At a lunch, the chief financial officer of Halden Foods tells analyst Omar that a major customer contract will be lost. The loss has not been announced, and Omar covers Halden with a Buy rating and judges the news material. What should Omar do?

Not act or cause others to act on the news, and take it to his compliance department

Dana is a sell-side analyst whose analysis supports a Hold rating on Corvane Industries. Her firm's investment banking unit is negotiating a debt underwriting for Corvane, and a banking director asks Dana to move the rating to Buy before the deal is announced. Which action best complies with the Standards?

Publish the Hold rating and report the banking director's request to compliance

Beck manages a pooled fund whose offering documents describe a large-cap growth mandate. He finds an inexpensive small-cap value company and buys a 6% position, believing it will outperform. His research on the company is thorough and well documented. Which Standard is most directly violated?

Standard III(C) Suitability, since the position departs from the fund's stated mandate

Rina's client accounts pay commissions at market-level rates to Brokerco. In return, Brokerco supplies research and software that Rina's firm uses solely for its own proprietary trading desk and for no client account. How should Rina's arrangement be assessed under the Standards?

A violation of III(A), because client commissions fund a benefit that goes to the firm

A fund firm has told clients for years that it selects stocks by fundamental value analysis. Its portfolio manager Ines moves the strategy to momentum screens after a strong quarter, and performance improves. She does not tell clients because they are satisfied. Which Standard is most directly violated?

Standard V(B) Communication, since a significant process change was not disclosed

Selma, an employed portfolio manager, plans to leave and start her own firm. On her own time and her own computer, she registers a company name and drafts a business plan. She has not contacted clients, taken client lists, or used her employer's resources. Are her actions consistent with Standard IV(A) Loyalty?

Yes, as long as she does not solicit clients or use employer resources before leaving

Eli is a portfolio manager at a trust company managing a corporate pension plan. The plan sponsor's chief executive, who hired Eli's firm, asks him to raise the plan's weight in the sponsor's own stock to support the share price. Under Standard III(A), to whom does Eli owe his duty of loyalty in this decision?

The plan participants and beneficiaries, whose interests he must put first

Maria has passed the Level II exam and is registered for Level III, but she has not earned the charter. She is updating her business card. Under Standard VII(B), which wording is permitted?

Maria Chen, candidate in the CFA Program

CFA Level II Ethical and Professional Standards Practice Questions

Official outline: CFA Institute 2026 Level II Topic Outlines (learning outcomes)
Questions on this page: 8
Updated: Nov 3, 2026

Question 1, medium
At a lunch, the chief financial officer of Halden Foods tells analyst Omar that a major customer contract will be lost. The loss has not been announced, and Omar covers Halden with a Buy rating and judges the news material. What should Omar do?
- A.Not act or cause others to act on the news, and take it to his compliance department
- B.Cut the rating to Hold in his next report without citing the news, so no client learns why
- C.Sell his personal Halden shares, since client accounts are not affected by the news
- D.Tell his largest clients so they can reduce their positions before the announcement
Show answer and explanationHide answer
Correct answer: A. Not act or cause others to act on the news, and take it to his compliance department
Under Standard II(A), a member in possession of material nonpublic information must not act or cause others to act on it. Omar should refrain from trading or recommending on it and involve compliance about proper handling. Tipping some clients or changing the rating are both uses of the information.
- A. Correct: no action on it and escalation to compliance is the required response.
- B. Wrong: changing the rating on the basis of the news is acting on MNPI, even if unexplained.
- C. Wrong: a personal sale is trading on MNPI, and the client accounts are not the only concern.
- D. Wrong: passing the news to selected clients is tipping and also breaches fair dealing.
- Source: CFA Institute Standard II(A) (Material Nonpublic Information), accessed October 2026
Question 2, hard
Dana is a sell-side analyst whose analysis supports a Hold rating on Corvane Industries. Her firm's investment banking unit is negotiating a debt underwriting for Corvane, and a banking director asks Dana to move the rating to Buy before the deal is announced. Which action best complies with the Standards?
- A.Upgrade to Buy and add a disclosure that the firm is negotiating an underwriting for Corvane
- B.Publish the Hold rating and report the banking director's request to compliance
- C.Drop coverage of Corvane and tell no one why, so the banking team has no rating to object to
- D.Publish Hold but omit the findings the banking team objected to, keeping the tone neutral
Show answer and explanationHide answer
Correct answer: B. Publish the Hold rating and report the banking director's request to compliance
Standard I(B) requires independent, objective research free of pressure from the firm's banking business. Dana should publish the rating her analysis supports and escalate the improper request to compliance. Disclosure under VI(A) does not cure a rating she does not believe.
- A. Wrong: disclosing the banking relationship does not make a rating she does not hold objective.
- B. Correct: she keeps her independent view and escalates the pressure to compliance.
- C. Wrong: silently dropping coverage lets the pressure succeed and withholds a view clients rely on.
- D. Wrong: omitting unfavorable findings to appease banking distorts the report and breaches objectivity and diligence.
- Source: CFA Institute Standard I(B) (Independence and Objectivity), accessed October 2026
- Source: CFA Institute Standard V(A) (Diligence and Reasonable Basis), accessed October 2026
Question 3, hard
Beck manages a pooled fund whose offering documents describe a large-cap growth mandate. He finds an inexpensive small-cap value company and buys a 6% position, believing it will outperform. His research on the company is thorough and well documented. Which Standard is most directly violated?
- A.Standard III(C) Suitability, since the position departs from the fund's stated mandate
- B.Standard V(A) Diligence and Reasonable Basis, since small-cap analysis is less reliable
- C.Standard VI(A) Disclosure of Conflicts, since investors were not told about the purchase
- D.Standard III(D) Performance Presentation, since the fund's benchmark now fits poorly
Show answer and explanationHide answer
Correct answer: A. Standard III(C) Suitability, since the position departs from the fund's stated mandate
When managing a pooled fund, a manager's suitability duty is to invest consistently with the fund's stated mandate. A well-researched position outside that mandate still breaches Standard III(C). Diligence is satisfied, and nothing about a conflict or a benchmark is at issue.
- A. Correct: investments must be consistent with the stated mandate.
- B. Wrong: his research was thorough, so diligence is met.
- C. Wrong: no personal conflict exists, and trade-level disclosure is not the issue.
- D. Wrong: benchmark fit is a reporting matter and is not the breach described.
- Source: CFA Institute Standard III(C) (Suitability), accessed October 2026
Question 4, medium
Rina's client accounts pay commissions at market-level rates to Brokerco. In return, Brokerco supplies research and software that Rina's firm uses solely for its own proprietary trading desk and for no client account. How should Rina's arrangement be assessed under the Standards?
- A.Permitted, because soft dollar research is an accepted and common use of client commissions
- B.Permitted if the firm describes the arrangement in its marketing brochure
- C.Permitted when the commission rates match those charged by comparable brokers
- D.A violation of III(A), because client commissions fund a benefit that goes to the firm
Show answer and explanationHide answer
Correct answer: D. A violation of III(A), because client commissions fund a benefit that goes to the firm
Client brokerage is an asset belonging to clients. Under Standard III(A), it should be used for their benefit, such as research that helps manage their accounts. Using it to fund research for the firm's own trading desk benefits the firm at the clients' expense, even at market rates.
- A. Wrong: soft dollars are acceptable only when the research benefits the clients who paid.
- B. Wrong: a brochure mention does not turn a firm-only benefit into a client benefit.
- C. Wrong: market-level rates do not fix the problem that the benefit does not reach clients.
- D. Correct: the clients bear the cost while the firm captures the benefit.
- Source: CFA Institute Standard III(A) (Loyalty, Prudence, and Care), accessed October 2026
Question 5, hard
A fund firm has told clients for years that it selects stocks by fundamental value analysis. Its portfolio manager Ines moves the strategy to momentum screens after a strong quarter, and performance improves. She does not tell clients because they are satisfied. Which Standard is most directly violated?
- A.Standard III(C) Suitability, since the new strategy may not fit client objectives
- B.Standard V(A) Diligence and Reasonable Basis, since momentum signals lack research support
- C.Standard III(D) Performance Presentation, since the improved returns were not explained
- D.Standard V(B) Communication, since a significant process change was not disclosed
Show answer and explanationHide answer
Correct answer: D. Standard V(B) Communication, since a significant process change was not disclosed
Standard V(B) requires members to disclose the basic format and general principles of the investment process and to promptly communicate significant changes to it. Switching from fundamental value to momentum is a significant change that clients were not told about.
- A. Wrong: suitability may follow later, but the failure described is not telling clients.
- B. Wrong: no lack of research basis is described.
- C. Wrong: no performance report is described as misleading.
- D. Correct: significant process changes must be communicated to clients.
- Source: CFA Institute Standard V(B) (Communication with Clients and Prospective Clients), accessed October 2026
Question 6, medium
Selma, an employed portfolio manager, plans to leave and start her own firm. On her own time and her own computer, she registers a company name and drafts a business plan. She has not contacted clients, taken client lists, or used her employer's resources. Are her actions consistent with Standard IV(A) Loyalty?
- A.No, because any preparation to compete while employed breaches the duty of loyalty
- B.No, because she must first inform her employer that she intends to leave
- C.Yes, but only after she has told her clients that she plans to depart
- D.Yes, as long as she does not solicit clients or use employer resources before leaving
Show answer and explanationHide answer
Correct answer: D. Yes, as long as she does not solicit clients or use employer resources before leaving
Standard IV(A) allows an employee to plan a competing business so long as she does not breach her duties during employment, such as soliciting clients, using employer property or confidential information, or neglecting her job. Preparation on her own time with her own resources is permitted.
- A. Wrong: mere preparation is not a breach of loyalty.
- B. Wrong: no duty requires announcing an intent to leave in advance.
- C. Wrong: telling clients before departure would itself be soliciting them.
- D. Correct: she may prepare, provided she avoids solicitation and employer resources.
- Source: CFA Institute Standard IV(A) (Loyalty), accessed October 2026
Question 7, medium
Eli is a portfolio manager at a trust company managing a corporate pension plan. The plan sponsor's chief executive, who hired Eli's firm, asks him to raise the plan's weight in the sponsor's own stock to support the share price. Under Standard III(A), to whom does Eli owe his duty of loyalty in this decision?
- A.The plan participants and beneficiaries, whose interests he must put first
- B.The sponsor's chief executive, who hired the firm and approves its fees
- C.The sponsor's board of directors, who approved the engagement
- D.His own firm, whose revenue depends on retaining the sponsor as a client
Show answer and explanationHide answer
Correct answer: A. The plan participants and beneficiaries, whose interests he must put first
For a trust or plan, the client is the beneficiary group, not the person who hired the manager. Standard III(A) requires Eli to act for participants and beneficiaries, with prudence and care. A concentration that serves the sponsor's share price at their expense is not consistent with that duty.
- A. Correct: the duty runs to the participants and beneficiaries.
- B. Wrong: the person who hires and pays the manager is not the client in a plan setting.
- C. Wrong: board approval of the engagement does not shift the duty away from beneficiaries.
- D. Wrong: the firm's revenue interest is a conflict to manage, not the object of the duty.
- Source: Exam outline: CFA Institute 2026 Level II Topic Outlines (learning outcomes), accessed October 2026
Question 8, medium
Maria has passed the Level II exam and is registered for Level III, but she has not earned the charter. She is updating her business card. Under Standard VII(B), which wording is permitted?
- A.Maria Chen, CFA Level II, with the Level III exam to come
- B.Maria Chen, candidate in the CFA Program
- C.Maria Chen, CFA (charter pending, expected next year)
- D.Maria Chen, partial CFA charterholder with two levels passed
Show answer and explanationHide answer
Correct answer: B. Maria Chen, candidate in the CFA Program
Standard VII(B) lets a candidate state that she is a candidate in the CFA Program, but she must not suggest she holds the designation or part of it. Wording such as a level number attached to the designation, a pending charter, or a partial charter implies a credential she lacks.
- A. Wrong: a level label attached to the designation implies a partial designation.
- B. Correct: this accurately states her status as a candidate.
- C. Wrong: the pending label still presents the designation as if held.
- D. Wrong: there is no such thing as a partial charterholder; the wording misleads.
- Source: CFA Institute Standard VII(B) (Reference to CFA Institute, the CFA Designation, and the CFA Program), accessed October 2026

Sources

CFA Institute

CFA Institute Standard II(A) (Material Nonpublic Information), checked October 2026
CFA Institute Standard I(B) (Independence and Objectivity), checked October 2026
CFA Institute Standard V(A) (Diligence and Reasonable Basis), checked October 2026
CFA Institute Standard III(C) (Suitability), checked October 2026
CFA Institute Standard III(A) (Loyalty, Prudence, and Care), checked October 2026
CFA Institute Standard V(B) (Communication with Clients and Prospective Clients), checked October 2026
CFA Institute Standard IV(A) (Loyalty), checked October 2026
CFA Institute Standard VII(B) (Reference to CFA Institute, the CFA Designation, and the CFA Program), checked October 2026

Questions are drafted with help from AI and published only after a person reviews and approves them. How these questions are made

CFA Level II Ethical and Professional Standards Practice Questions

Sources

CFA Institute

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