Ethical & Professional Standards

CFA® Level I, published weight 15–20%. The Code, the seven Standards, and how examiners phrase violations.

What the outline covers

Ethics and Trust in the Investment Profession
Code of Ethics and Standards of Professional Conduct
Guidance for Standard I: Professionalism
Guidance for Standard II: Integrity of Capital Markets
Guidance for Standard III: Duties to Clients
Guidance for Standard IV: Duties to Employers
Guidance for Standard V: Investment Analysis, Recommendations, and Actions
Guidance for Standard VI: Conflicts of Interest
Guidance for Standard VII: Responsibilities as a CFA Institute Member or Candidate
Application of the Code and Standards: Level I

Sample questions

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Question 1

A member works in a jurisdiction whose regulation permits front-running client orders. The Code and Standards prohibit it. The member must:

A. Follow local law
B. Follow the stricter Code and Standards
C. Disclose the practice and proceed
D. Seek written employer approval

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B. Members follow the most strict of applicable law, the Code and the Standards. Less strict local law never lowers the bar.

Reading: Standard I(A) — Knowledge of the Law

Question 2

An analyst accepts a paid consulting role outside her firm without informing her employer. She has most likely violated:

A. Standard III(A) Loyalty, Prudence and Care
B. Standard IV(B) Additional Compensation Arrangements
C. Standard V(A) Diligence and Reasonable Basis
D. No standard, because the work is outside the firm

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B. Additional compensation arrangements that could conflict with the employer’s interest require written consent from all parties involved.

Reading: Standard IV(B) — Additional Compensation Arrangements

Question 3

A member publishes a research summary that omits the fact that his firm holds an 8% beneficial ownership stake in the issuer. This most likely violates:

A. Standard VI(A) Disclosure of Conflicts
B. Standard II(B) Market Manipulation
C. Standard III(D) Performance Presentation
D. Standard VII(A) Conduct as Participants

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A. Beneficial ownership that could reasonably impair independence must be disclosed prominently. Omitting it breaches Standard VI(A).

Reading: Standard VI(A) — Disclosure of Conflicts

Question 4

Which action best satisfies Standard V(B), Communication with Clients and Prospective Clients?

A. Presenting projections as assured outcomes
B. Distinguishing between fact and opinion
C. Omitting the process used to reach the conclusion
D. Reporting only the recommendations that performed well

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B. Members must distinguish fact from opinion and describe the basic process by which conclusions were reached, including its limitations.

Reading: Standard V(B) — Communication with Clients

Question 5

A portfolio manager recommends a security after reading a single sell-side note and performing no further work. The security subsequently performs well. The manager has:

A. Not violated the Standards, because the result was favourable
B. Violated Standard V(A) regardless of the outcome
C. Violated Standard III(A) only if a client lost money
D. Violated Standard I(C) Misrepresentation

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B. Standard V(A) requires a reasonable and adequate basis supported by appropriate research. The outcome is irrelevant — the process is what is judged.

Reading: Standard V(A) — Diligence and Reasonable Basis

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