CFA Level I · CFA Level I Exam

Ethics and Trust in the Investment Profession: formula sheet

Full chapter guide

Key formulas

Ethics versus law: Ethical conduct ≥ legal compliance; Complying with the law is necessary but may not be enough. Where law and the Code differ, follow the stricter one.
Trust chain: Ethical conduct → client trust → capital market integrity; Use this to explain why professional ethics matters to clients, firms and the wider market.
Professional test: Specialised knowledge + shared standards + duty to society; The features that make an occupation a profession, not just a job.
Trust chain (core logic): Ethical conduct → trust → participation and fair markets → efficient capital allocation → economic growth; Use this chain to judge answer options. Unethical conduct reverses every link.
Ethics versus law: Ethical standard ≥ legal minimum; Acting legally is not always acting ethically. Ethics can require more than the law does.
Effects of unethical behaviour: Loss of trust → lower participation, higher cost of capital, weaker price discovery, less efficient allocation; Harm spreads beyond the wrongdoer to other participants and to society.
Role of the profession: Serve clients + protect market integrity + benefit society; The profession's wider purpose is more than maximising returns for one client or firm.
Ethical decision-making framework (steps): Identify → Consider → Decide and act → Reflect; Identify the relevant facts, stakeholders, duties and conflicts. Consider the situation: the Code and Standards, firm policy, law and other guidance. Decide and act. Then reflect on the outcome. Wording of the steps may differ slightly across sources, so learn the logic rather than the labels.
Challenges to ethical behavior: Overconfidence | Situational influences | Focus on short-term results | Tolerant culture | Rationalization; These are conditions that make unethical choices more likely. Recognising them is the first defence.
Test of a good decision: Would the action withstand scrutiny by clients, employer, regulators and the public?; Use this as a final check on any option before you choose it.
Law versus Standards (separate from the framework steps): Members must comply with the stricter of applicable law and the Code and Standards; This is a requirement of Standard I(A) Knowledge of the Law. It is not one of the framework steps. Complying with the law alone is not enough if the Code and Standards demand more.
Code of Ethics, component 1: Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets; The broad duty of conduct toward everyone you deal with.
Code of Ethics, component 2: Place the integrity of the investment profession and the interests of clients above your own personal interests; Clients and the profession come before your personal interests. This component does not mention employers. Loyalty to your employer is a separate duty under Standard IV(A).
Code of Ethics, component 3: Use reasonable care and exercise independent professional judgment when conducting investment analysis, making recommendations, taking investment actions and engaging in other professional activities; Links to independence, objectivity and diligence.
Code of Ethics, component 4: Practice and encourage others to practice in a professional and ethical manner that reflects credit on yourself and the profession; You should also encourage others, not only behave well yourself.
Code of Ethics, component 5: Promote the integrity and viability of the global capital markets for the ultimate benefit of society; The market-integrity duty. It underlies Standard II.
Code of Ethics, component 6: Maintain and improve your professional competence and strive to maintain and improve the competence of other investment professionals; A continuing duty to learn, and to support colleagues.
Structure of the Standards: 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; Seven Standards. Learn the order, because later questions name them by number and letter.

Quick revision

A profession has specialised knowledge, a code of conduct and a duty to serve others' interests.
Trust in investment professionals underpins client relationships and the wider financial system.
Ethical markets support fair, transparent and efficient allocation of capital.
Loss of trust raises the cost of capital and discourages participation in markets.
Legal compliance is the minimum; ethical behaviour often asks for more.
Ethical conduct is judged by the effect on clients, markets and the profession, not only on the firm.
The ethical decision-making framework moves you from facts to action: identify the relevant facts, stakeholders, duties and conflicts of interest; consider situational influences and the guidance that applies (the Code and Standards, laws, firm policies); then decide and act on the alternative that best satisfies the ethical principles and the checklist. Check the exact step names against the current curriculum text.
The Preamble states the purpose of the Code and Standards and the duty to place client and market integrity first.
Ethics questions are three-option MCQs; pick the action that best upholds the Code and Standards.
Choose the option that best matches what the Code and Standards require, and eliminate options that fall short.
No penalty for wrong answers, so never leave an ethics question blank.

Common mistakes

Thinking that if an action is legal, it is ethical. Fix: Remember law is a minimum. Ask separately whether the action is fair, honest and in the client's interest.
Thinking ethics and law always agree. Fix: Recall that something can be legal but unethical, or the rules may differ across countries. Apply the stricter standard.
Treating ethics as the same as obeying the law. Fix: Remember that law is a minimum. Ethical conduct can require more, and laws differ across countries.
Thinking unethical conduct only harms the victim. Fix: Think market-wide. Scandals reduce confidence, raise the cost of capital and discourage participation by everyone.
Treating the framework as a calculation with one fixed answer Fix: Think of it as a process. Use the steps to organise the facts, then pick the option that best protects clients and the integrity of the profession.
Assuming that following the law is always enough Fix: Remember that Standard I(A) requires members to comply with the stricter of applicable law and the Code and Standards. Where they differ, follow the stricter one.
Treating the Code of Ethics and the Standards of Professional Conduct as the same thing. Fix: Remember the Code has six broad principles and the Standards have seven detailed groups of duties. The Code states values; the Standards apply them.
Thinking the Code applies only to charterholders. Fix: Say Members and Candidates. Candidates in the program must follow the Code and Standards.

Exam tips

Expect short conceptual items. Read each option for an absolute claim such as always or guarantees; these are usually wrong.
When an option says legal compliance is enough, treat it with suspicion.
Link ethics to trust and market integrity in your own words so you can recognise paraphrases.
Revisit this topic before you study the individual Standards; it gives you the reasoning behind them.
Practise ethics items in short daily sets, which suits phone study.
Expect short, conceptual items. Answer from the trust chain rather than from memorised Standards.
Be wary of options with guarantees, absolutes or the idea that law alone is enough.
Look for words such as integrity, confidence, fair markets and efficient allocation in the correct option.