Chartered Financial Analyst (CFA) Ethics Practice Test

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Which CFA Institute standard is violated when a risk disclosure fails to adequately describe investment risks, misleading clients about potential losses?

Standard IV.D Performance Presentation. Standard VI.A Disclosure of Conflicts. Standard III.A Loyalty, Prudence, and Diligence. Standard IV.B Fair Dealing.

Correct Answer:

Standard IV.B Fair Dealing.

Explanation:

The issue is governed by the standard that requires fair dealing with clients, meaning information must be presented honestly, clearly, and in a way that lets the client make informed decisions. If a risk disclosure omits material risks or gives a misleading impression about potential losses, it fails to meet this standard. Clients rely on accurate disclosures to assess risk and make prudent choices, so downplaying or hiding risk information violates the duty to deal fairly. Other standards focus on different concerns, such as conflicts of interest or how performance data is presented, but they don’t address the fundamental obligation to disclose investment risks fairly and fully.

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