clients. The trip is not disclosed to her employer. Which standard is most directly breached?

  1. Independence and objectivity, because a gift from a broker may compromise judgment Correct answer.
  2. Market manipulation, because the broker is influencing trade allocation
  3. Fair dealing, because other clients did not receive the trip
  4. Performance presentation, because the trip is not a client benefit

Explanation

Gifts and entertainment from parties with a business relationship can impair a member's independence and objectivity, and must be disclosed to the employer. Undisclosed valuable benefits from a broker create a conflict that threatens objective decision-making. Fair dealing concerns treatment of clients, not receipt of gifts.

Question 33Ethics and professional standards

A member is preparing a research report and discovers that a colleague's draft contains a forecast copied from a sell-side report without attribution. What is the member's most appropriate action under the Standards?

  1. Paraphrase the forecast slightly so it is no longer identical to the original
  2. Remove the forecast entirely and publish the report with no earnings estimate
  3. Submit the report unchanged, because the colleague is responsible for the content
  4. Attribute the source and, if necessary, escalate the plagiarism concern to a supervisor Correct answer.

Explanation

Members must not present the work of others as their own and should attribute sources when using external research. Discovering plagiarism in a draft requires corrective action and, where appropriate, escalation under the employer's policies. Minor paraphrasing does not cure the misappropriation.

Question 34Ethics and professional standards

A client asks an adviser to invest only in companies that meet certain environmental criteria. The adviser personally disagrees with the criteria. What is the adviser's best course of action?

  1. Refer the client to another firm without disclosing the disagreement
  2. Invest as the adviser sees fit and explain the deviation at the next review
  3. Accept the mandate but apply the criteria only to new purchases
  4. Follow the client's mandate, or decline the assignment if unable to implement it faithfully Correct answer.

Explanation

Members must act in the client's interest and follow the client's stated mandate, or decline the relationship if they cannot implement it. Personal views about the client's preferences must not override the agreed objectives. Quietly deviating from the mandate breaches the duty of loyalty.

Question 35Ethics and professional standards

An analyst learns from a company's CFO, during a private call, that an earnings restatement will be announced next week. The information is not public. The analyst should:

  1. Keep the information confidential and not trade or cause others to trade Correct answer.
  2. Recommend the stock to clients before the announcement to add value
  3. Share the information only with colleagues inside the firm
  4. Trade on the information personally but avoid client accounts

Explanation

Material nonpublic information must not be used for trading or passed on so others can trade. The analyst should keep it confidential and follow the firm's procedures on handling MNPI. Trading, recommending, or tipping others would breach the standard on material nonpublic information.

Question 36Ethics and professional standards

A firm advertises that its equity fund returned 18% last year. The figure reflects a composite of only the accounts that remained open all year, excluding closed accounts with poor results. This presentation most likely violates which standard?

  1. Fair dealing, because some clients were excluded from the composite
  2. Record retention, because the firm kept insufficient records
  3. Performance presentation, because the reported results are not fair, accurate, or complete Correct answer.
  4. Suitability, because the fund may not suit all investors

Explanation

Performance presentation requires that reported results be fair, accurate, and complete, and that composites not cherry-pick accounts. Excluding terminated accounts with poor performance misrepresents the strategy's track record. Suitability and fair dealing concern client treatment rather than the accuracy of reported performance.

Question 37Ethics and professional standards

A member serves on a charity's investment committee and learns that the charity plans to award a large contract to a company the member also advises. The member should:

  1. Resign from the charity immediately without explanation
  2. Vote in favor because the company is well managed
  3. Disclose the conflict and recuse herself from the decision Correct answer.
  4. Abstain silently without informing the committee

Explanation

Members must disclose conflicts of interest and take steps to ensure they do not impair professional judgment. Recusal after disclosure protects the integrity of the decision. Silent abstention conceals the conflict, and immediate resignation without explanation avoids rather than manages it.

Question 38Ethics and professional standards

Which action best demonstrates compliance with the standard on diligence and a reasonable basis for recommendations?

  1. Reviewing the issuer's filings, industry data, and financial statements before recommending Correct answer.
  2. Relying on a single sell-side note because it is recent
  3. Recommending a stock because a senior colleague likes it
  4. Using only price momentum as the basis for a long-term recommendation

Explanation

A reasonable basis requires independent investigation of the relevant facts, including filings, financial condition, and industry context. Relying on a single external note, seniority, or price momentum alone does not establish a sufficient foundation. The depth of research should be proportionate to the recommendation's importance.

Question 39Ethics and professional standards

A member manages a pension account with a written IPS permitting up to 40% in equities. The member invests 55% in equities to chase higher returns. The member has most likely breached:

  1. The standard on preservation of confidentiality
  2. The standard on market manipulation
  3. The standard on performance presentation
  4. The standard on suitability and the duty to follow the client's mandate Correct answer.

Explanation

Investing beyond the limits in a client's IPS breaches the duty to act within the client's objectives and constraints. Suitability requires recommendations and portfolio actions consistent with the client's documented mandate. The other standards concern market conduct, reporting, and information handling, not mandate adherence.

Question 40Ethics and professional standards

An investment adviser is entitled to a performance fee but also receives a commission from a product provider for each client placed in that product. To comply with the Standards, the adviser should:

  1. Keep the arrangement confidential because it is commercially sensitive
  2. Disclose the arrangement to clients in a clear and prominent manner Correct answer.
  3. Disclose the arrangement only if a client asks about fees
  4. Donate the commission to charity without disclosure

Explanation

Referral fees, commissions, and other compensation arrangements that create conflicts must be disclosed to clients and prospective clients. Disclosure allows clients to judge whether the advice is influenced by the additional compensation. Confidentiality or donor arrangements do not remove the conflict.

Question 41Ethics and professional standards

A member is asked to write a marketing piece claiming a strategy is "guaranteed to outperform." The member knows no such guarantee exists. The member should:

  1. Write the claim but add a small disclaimer at the end
  2. Include the claim only in materials sent to sophisticated investors
  3. Write the claim and attribute it to the marketing department
  4. Refuse to include the guarantee and correct the claim to be accurate Correct answer.

Explanation

Members must not make misrepresentations about investment performance or capabilities. A guarantee of outperformance is false and cannot be cured by a disclaimer or by attributing it to others. The member should decline and ensure the material is accurate.

Question 42Ethics and professional standards

Under the Standards, how should a member treat a client's request to keep certain personal financial details confidential from the member's own firm?

  1. Publish the details in a research note as an example
  2. Share the details with all colleagues because the firm owns client data
  3. Keep the information confidential and share only as needed to service the account Correct answer.
  4. Refuse to accept the client because confidentiality is impossible

Explanation

Client information must be kept confidential and used only for legitimate business purposes related to servicing the client. Internal sharing should be limited to those who need the information. Publishing or broad internal distribution would breach the duty of confidentiality.

Question 43Ethics and professional standards

A trader places large buy orders in a thinly traded stock shortly before the close to push the price up, then sells the position the next morning. This conduct is best described as:

  1. Market manipulation through transaction-based distortion Correct answer.
  2. Information-motivated trading based on public data
  3. A permitted arbitrage strategy
  4. Legitimate market making to provide liquidity

Explanation

Transaction-based manipulation involves trades intended to distort prices or mislead other market participants. Buying to move the closing price and then reversing the position is a classic pattern of such manipulation. Providing liquidity or arbitrage does not involve intent to distort price.

Question 44Ethics and professional standards

A member changes employers and wants to contact former clients. Under the Standards, the member should:

  1. Ask a colleague still at the old firm to forward client records
  2. Use confidential client data from the prior firm to target the most profitable clients
  3. Follow any non-compete or solicitation agreements and use only permitted information Correct answer.
  4. Take the former employer's client list and contact everyone immediately

Explanation

Members must respect agreements with former employers and must not use confidential information from a prior firm. Soliciting former clients is permissible only within the limits of applicable agreements and law. Taking client lists or using confidential data breaches those duties.

Question 45Ethics and professional standards

A supervisor learns that a junior analyst has been repeatedly trading on inside information. The supervisor does nothing. Under the Standards, the supervisor:

  1. Should wait for the compliance department to act on its own
  2. May be in breach for failing to take reasonable steps to prevent and detect violations Correct answer.
  3. Has no responsibility because the analyst acted alone
  4. Is liable only if the supervisor personally profited

Explanation

Supervisors must take reasonable steps to prevent and detect violations by those they supervise. Failing to act after learning of misconduct can itself constitute a breach. Personal profit or sole responsibility of the subordinate does not eliminate the supervisor's duty.

Question 46Ethics and professional standards

An analyst covers a company whose shares are held in her own retirement account. To comply with the Standards, she should most appropriately:

  1. Continue as normal because retirement accounts are outside the rules
  2. Avoid mentioning the holding because it is a personal matter
  3. Disclose her ownership to her employer and in the report if required by policy Correct answer.
  4. Sell the shares before publishing any report

Explanation

Personal ownership of a covered security creates a conflict that must be disclosed to the employer and, where required, in the research report. Disclosure allows clients and the firm to assess objectivity. Selling may be one remedy but is not the general requirement.

Question 47Ethics and professional standards

A member is preparing a report on a private company and cannot verify a key revenue figure. What is the most appropriate treatment?

  1. State the figure as fact because the company provided it verbally
  2. Disclose the limitation and qualify the analysis appropriately Correct answer.
  3. Use the highest plausible estimate to be conservative
  4. Omit any mention of the figure and proceed

Explanation

When key data cannot be verified, members should disclose the limitation and ensure the report is not misleading. Presenting unverified figures as fact, or selecting an aggressive estimate, misrepresents the basis of the analysis. Omission that distorts the conclusion is also inappropriate.

Question 48Ethics and professional standards

Which of the following best reflects the duty of fair dealing when a member has a strong new buy recommendation?

  1. Provide the recommendation to the largest clients first
  2. Give the recommendation to clients who pay the highest fees first
  3. Disseminate the recommendation to all clients simultaneously or per a disclosed allocation policy Correct answer.
  4. Share the recommendation with friends before publishing it

Explanation

Fair dealing requires that clients be treated impartially, so recommendations should be disseminated simultaneously or according to a disclosed, non-discriminatory policy. Preferring large or high-fee clients, or leaking to friends, gives some recipients an unfair advantage.

Question 49Ethics and professional standards

A member believes a colleague is misstating fund expenses in client reports. The firm has no formal escalation procedure. What should the member do first?

  1. Post the concern on social media to force a response
  2. Report the concern through the firm's normal chain of command or compliance function Correct answer.
  3. Ignore it because there is no formal procedure
  4. Confront the colleague publicly in a client meeting

Explanation

Members should report known or suspected misconduct to the appropriate person, typically a supervisor or compliance, even absent a formal procedure. Public disclosure or confrontation is not the proper first step. Ignoring the issue breaches the duty to act.

Question 50Ethics and professional standards

A member uses a backtested model to project future returns and presents the backtest as if it were actual client performance. This most clearly breaches which standard?

  1. Confidentiality, because the model uses client data
  2. Diligence, because backtests are never useful
  3. Performance presentation, because hypothetical results are presented as actual results Correct answer.
  4. Fair dealing, because not all clients received the model

Explanation

Performance presentation requires clear distinction between actual and hypothetical or model results. Presenting a backtest as realized client performance is misleading regardless of the model's quality. Diligence is not the issue if the model was properly built; the defect is in how results are portrayed.