Title LM05 Ethics Application IFT Notes.pdf ✅

LM05 Ethics Application 2025 Level I Notes © IFT. All rights reserved 2 A. Conduct as Participants in CFA Institute Programs .................................................................................... 24 B. Reference to CFA Institute, the CFA Designation, and the CFA Program ........................................... 24 Solutions ..................................................................................................................................................................26 Required disclaimer: IFT is a CFA Institute Prep Provider. Only CFA Institute Prep Providers are permitted to make use of CFA Institute copyrighted materials which are the building blocks of the exam. We are also required to create / use updated materials every year and this is validated by CFA Institute. Our products and services substantially cover the relevant curriculum and exam and this is validated by CFA Institute. In our advertising, any statement about the numbers of questions in our products and services relates to unique, original, proprietary questions. CFA Institute Prep Providers are forbidden from including CFA Institute official mock exam questions or any questions other than the end of reading questions within their products and services. CFA Institute does not endorse, promote, review or warrant the accuracy or quality of the product and services offered by IFT. CFA Institute®, CFA® and “Chartered Financial Analyst®” are trademarks owned by CFA Institute. © Copyright CFA Institute Version 1.0
LM05 Ethics Application 2025 Level I Notes © IFT. All rights reserved 3 Introduction This learning module presents a number of short cases that demonstrate how to apply the Code and Standards in situations where professional and ethical judgement is required. For each case understand the rationale for why or why not a violation of the Code and Standards may have taken place and conduct that would comply with the Code and Standards. Instructor’s Note: We have covered the most important points of each case. We suggest that you also go through the curriculum to get a complete understanding of these cases. We strongly recommend that you read the question and come up with your answer before reading the solution. To make this easier we have presented the solutions at the end rather than immediately after each question. I. Professionalism A. Knowledge of the Law Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations. Mandracken SBS Bank (SBS) acts as a custody bank for a wide range of clients. It charges its clients an asset-based fee for the services it provides. According to the bank’s client agreement, custody clients agree to reimburse the bank for out-of-pocket expenses for items paid by SBS on their behalf. Most of these expenses are for messages sent via SWIFT, a secure messaging network used by banks and other financial institutions. While SBS charges a fixed rate for SWIFT messages, the rate is higher than the actual cost of providing this service. Mandracken, CFA, a vice president at SBS notices this discrepancy and brings it to the attention of his supervisor. Mandracken’s supervisor tells him to reduce the SWIFT fee rate for new clients and to revisit the rate for existing clients when their contracts are renewed. To meet his obligations under the CFA Institute Code and Standards, Mandracken should: A. implement the corrective procedures as directed by his supervisor. B. implement the corrective procedures as directed by his supervisor but report his objections to the bank’s board of directors. C. refuse to participate in any client interactions using the fee schedule until the bank
LM05 Ethics Application 2025 Level I Notes © IFT. All rights reserved 4 revises the SWIFT rate to reflect the actual cost of the service. View Solution Pellie Pellie, CFA, is CEO of Kwaume Investment Group (KIG), an investment adviser that is a wholly owned subsidiary of Kwaume Bank. A longtime bank customer that Pellie knows personally recently opened an investment account at KIG with a stated investment objective of earning income. Over the next year, the client made a few investments, but a majority of activity in the account involved several hundred bank transactions to and from individuals and entities located in bank secrecy havens and countries identified by the government as at risk for money-laundering activity. Given the client’s longstanding relationship, Pellie assumes the transactions have a legitimate business purpose and accepts vague descriptions, such as “for services provided,” “consulting fees,” and “commissions. He also approves the daily anti-money-laundering (AML) reports without further inquiry. Pellie’s actions are: A. a violation of the CFA Institute Code and Standards. B. appropriate because Pellie is protecting the confidentiality of client information. C. appropriate because Pellie can rely on the account’s clearing firm to report suspicious activity for the account. View Solution Mwangi Mwangi, CFA, works for a firm that sells insurance products. Three of Mwangi’s clients purchase one type of product (Class A). But they later change their minds and ask to switch to another, lower priced product (Class B). For this switch to happen, the law requires that her clients sign new sale and purchase documents for the Class B product. When the Class B documents are ready, Mwangi tries to reach her clients for their signatures but is unable to do so. Because of the missing signatures, Mwangi’s manager threatens to cancel the exchange. To prevent this from happening, Mwangi signs the necessary documents on behalf of her clients. Mwangi’s actions are: A. a violation of the CFA Institute Code and Standards. B. acceptable because her clients had already given their permission for the exchange to be made. C. acceptable if the clients gave Mwangi explicit permission to sign the documents on their