CFA Level I · CFA Level I Exam

Code of Ethics and Standards of Professional Conduct: formula sheet

Full chapter guide

Key formulas

I(A) Knowledge of the Law: Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the Code and Standards) 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.; Stricter rule wins. If you know of a violation, dissociate: at a minimum, stop participating. If the violation continues, confront the violator and report to your supervisor or compliance. Reporting to CFA Institute or a regulator is not required by the standard itself.
I(B) Independence and Objectivity: Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity.; Test: could it reasonably compromise objectivity? Disclosure and firm policy help but do not cure a real compromise.
I(C) Misrepresentation: Members and Candidates must not knowingly make any misrepresentation relating to investment analysis, recommendations, actions, or other professional activities.; Includes plagiarism, false credentials, misleading performance claims and omitting relevant facts.
I(D) Misconduct: Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.; Covers dishonesty, fraud and deceit. It is not a general ban on every private mistake.
Conflict rule of thumb: Law stricter than Code: follow the law. Code stricter than law: follow the Code.; In a country with no law on the point, follow the Code and Standards.
Standard II(A) test: Material + Nonpublic → do not act or cause others to act; If either element is missing, II(A) is not violated. Both must be present.
Material information: Disclosure would probably affect the security's price, or reasonable investors would want to know it; Judge by effect on price or investor interest, not by how the information was obtained.
Nonpublic information: Not yet disseminated to the marketplace in general; Selective disclosure to a few analysts does not make information public.
Mosaic theory: Public information + nonmaterial nonpublic information → permitted conclusion; Permitted even if the conclusion is material. A single material nonpublic piece is not allowed.
Standard II(B) test: Practice that distorts prices or artificially inflates volume + intent to mislead → violation; Covers information-based and transaction-based manipulation. Without intent to mislead, ordinary trading is fine.
Standard V(A) core duty: Diligence + independence + thoroughness + reasonable and adequate basis supported by appropriate research; Applies to analysis, recommendations and actions. The depth of research scales with the complexity and risk of the situation.
Standard V(B) core duty: Disclose the investment process + identify important factors + separate fact from opinion; Applies to clients and prospective clients. Disclose material changes in the process promptly.
Standard V(C) core duty: Maintain records that support analyses, recommendations, actions and client communications; Handbook recommends at least 7 years unless local law requires longer. Records are firm property.
Use of third-party or group research: Reasonable effort to confirm the research is sound before relying on it; Reliance without any check on the source's diligence and assumptions is a breach risk.
Standard VI(A) Disclosure of Conflicts: Make full and fair disclosure of all matters that could reasonably be expected to impair independence and objectivity or interfere with duties to clients, prospective clients, and employer.; Disclosures must be prominent, in plain language, and communicate the information effectively. Applies to all three recipient groups.
Standard VI(B) Priority of Transactions: Client and employer transactions come before transactions in which you are the beneficial owner.; Personal trading is allowed if clients are not disadvantaged. Front-running breaches this.
Standard VI(C) Referral Fees: Disclose to employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for recommending products or services.; Covers fees paid and received. Disclose before the service agreement is entered into.
Standard VII(A) in short: Do not compromise the integrity, validity or security of CFA Institute programs, or the reputation of CFA Institute or the designation; Applies to exam conduct, confidential exam content and any other program participation.
Standard VII(B) in short: Do not misrepresent or exaggerate the meaning or implications of membership, the designation or candidacy; Facts are fine. Guarantees, superiority claims and implied partial designations are not.
Candidate status wording: Say "candidate in the CFA Program" or state the level passed. Do not say "CFA Level II" as if it were a designation; Candidacy is not a designation, and there is no partial designation.
Designation use: Use the CFA letters after your name only once you are a charterholder; Do not use it before all requirements are met.

Quick revision

The Standards are I Professionalism, II Integrity of Capital Markets, III Duties to Clients, IV Duties to Employers, V Investment Analysis, Recommendations, and Actions, VI Conflicts of Interest, VII Responsibilities as a CFA Institute Member or Candidate.
Comply with the stricter of applicable law and the Standards (Standard I(A), Knowledge of the Law); if the Standards are stricter, follow them.
Standard I(C) bars misrepresentation, and I(D) bars conduct involving dishonesty, fraud or deceit.
Standard II(A): do not act or cause others to act on material nonpublic information.
Standard III(A) is loyalty, prudence and care, and the client's interests come before your own and your employer's.
Standard III(B) requires fair dealing, so no client group gets favoured when recommendations or trades are made.
Standard III(C) requires suitability, judged against the client's objectives and constraints.
Standard V(A) requires diligence and a reasonable basis for any recommendation or action.
Standard VI(A) requires disclosure of conflicts, and VI(B) gives clients' and employers' trades priority over your own.
Misuse of the CFA designation or of candidacy status falls under Standard VII, so do not claim more than the facts allow.
When two options both look ethical, choose the one that is more direct, complete and timely.

Common mistakes

Following the local law when the Code is stricter. Fix: Compare the two. Always follow the stricter, and if there is no law, follow the Code.
Treating any gift as a violation of I(B). Fix: Apply the test: could it reasonably be expected to compromise independence and objectivity? Small, token items often do not, and disclosure helps.
Thinking the mosaic theory bans any conclusion that turns out to be material Fix: The mosaic theory allows public plus nonmaterial nonpublic inputs, even when the conclusion is material. Check the inputs, not the conclusion.
Treating selective disclosure to analysts as public information Fix: Information is public only when disseminated to the marketplace in general. A private call or briefing for a few does not count.
Thinking third-party research can never be used under V(A). Fix: Outside and group research is allowed if you make reasonable efforts to confirm it is sound and has a reasonable basis.
Stating that V(C) fixes a retention period of seven years. Fix: Say that the Handbook recommends at least seven years, unless local regulation requires a longer period. The Standard itself only requires appropriate records.
Thinking conflicts of interest must always be avoided. Fix: The Standards require disclosure, and avoidance where appropriate. A properly disclosed conflict is usually acceptable.
Disclosing only to clients and forgetting the employer. Fix: VI(A) covers clients, prospective clients and employer. VI(C) applies to employer, clients and prospective clients as appropriate.
Treating candidacy as a partial designation, such as saying someone is "CFA Level II". Fix: Say "passed Level I" or "candidate in the CFA Program". There is no partial designation.
Thinking that telling friends which topics appeared on the exam is harmless. Fix: Disclosing what was or was not tested compromises exam security and breaches VII(A).

Exam tips

Look for the keyword in the stem: stricter points to I(A), gift or pressure to I(B), copying or false claim to I(C), fraud or dishonesty to I(D).
Intent alone never cures an I(B) problem. The test is what could reasonably compromise objectivity.
For I(A), remember that dissociation is the minimum when you know of a violation. If it continues, confront the violator and report to supervisor or compliance. Do not choose options that continue to participate.
If a question mentions a country with no law on the point, follow the Code and Standards.
With no penalty for wrong answers, never leave a blank. Remove the option that ignores the stricter rule or the facts, then choose between the other two.
Lead with the two locks for II(A). Most vignettes hinge on whether information is truly material, truly nonpublic, or neither.
When the case says the information is nonmaterial, expect mosaic theory to be the answer.
For II(B), look for words like false rumour, artificially, create the appearance of activity, or pump up volume. These signal intent to mislead.