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CFA Level 1 Question of the Week - Ethical and Professional Standards

Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 141 Associate
edited August 2017 in Level 1 Questions
Ella Lawson is the chief executive at Rome Bank, a commercial banking enterprise. On behalf of the bank, Rome will be providing funding to a manufacturing enterprise seeking to expand its operations. During her visit to the manufacturer’s factory, Lawson overhears two employees on the production floor discussing the likelihood of their employer’s inability to carry out expansion. Lawson holds shares of the enterprise and decides to sell her holding and reject providing financial support. Lawson is most likely in violation of the CFA Institute Standard of Professional Conduct relating to:

CFA Level 1 Question of the Week - Ethical and Professional Standards 11 votes

A. Loyalty, prudence, and care.
9% 1 vote
B. Diligence and reasonable basis.
63% 7 votes
C. Material, nonpublic information.
27% 3 votes


  • Shouldn't it be 'On behalf of the bank, LAWSON will be providing...'?
  • The correct answer is B. 

    Lawson is in violation of the standard relating to diligence and reasonable basis. This is because the discussion between the two production employees and any information shared is not credible enough to base her investment decision on. Given that these individuals lack seniority, it is less likely they have access to confidential information. Therefore basing her financing and share disposal decisions on information, which is not credible will result in a decision, which lacks a reasonable and adequate basis. Lawson is not in violation of the standard concerning material nonpublic information. The specificity of the information, the extent of its difference from public information, its nature, and its reliability are key factors in determining whether a particular piece of information is material; the less reliable information is, the less likely it is to be material. As discussed above, the fact that the production employees are discussing a strategic issue whose likelihood of occurrence is uncertain makes the information nonmaterial.

  • Shouldn't it be 'On behalf of the bank, LAWSON will be providing...'?
    You are right! We could also just delete "On behalf of the bank". We try to change a few things here and there not to have the same material as in our question bank, but some mistakes might occur. Thank you for pointing out the issue and good luck with the exam!
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