Free CFA Level II Ethical and Professional Standards Practice Questions

B is correct. Standard III(C) – Suitability requires that before making investment recommendations or taking investment action, members must make a reasonable inquiry into the client's investment experience, risk and return objectives, and financial constraints (including time horizon, liquidity needs, tax considerations, unique circumstances, and legal and regulatory factors). This information forms the basis of the investment policy statement and is essential for determining suitable investments.

A is incorrect. While tax information is relevant to suitability, the standard does not require obtaining a specific number of years of tax returns. The requirement is to make a 'reasonable inquiry' into relevant factors, which may include discussing tax situations but does not prescribe a specific documentation requirement like three years of tax returns.

C is incorrect. The standard does not require minimum net worth thresholds for making recommendations. Suitability is determined by the match between the investment and the client's individual circumstances, objectives, and constraints—not by whether the client meets a specific wealth threshold.

A is correct. Davidson, as Chen's supervisor, has a duty under Standard IV(C) – Responsibilities of Supervisors to establish and enforce reasonable procedures to prevent violations by those under his supervision. By approving the report without detecting the plagiarism, Davidson failed to implement adequate review procedures. A supervisor must make reasonable efforts to detect and prevent violations.

B is incorrect. Standard I(C) – Misrepresentation would apply to Davidson only if he knowingly participated in the plagiarism or was aware of it. The vignette states he did not notice the similarities, so while his oversight was negligent, he did not personally misrepresent the work.

B is incorrect. Standard II(A) – Material Nonpublic Information relates to trading on or communicating material nonpublic information. There is no indication that insider information was involved in this scenario.

C is correct. Kovacs has violated two Standards. Standard VI(A) – Disclosure of Conflicts requires disclosure of any matter that could reasonably impair the member's objectivity. Kovacs has a direct financial interest in the endowment selecting Meridian — her AUM-linked bonus increases if Meridian gains the mandate — yet she has disclosed this to neither the investment committee (whose decision she actively influenced) nor Meridian's compliance department (which has the right to know about potential conflicts in client-facing activities). Both disclosures are required independently. Standard IV(B) – Additional Compensation Arrangements applies to any arrangement outside of the member's employment that could create a conflict with the employer's interest. The trustee role itself is uncompensated, but the combination of the trustee position with Kovacs's AUM-tied compensation creates an arrangement where her volunteer fiduciary role is entangled with her employer's business development — a conflict that must be disclosed to Meridian in writing. Standard IV(B) is not limited to cash compensation received from third parties; it encompasses any arrangement, including unpaid roles, that creates competing incentives.
B is incorrect because Standard IV(B) is not limited to direct outside compensation. The financial benefit Kovacs derives (indirectly through her bonus) from securing a client mandate while acting in a fiduciary capacity is precisely the type of conflict IV(B) is designed to address. The absence of direct compensation from the endowment does not eliminate the conflict.
A is incorrect because the CFA Standards do not limit conflict disclosure obligations to situations where the member receives payment from both parties. Standard VI(A) applies whenever a relationship could impair objectivity, regardless of whether compensation flows from both sides. Additionally, limiting the analysis to III(A) ignores the separate disclosure failures to both the endowment and Meridian that III(A) alone does not capture.