CAIA Ethics Case: Conflicts in an Alternatives Allocation
An ethics case answer should connect a specific duty to a decisive fact and a concrete action. Separate the commercial attraction of a fund from conflicts, missing evidence and the client’s ability to bear its risks.
The key decisions, at a glance
| Concept | What to do | Watch for |
|---|---|---|
| Affected party | Identify the client and any other affected stakeholders. | Do not assume the manager’s objective is the client’s objective. |
| Decisive fact | Name the payment, omission or constraint creating the problem. | A vague concern about ethics does not diagnose the case. |
| Required action | Explain the disclosure, review, control or refusal needed. | Naming a principle without changing conduct is incomplete. |
| Remaining issue | Test whether the action resolves the underlying conflict. | Disclosure cannot repair every suitability or evidence failure. |
1. Affected party
Identify the client and any other affected stakeholders.
Watch for: Do not assume the manager’s objective is the client’s objective.
2. Decisive fact
Name the payment, omission or constraint creating the problem.
Watch for: A vague concern about ethics does not diagnose the case.
3. Required action
Explain the disclosure, review, control or refusal needed.
Watch for: Naming a principle without changing conduct is incomplete.
4. Remaining issue
Test whether the action resolves the underlying conflict.
Watch for: Disclosure cannot repair every suitability or evidence failure.
Original worked case
An allocation to an affiliated fund
Given: An analyst recommends the employer’s private fund to a client needing cash in 18 months. The fund normally locks capital for five years. The analyst’s bonus rises with internal fund sales, and the memo omits both facts.
01 Identify the omissions
The client lacks information about the lockup and the analyst’s incentive.
02 Assess fit
The stated five-year restriction conflicts with the 18-month cash requirement.
03 Respond
Correct the memo, disclose and manage the incentive, and reassess or reject the allocation for this mandate.
Answer and interpretation
A strong answer addresses both communication and client fit. Adding a bonus disclosure alone leaves the cash mismatch unresolved.
Change one assumption
If the client has ample separate liquidity, reassess suitability using the full balance sheet; do not automatically conclude that every long lockup is inappropriate.
Independent teaching example with the stated assumptions. Not an official exam question, marking key or observed market trend.
Understand the method
Part 1
Separate case facts from assumptions and accusations
Underline what the case actually establishes: the professional’s role, client objective, proposed action, incentive and available evidence. Put unknowns in a separate list. A relationship with a manager establishes a possible conflict, but it does not by itself prove a corrupt recommendation. A missing valuation document establishes an evidence gap, but not automatically a false valuation.
This discipline keeps the answer proportionate. State the issue that the facts support, then specify what further evidence would change the assessment. Do not invent client consent, an internal approval, a legal prohibition or a favourable contract term. Ethical analysis is stronger when it explains the uncertainty and still identifies a practical next action.
Part 2
Name the duty and explain why this fact engages it
An answer that merely names “transparency” or “client interests” leaves the reasoning unfinished. Connect the principle to the decision. For example, undisclosed related-party compensation may affect the independence of a manager recommendation; a client cannot evaluate that incentive without clear disclosure and an appropriate review process. The causal link is more useful than a long list of principle names.
Several duties can apply together. In a valuation case, evidence quality, honest communication and comprehensive risk assessment interact. Prioritize the duties that change the recommended action rather than mentioning all eight mechanically. The official principles provide the framework; the cases here are original practice and do not represent an official marking scheme.
Part 3
Specify an action that resolves or controls the problem
“Be ethical” is not an action plan. A useful answer states who should do what before the recommendation proceeds. Possible actions include obtaining independent valuation evidence, correcting a client report, disclosing a material incentive, recusing a conflicted decision-maker or pausing an unsupported commitment. Choose an action tied to the observed failure mechanism.
Disclosure alone may not be sufficient when the proposed transaction remains unsuitable or the decision process cannot be made independent. Likewise, rejecting every imperfect investment is not a thoughtful default. Explain whether the issue can be remedied, what evidence would establish that remedy and who is authorized to review it. Preserve records of the decision and any correction.
Part 4
Write a short conclusion with a condition and a reason
A useful case response can follow four sentences: identify the material fact, connect it to a duty, recommend an action, and state the condition for proceeding. This structure forces the answer to move beyond a label. It also makes unsupported assumptions easier to spot because the conclusion must rest on evidence described in the response.
For example: “The proposed fund is locked for five years while the client needs this capital next year. That mismatch conflicts with a client-centred recommendation. Reserve the near-term spending amount in a suitable liquid allocation and reassess any remaining commitment. Proceed only after the funding plan and risk explanation are documented.” This is an original reasoning model, not a prescribed exam response length.
Case-analysis worksheet
Fact
- Write this
- Specific evidence supplied in the case
- Avoid this
- Invented consent or accusations
Duty
- Write this
- Principle plus the causal connection
- Avoid this
- A list of labels without explanation
Action
- Write this
- Named remedy, owner and sequence
- Avoid this
- “Disclose everything” without a plan
Conclusion
- Write this
- Proceed, defer or reject with conditions
- Avoid this
- A confident answer that ignores missing facts
More worked practice
Original teaching cases. Use the stated assumptions; these are not official exam questions or marking keys.
A valuation omission before a client presentation
Given: An analyst discovers that a property model omits a known $2m repair cost. The presentation is tomorrow, and a colleague suggests using the current value because a revised model is not ready.
- 1Identify the omission as material to the valuation, not merely a formatting issue.
- 2Recalculate or obtain competent review; if the figure cannot be supported in time, defer that claim or clearly limit the presentation.
- 3Correct affected materials and assess whether earlier recipients need a correction.
Interpretation: A deadline does not justify presenting a known incomplete valuation as reliable. The remedy addresses evidence and communication while preserving a reviewable correction trail.
Check your understanding
Answer first, then open the explanation. These checks are original practice and do not generate an exam score.
1. A manager offers an analyst a personal benefit during selection. What should the answer address?
The incentive, the applicable conflict policy, disclosure to the appropriate reviewer and whether recusal or independent evaluation is needed. Do not assume the benefit automatically proves misconduct or that disclosure automatically resolves it.
2. A client insists on an unsuitable illiquid allocation. Is a signed acknowledgement enough?
A signature does not remove the need to explain the mismatch, assess the mandate and make a defensible recommendation. Escalate or decline the recommendation where appropriate.
3. What makes an ethical conclusion reviewable?
A clear chain from supplied facts to relevant duty, concrete action and evidence-based conditions. The reviewer should not need to guess why the action follows.
Common questions
Should I list every ethical principle?
Prioritize the principles and facts relevant to the question. An exhaustive list can obscure the decisive issue.
What changes if the manager has excellent historical returns?
The performance may inform investment analysis, but it does not remove the incentive conflict or the need to fit the client’s liquidity requirements.
Sources and scope
The sources below establish their stated framework or subject context. Calculations and cases are our own teaching material; these sources do not endorse them or establish complete exam coverage.
- CAIA Ethical Principles
The professional principles. Our case decisions are independent applications, not an official answer key.
- CAIA curriculum and study tools
Official curriculum, companions and required readings for the exam year. The current page now links to 2027 materials.
- CAIA 2027 curriculum overview
Published topic categories and Emerging Topics reading titles for 2027. The overview is not the complete learning-objective list.
By MiloPrep editorial team. Updated 10 October 2026. Independent study notes, not affiliated with or endorsed by CAIA Association. How we prepare our content.
Notes
- * Study scope: Selected study concepts, not complete curriculum coverage. Match your sitting to the official exam-year materials; CAIA’s current resource page now links to 2027. ↩ Return to content