CFA Level III Ethical and Professional Standards Practice Questions
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- CFA Institute Level III exam topics and pathways
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- 7
- Updated
- Nov 3, 2026
Ramon, a retiree, has an investment policy statement with a low risk tolerance and an income objective. His adviser Elena places 5% of his account in a small-cap emerging-market fund because the fund's own risk-adjusted record is strong. She did not compare it with the policy statement or the rest of his portfolio. Which standard is violated?
- A.Performance Presentation
- B.Suitability
- C.Disclosure of Conflicts
- D.Fair Dealing
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Correct answer: B. Suitability
Suitability requires an adviser to determine that an investment is appropriate for the client's objectives, constraints and circumstances, and to judge it in the context of the total portfolio. A fund can be attractive on its own and still be unsuitable for this client's risk profile.
- A. No performance was presented to a prospect in the facts.
- B. Correct: the investment was not assessed against the IPS and the whole portfolio.
- C. No conflict of interest is described.
- D. No other clients were treated differently.
- Source: CFA Institute Standard III(C) (Suitability), accessed October 2026
A trader at a fund buys small amounts of thinly traded stocks in the final minutes of each quarter to lift closing prices and the fund's reported value. There is no investment rationale for the trades. Which standard is violated?
- A.Fair Dealing
- B.Priority of Transactions
- C.Market Manipulation
- D.Suitability
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Correct answer: C. Market Manipulation
Market Manipulation prohibits actions intended to mislead market participants by distorting prices or artificially inflating trading volume. Trading solely to raise closing prices and the reported value of holdings has that intent and effect.
- A. No client was favored over another in the facts.
- B. No personal-account trading is described.
- C. Correct: trades intended to distort prices.
- D. No client's investment profile is involved.
- Source: CFA Institute Standard II(B) (Market Manipulation), accessed October 2026
Chen studies a retailer using public filings, channel checks with its suppliers, and a conversation in which a mid-level manager mentions generally weak store traffic. None of the pieces is material by itself. Combining them, Chen concludes earnings will miss and sells the fund's position before the report. What is the compliance determination?
- A.Violation, because the combined conclusion is material and was obtained from a company employee
- B.No violation, because the conclusion is built from public and nonmaterial nonpublic information
- C.Violation, because conversations with company staff are prohibited unless the issuer is notified
- D.Violation unless the fund discloses to clients the source of each piece of information
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Correct answer: B. No violation, because the conclusion is built from public and nonmaterial nonpublic information
Under the mosaic theory, an analyst may combine public information and nonmaterial nonpublic information to reach a material conclusion without violating the standard on material nonpublic information. The analysis is the analyst's own work product, and no single input was material and nonpublic.
- A. A material conclusion drawn from permissible inputs is not itself inside information.
- B. Correct: mosaic analysis is permissible.
- C. Speaking with company staff is allowed if no material nonpublic information is received.
- D. No rule requires disclosing each input to clients.
- Source: Exam outline: CFA Institute Level III exam topics and pathways, accessed October 2026
Priya's firm directs client brokerage to a broker that bundles execution and research. Most of the research is used in managing client portfolios, but the firm also arranges for the broker to rebate part of the commissions to pay the firm's office rent. Which statement best describes the compliance position?
- A.Soft-dollar use is acceptable when disclosed, even for firm overhead, because clients pay the commissions
- B.Client commissions may be used for any firm expense provided best execution is shown on the trade tickets
- C.The research use is also improper, because all research must be paid in hard dollars by the firm
- D.Commissions belong to clients and may fund only items benefiting them; stop the rent rebate
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Correct answer: D. Commissions belong to clients and may fund only items benefiting them; stop the rent rebate
Brokerage commissions are client assets. Soft dollars may pay for research and execution services that assist the investment decision process for clients, but not for the firm's overhead. Using commissions for rent breaches the duty of loyalty, prudence and care, even if disclosed.
- A. Disclosure does not make firm overhead a permissible use of client commissions.
- B. Best execution evidence does not cure the use of client assets for firm expenses.
- C. Client-benefiting research under a soft-dollar arrangement is permitted with disclosure.
- D. Correct: research that benefits clients is permissible; rent is not.
- Source: Exam outline: CFA Institute Level III exam topics and pathways, accessed October 2026
Neil recommends shares of a company in which his firm holds an 8% stake. His research is sound, but he does not tell clients about the stake. Which standard is violated?
- A.Disclosure of Conflicts
- B.Misrepresentation
- C.Diligence and Reasonable Basis
- D.Suitability
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Correct answer: A. Disclosure of Conflicts
Members must make full and fair disclosure of all matters that reasonably could impair independence or objectivity or interfere with duties to clients. A significant firm ownership stake in a recommended company is such a matter, even when the research is sound.
- A. Correct: ownership of the issuer is a conflict that needs disclosure.
- B. He made no false statement; he omitted a conflict.
- C. The facts say the research is sound.
- D. Nothing about client fit is described.
- Source: CFA Institute Standard VI(A) (Avoid or Disclose Conflicts), accessed October 2026
Rina recommends bonds using a vendor's credit scoring model. She has not read the methodology, does not know its limitations, and has never tested it on the types of issuers she covers. Which standard is most directly violated?
- A.Suitability
- B.Record Retention
- C.Loyalty, Prudence, and Care
- D.Diligence and Reasonable Basis
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Correct answer: D. Diligence and Reasonable Basis
Members must exercise diligence and have a reasonable and adequate basis for recommendations. Using a third-party model is allowed, but the user should understand how it works and test whether it is appropriate for the use. Suitability concerns client fit, not the analytical basis.
- A. The facts do not involve a mismatch with any client's profile.
- B. Record keeping is not at issue in the facts.
- C. The facts describe an analytical process gap rather than a breach of duty to a client.
- D. Correct: no review of the model's basis or limits.
- Source: CFA Institute Standard V(A) (Diligence and Reasonable Basis), accessed October 2026
Karl, an equity analyst, covers a company whose investor relations head offers to fly him by private jet and host him at a resort for a week to tour operations. Karl believes his rating would not be affected. What is the best action?
- A.Accept the trip and disclose it only to his employer
- B.Accept the trip and disclose it in the next research report on the company
- C.Accept the trip because a genuine site visit is a normal part of research
- D.Decline the lavish offer and travel at his employer's expense
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Correct answer: D. Decline the lavish offer and travel at his employer's expense
Modest gifts and reasonable hospitality are acceptable, but lavish benefits from a covered company can compromise independence, or appear to. The best course is to decline, with the analyst's employer paying reasonable travel costs. Personal belief that the rating is unaffected is not a safe test.
- A. Disclosure to the employer does not remove the compromise of objectivity.
- B. Disclosure in a report does not make a lavish gift appropriate.
- C. A site visit can be appropriate, but not on lavish terms paid by the company.
- D. Correct: declining protects independence and objectivity.
- Source: CFA Institute Standard I(B) (Independence and Objectivity), accessed October 2026
Sources
- CFA Institute Standard III(C) (Suitability), checked October 2026
- CFA Institute Standard II(B) (Market Manipulation), checked October 2026
- CFA Institute Standard VI(A) (Avoid or Disclose Conflicts), checked October 2026
- CFA Institute Standard V(A) (Diligence and Reasonable Basis), checked October 2026
- CFA Institute Standard I(B) (Independence and Objectivity), checked October 2026
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