Free CFA Level III: Portfolio Management Ethical & Professional Standards Practice Questions
Ethical and professional standards on CFA Level III tests the Standards of Practice applied to portfolio management contexts, client communication requirements, GIPS compliance, and fiduciary responsibilities.
Sample Questions
Question 1
Easy
Based on the August 12 event in Exhibit 1, Raghavan most likely violated which CFA Institute Standard?
Solution
C is correct. Standard I(B) Independence and Objectivity addresses the receipt of gifts and entertainment from parties other than clients. Members must not accept any gift, benefit, or compensation that could reasonably be expected to compromise their independence and objectivity, and any such items received from outside parties must be disclosed in writing to the employer. Courtside seats with a face value of $3,400 received from the CEO of a portfolio holding clearly meet that threshold (and exceed Sterling's own $250 written-disclosure trigger), and Raghavan's verbal-only notification fails the written-disclosure requirement of Standard I(B).
Question 2
Medium
Based on Exhibit 2, the most significant concern under Standard III(D) Performance Presentation is:
Solution
A is correct. Standard III(D) requires performance information to be fair, accurate, and complete. GIPS permits defined, prospective exclusions (such as accounts below a stated minimum or those with client-directed brokerage) only when consistently applied and disclosed. Pulling $140 million of sub-advised legacy accounts out of a live composite under an undefined "portfolio transition" label is the classic pattern of survivorship/selection bias: the excluded accounts are likely the poorest performers, and their removal inflates the reported 9.4% figure relative to what a full, honest composite would show.
Question 3
Hard
Considering Exhibits 1 and 2 together, which of Priya's actions represents the MOST serious violation of the CFA Institute Standards, and why?
Solution
A is correct. The undisclosed familial relationship is independently a Standard VI(A) Disclosure of Conflicts violation, but layered on top of an allocation that gives Meridian more than four times its pro-rata share of a 4.2x oversubscribed IPO, it becomes a compound violation that directly harms the other 13 clients by diverting scarce shares. Ethics failures that are simultaneously undisclosed AND produce unequal client outcomes implicate Standards III(B) Fair Dealing and VI(A) together and are the most serious category because they breach duties to clients, not just internal policy.