Application of the Code and Standards: Level II: formula sheet

Key formulas

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 CFA Candidate

Learn the seven headings in order. Knowing the group helps you find the right sub-standard quickly.

Sub-standards by group

I(A)-(D) | II(A)-(B) | III(A)-(E) | IV(A)-(C) | V(A)-(C) | VI(A)-(C) | VII(A)-(B)

Sub-standards are lettered, so cite them as, for example, III(C) Suitability.

Law versus Code rule

Follow the stricter of applicable law and the Code and Standards

If the law is less strict, follow the Code. If the law is stricter, follow the law. Do not break the law to follow the Code.

Components of the Handbook for each Standard

Standard text + guidance + recommended procedures for compliance + application examples

Exam answers draw on the guidance and the compliance procedures, not just the bare rule.

Strictest-rule principle

Follow the stricter of (applicable law) and (Code and Standards)

If no law exists, the Code and Standards govern your conduct. Never break applicable law that is stricter.

Duty on known violations

Know or should know of a violation → do not knowingly participate → dissociate

At minimum, stop taking part. Encourage correction through supervisor or compliance.

Limit of the duty

Standard I(A) does not require members to report violations to authorities

Reporting may be prudent or required by law, but I(A) itself requires dissociation.

Quick revision

• Know the Code of Ethics and each of the seven Standards by name and core duty.
• Comply with the stricter of applicable law and the Code, and do not knowingly participate in or assist any violation.
• Members must not knowingly take part in or assist any violation of law, rule, regulation or the Code. If they know of one, they must dissociate from it, which may mean ceasing the activity or reporting to supervisors or compliance.
• Where there is no securities law, the Code still applies in full.
• Name the Standard first, then judge the conduct.
• Read the vignette for who knew what, and when.
• The best answer is usually a complete, proactive action, not a minimal or delayed one.
• Disclosure is required for some issues (e.g. conflicts of interest under Standard VI(A)), but it is never a remedy for others (e.g. trading on material nonpublic information). Disclosure alone may not be enough.
• Supervisors have duties for the people they oversee.
• There is no penalty for wrong answers, so answer every question.
• Ethics issues can hide inside non-ethics item sets.

Common mistakes

• Treating legal compliance as enough Fix: Apply the stricter of law and Code. An action can be legal and still violate a Standard.
• Naming the wrong Standard Fix: Pick the Standard whose core duty is most directly broken. Tie the fact to the duty, not to a keyword.
• Concluding that no law means no obligation Fix: Remember that CFA members must follow the Code and Standards everywhere. Where law is silent, they are the rule.
• Following the weaker rule because it is the local custom Fix: Apply the strictest-rule principle. Local custom does not override a stricter Standard.

Exam tips

• Memorise the seven Standards in order with their sub-standards, so you can name the Standard in seconds.
• Read the question stem before the vignette, then mark each person's actions as you read.
• Eliminate options that depend on legality, informal consent, or doing nothing yet.
• Answer from the Handbook guidance, not from your firm's practice or local custom.
• Since there is no penalty for wrong answers, always pick an option, but spend your time on reading the facts carefully.
• Spot the trigger phrases: no law, weaker law, local custom. They signal the strictest-rule principle.
• Prefer answers that dissociate and escalate internally over answers that ignore the issue or jump to reporting authorities.
• Watch for overstatements such as must resign immediately or must report to CFA Institute. These are usually wrong for I(A).