Ethical & Professional Standards — Study Notes

CFA® Level I topic weight 15–20% · the largest single topic on the exam

The framework

Code of Ethics vs Standards of Professional Conduct: the Code states broad principles (integrity, competence, putting clients first, improving market integrity); the seven Standards translate them into enforceable rules. Exam questions almost always test the Standards applied to a scenario, so learn each Standard’s sub-sections, not just its title.
Stricter-rule principle: members must comply with the stricter of applicable law or the Code and Standards. If local law is stricter, follow local law; if the Code is stricter, follow the Code. Where no law prohibits something the Standards prohibit, the Standards still govern.
Ethical decision-making framework: identify the facts and duties, consider situational influences and alternatives, decide and act, then reflect on the outcome. Questions test recognizing situational pressure (loyalty, overconfidence, incentives) as a source of poor decisions.

Standards I–III: markets and clients

Standard I — Professionalism: knowledge of the law, independence and objectivity (modest gifts from clients may be acceptable with disclosure; gifts from parties trying to influence research are not), no misrepresentation (including plagiarism and overstating qualifications), and no misconduct involving dishonesty or deceit.
Standard II — Integrity of Capital Markets: acting on material nonpublic information (MNPI) is prohibited. The mosaic theory is the key exception: conclusions assembled from nonmaterial nonpublic information plus public information may be acted on. Market manipulation — spreading false rumors or transacting to distort prices or volume — is prohibited even if profitable for clients.
Standard III — Duties to Clients: loyalty, prudence and care (client interests before employer’s and your own); fair dealing means treating clients fairly, not identically — premium service tiers are fine if disclosed and no client is disadvantaged on material recommendations; suitability requires an investment policy statement and judging investments in a total-portfolio context; performance must be fair, accurate and complete; confidentiality survives the end of the client relationship, with exceptions for illegal activity and legal compulsion.

Standards IV–VII: employers, analysis, conflicts, the program

Standard IV — Duties to Employers: you may prepare to leave (arrange office space, incorporate) but may not solicit clients or take records, models or client lists before resigning. Additional compensation arrangements require written consent from all parties. Supervisors must take steps to prevent violations — inadequate procedures are themselves a violation.
Standard V — Investment Analysis, Recommendations and Actions: diligence and reasonable basis for every recommendation; communicate the difference between fact and opinion; disclose the basic format and general principles of the investment process; retain records supporting your analysis (seven years is the recommended default absent regulation).
Standard VI — Conflicts of Interest: full and prominent disclosure of anything that could impair independence; priority of transactions — client and employer trades come before personal trades (family accounts that are ordinary client accounts are treated like any client); referral fees must be disclosed to clients and employers before an engagement.
Standard VII — Responsibilities as a Member or Candidate: no conduct compromising the integrity of CFA Institute programs (sharing exam content, using confidential exam information); reference the designation and candidacy accurately — there is no such thing as a “CFA Level II” title, only “passed Level II” or “Level III candidate,” and no claims that the charter guarantees superior performance.

GIPS fundamentals

Purpose: the Global Investment Performance Standards give prospective clients a fair, comparable, full picture of a firm’s track record and prevent cherry-picking of best accounts or periods.
Firm-level compliance: only investment management firms can claim compliance, it applies firm-wide, and there is no partial compliance — “in compliance except for…” is prohibited.
Composites: all actual, fee-paying, discretionary portfolios must be included in at least one composite defined by a similar strategy or mandate — the mechanism that prevents survivorship and selection bias. Verification by an independent third party is recommended, not required.

Common traps

Assuming the local law always wins — the stricter of law or the Code governs, and following the law is not a safe harbor when the Code demands more.
Reading “fair dealing” as “equal dealing” — different service levels are permitted; disadvantaging clients on material recommendation changes is not.
Missing the mosaic theory — combining public information with nonmaterial nonpublic pieces is allowed even when the resulting conclusion is material.
Thinking departing employees may contact clients before resigning — preparation is allowed, solicitation and taking firm property are not.
Treating GIPS as account-level or partially adoptable — compliance is firm-wide and all-or-nothing.

For exam preparation reference only — original condensed summaries of publicly known Level I curriculum concepts. Independent study aid. CFA Institute does not endorse, promote, or warrant the accuracy or quality of this product. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.