CFA Level 2 Ethics: notes and free practice

1. Question 1 of 10Level II topic sample · Case 1 of 5EthicsMultiple choice

   Case facts

   Rina forms a takeover thesis using public filings and individually immaterial nonpublic supplier observations, with a reasonable analytical basis. Before trading, she receives a director’s private confirmation of an unannounced signed takeover agreement that is material to the share price.

   Before the director’s confirmation, how should Rina’s original research be assessed?

   A.All nonpublic observations are prohibitedB.A supported mosaic may use immaterial nonpublic inputsC.Only insider confirmation can justify her thesis
   Answer and explanations

   Public facts and individually immaterial nonpublic inputs may support an independent analytical conclusion.

   Review the method

   • A: The mosaic approach distinguishes immaterial observations from material private facts.
   • B - correct: Public facts and individually immaterial nonpublic inputs may support an independent analytical conclusion.
   • C: A reasonable basis does not require prohibited material insider confirmation.
2. Question 2 of 10Level II topic sample · Case 1 of 5EthicsMultiple choice

   Case facts

   Rina forms a takeover thesis using public filings and individually immaterial nonpublic supplier observations, with a reasonable analytical basis. Before trading, she receives a director’s private confirmation of an unannounced signed takeover agreement that is material to the share price.

   After the director confirms the signed agreement, what should Rina do?

   A.Trade because her initial thesis was independentB.Tell clients the secret and tradeC.Refrain from trading or causing trades and follow compliance restrictions
   Answer and explanations

   The material private confirmation requires refraining from trading or causing trades and appropriate compliance escalation.

   Review the method

   • A: Receiving material private information changes her obligations after the original analysis.
   • B: Giving clients the information does not make it public.
   • C - correct: The material private confirmation requires refraining from trading or causing trades and appropriate compliance escalation.
3. Question 3 of 10Level II topic sample · Case 2 of 5EthicsMultiple choice

   Case facts

   Evan receives a referral payment when a tax adviser’s prospect signs an investment-management contract. His employer knows the arrangement, but prospects do not. He recommends a manager to a prospect and proposes revealing the payment only after the prospect signs.

   When should Evan disclose the referral payment to the prospect?

   A.Before the prospect enters the service agreementB.After the first profitable yearC.Never, because his employer knows
   Answer and explanations

   Pre-agreement disclosure lets the prospect assess the incentive behind the recommendation.

   Review the method

   • A - correct: Pre-agreement disclosure lets the prospect assess the incentive behind the recommendation.
   • B: Waiting for results is too late for the initial informed choice.
   • C: Employer disclosure does not discharge the separate prospect obligation.
4. Question 4 of 10Level II topic sample · Case 2 of 5EthicsMultiple choice

   Case facts

   Evan receives a referral payment when a tax adviser’s prospect signs an investment-management contract. His employer knows the arrangement, but prospects do not. He recommends a manager to a prospect and proposes revealing the payment only after the prospect signs.

   Which disclosure best enables Evan’s prospect to evaluate the referral conflict?

   A.A generic warning that conflicts may existB.The arrangement’s nature and value or compensation basisC.Only the tax adviser’s office address
   Answer and explanations

   Specific information about the nature and value or basis of compensation makes the incentive understandable.

   Review the method

   • A: A vague warning does not explain the actual benefit.
   • B - correct: Specific information about the nature and value or basis of compensation makes the incentive understandable.
   • C: An address does not explain the financial incentive.
5. Question 5 of 10Level II topic sample · Case 3 of 5EthicsMultiple choice

   Case facts

   Maya manages two equally suitable accounts with equal pre-submitted orders for an oversubscribed placement. Her written policy requires proportional allocation. One client pays higher fees. A separate disclosed premium service offers longer consultations after recommendations are distributed fairly.

   How should Maya allocate the limited placement under the case facts?

   A.Give it all to the higher-fee accountB.Ignore the policy and draw namesC.Apply the stated proportional allocation policy
   Answer and explanations

   Both accounts are suitable and ordered equally; consistent proportional allocation treats them fairly.

   Review the method

   • A: Higher fees do not justify overriding fair allocation.
   • B: An improvised lottery disregards the stated policy.
   • C - correct: Both accounts are suitable and ordered equally; consistent proportional allocation treats them fairly.
6. Question 6 of 10Level II topic sample · Case 3 of 5EthicsMultiple choice

   Case facts

   Maya manages two equally suitable accounts with equal pre-submitted orders for an oversubscribed placement. Her written policy requires proportional allocation. One client pays higher fees. A separate disclosed premium service offers longer consultations after recommendations are distributed fairly.

   Are Maya’s longer premium consultations necessarily prohibited?

   A.No, if disclosed and others are not unfairly disadvantagedB.Yes, all services must be identicalC.No, premium fees permit priority on every trade
   Answer and explanations

   Disclosed service differences can be permissible without unfair treatment in recommendations and investment actions.

   Review the method

   • A - correct: Disclosed service differences can be permissible without unfair treatment in recommendations and investment actions.
   • B: Fair dealing does not require identical service packages.
   • C: A premium service does not create unrestricted trading priority.
7. Question 7 of 10Level II topic sample · Case 4 of 5EthicsMultiple choice

   Case facts

   A supervisor discovers recommendations released without required evidence review. She stops new releases and investigates. Separately, her firm switches from unlevered large-company equities to a leveraged small-company strategy while retaining its old description to clients.

   After discovering the analyst’s bypass, the supervisor should:

   A.Rely only on a verbal promiseB.Investigate and enforce controls with follow-up monitoringC.Delegate once and disclaim responsibility
   Answer and explanations

   Reasonable supervision requires addressing the breach and monitoring procedures designed to prevent recurrence.

   Review the method

   • A: A promise without adequate investigation and controls is insufficient.
   • B - correct: Reasonable supervision requires addressing the breach and monitoring procedures designed to prevent recurrence.
   • C: Delegation does not eliminate reasonable-supervision responsibilities.
8. Question 8 of 10Level II topic sample · Case 4 of 5EthicsMultiple choice

   Case facts

   A supervisor discovers recommendations released without required evidence review. She stops new releases and investigates. Separately, her firm switches from unlevered large-company equities to a leveraged small-company strategy while retaining its old description to clients.

   What does the firm’s material strategy change require?

   A.Keep the old description until returns improveB.Notify only clients who complainC.Promptly communicate the significant change to affected clients
   Answer and explanations

   Leveraged small-company exposure materially changes the investment process and risks clients need to understand.

   Review the method

   • A: The old description no longer explains the actual process.
   • B: Communication duties do not depend on complaints.
   • C - correct: Leveraged small-company exposure materially changes the investment process and risks clients need to understand.
9. Question 9 of 10Level II topic sample · Case 5 of 5EthicsMultiple choice

   Case facts

   A client offers Leo a performance bonus outside his employer’s compensation plan; written consent from all involved parties is missing. Later, preparing to leave the firm, Leo proposes taking proprietary client records and doing basic office planning for his new business on personal time.

   Before accepting the outside performance bonus, Leo should:

   A.Obtain required written consent from all involved partiesB.Accept and disclose only if he winsC.Treat the client’s offer as sufficient consent
   Answer and explanations

   Additional compensation can conflict with employer interests; required written consent must precede acceptance.

   Review the method

   • A - correct: Additional compensation can conflict with employer interests; required written consent must precede acceptance.
   • B: Later disclosure does not cure missing prior consent.
   • C: The client’s offer does not supply the employer’s consent.
10. Question 10 of 10Level II topic sample · Case 5 of 5EthicsMultiple choice

    Case facts

    A client offers Leo a performance bonus outside his employer’s compensation plan; written consent from all involved parties is missing. Later, preparing to leave the firm, Leo proposes taking proprietary client records and doing basic office planning for his new business on personal time.

    Which conclusion best distinguishes Leo’s departure preparations?

    A.Both are always allowed on personal timeB.Basic preparation may be permissible, but employer records need authorizationC.All future-employment preparation is prohibited
    Answer and explanations

    Preparation must respect current duties; taking proprietary client records requires appropriate authorization.

    Review the method

    • A: Personal time does not transfer ownership of employer records.
    • B - correct: Preparation must respect current duties; taking proprietary client records requires appropriate authorization.
    • C: Noncompetitive preparation for a later departure is not categorically prohibited.

Four ideas to put to work

Find the method you need

Start with: The Code and Standards, materiality, client duties and the difference between disclosure and consent.

Questions about this topic

What if local law and the Code and Standards differ?

Apply the applicable stricter requirement as directed by the Code and Standards. A practice being permitted locally does not by itself make it acceptable under the professional standards.

Does disclosure permit trading on material nonpublic information?

No. Disclosure is not a substitute for the requirements governing material nonpublic information. Assess the information and required conduct from the specific facts.

How should I compare plausible Ethics answers in a vignette?

Identify the required duty and the conduct each answer actually recommends. Separate required corrective action from an optional response, and do not add a legal reporting duty that the case does not establish.