CFA Level II · CFA Level II Exam

Code of Ethics and Standards of Professional Conduct: formula sheet

Full chapter guide

Key formulas

Who the Code applies to: Code of Ethics + Standards of Professional Conduct → all CFA Institute members and CFA candidates; Candidates are bound as well as charterholders. Do not assume the Code only covers charterholders.
Component 1: Duty of conduct: Act with integrity, competence, diligence, respect and in an ethical manner with the public, clients, prospects, employers, employees, colleagues and other market participants; This is the broad duty to everyone you deal with.
Component 2: Clients first: Place the integrity of the profession and the interests of clients above your own personal interests; Links to Loyalty, Prudence and Care, and Priority of Transactions.
Component 3: Care and judgment: Use reasonable care and exercise independent professional judgment in analysis, recommendations, actions and other professional activities; Links to Independence and Objectivity and Diligence and Reasonable Basis.
Component 4: Reflect credit: Practice and encourage others to practice in a professional and ethical manner that reflects credit on themselves and the profession; Links to Misconduct and to supervisor duties.
Component 5: Market integrity: Promote the integrity and viability of the global capital markets for the ultimate benefit of society; Links to Material Nonpublic Information and Market Manipulation.
Component 6: Competence: Maintain and improve your professional competence and strive to maintain and improve the competence of other investment professionals; Links to Competence under Standard I.
Law versus the Code and Standards: Comply with the stricter of applicable law and the Code and Standards; Under Standard I(A), if law is stricter you follow the law. If the Code and Standards are stricter, you follow them. If law prohibits following the Code and Standards, you follow the law and adhere to the Code and Standards to the extent possible.
Who is bound: Members + candidates = bound by the Code and Standards; Compliance is a condition of membership and candidacy. Some Standards apply only where you have the relevant role, for example IV(C) for those with supervisory responsibility. VII(A) covers conduct as a participant in the CFA Program, such as exam security and cheating.
Structure: 1 Code of Ethics + 7 Standards of Professional Conduct; The Code and Standards set the duty. The Handbook adds guidance and examples for applying them.
Enforcement route: CFA Institute Professional Conduct Program → review and possible sanctions; Enforcement applies to members and candidates, not only to their employers.
Standard I: Professionalism: I(A) Knowledge of the Law, I(B) Independence and Objectivity, I(C) Misrepresentation, I(D) Misconduct; Covers legal compliance, honest dealing and personal conduct. When law and Code differ, follow the stricter one.
Standard II: Integrity of Capital Markets: II(A) Material Nonpublic Information, II(B) Market Manipulation; Information must be both material and nonpublic to trigger II(A). Mosaic-style analysis of public and non-material facts is allowed.
Standard III: Duties to Clients: III(A) Loyalty, Prudence, and Care, III(B) Fair Dealing, III(C) Suitability, III(D) Performance Presentation, III(E) Preservation of Confidentiality; Client interests come before employer and personal interests. Confidentiality has exceptions, such as illegal activity or a legal requirement.
Standard IV: Duties to Employers: IV(A) Loyalty, IV(B) Additional Compensation Arrangements, IV(C) Responsibilities of Supervisors; Applies to the employment relationship. IV(A) Loyalty means you must not harm your employer. Independent practice that could result in compensation or create a conflict with your employer needs the employer's consent, and written consent is the Handbook's recommended practice. IV(B) requires written consent from all parties involved before you accept gifts, benefits, compensation or consideration from third parties that compete with or might create a conflict with the employer's interests.
Standard V: Investment Analysis, Recommendations, and Actions: V(A) Diligence and Reasonable Basis, V(B) Communication with Clients and Prospective Clients, V(C) Record Retention; Focus on the quality, communication and documentation of research and decisions.
Standard VI: Conflicts of Interest: VI(A) Disclosure of Conflicts, VI(B) Priority of Transactions, VI(C) Referral Fees; Disclosure must be full and clear. Client and employer transactions come before personal ones.
Standard VII: Responsibilities as a CFA Institute Member or Candidate: VII(A) Conduct as Participants in CFA Institute Programs, VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program; Covers exam conduct, confidential programme information and how you describe your credentials.

Quick revision

The Code has six principles. The Standards have seven sections. Know both lists cold.
The seven 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.
When law and the Standards differ, follow the stricter one. This is Standard I(A).
Standard II(A) covers material nonpublic information: do not act or cause others to act on it.
Standard III(A) requires loyalty, prudence and care toward clients. Client interests come before employer and personal interests.
Standard III(B) requires fair dealing. Treat clients fairly when disseminating recommendations or taking investment action. Fair does not always mean equal.
Standard V(A) needs a diligent and thorough basis for recommendations, plus reasonable support and appropriate communication.
Standard VI(A) requires disclosure of conflicts so clients and employers can judge your objectivity.
Standard VII(B) says you must not misrepresent the CFA designation or what the Program implies.
In a case, compare each action with the Standard and pick the answer that fully complies, not one that merely reduces harm.
Use the vignette facts only. Do not add assumptions about what a person probably knew or intended.
Read all three options before choosing. The best answer often includes both stopping the problem and fixing it, such as disassociating or escalating.

Common mistakes

Treating the Code of Ethics and the Standards as the same thing. Fix: Remember the Code is the short set of principles, and the seven Standards are the detailed rules. Name the Standard when the question asks for a specific obligation.
Thinking the Code applies only to charterholders. Fix: Remember the Code and Standards bind CFA Institute members and CFA candidates.
Believing the Standards bind only charterholders Fix: Remember that members and candidates are both bound by the Code and Standards. Some Standards, such as IV(C), apply only where the person has the relevant role. Standard VII(A) covers conduct in the CFA Program, such as exam security.
Treating a new Handbook edition as new principles Fix: Know that the Code and seven Standards form the stable core. Editions refine guidance and examples, so rely on the official text for specifics.
Confusing duties to clients (III) with duties to employers (IV). Fix: Ask whose interest is at stake. Treatment of the people you serve is III. Obligations to the firm, such as outside work, extra pay and supervision, are IV.
Treating legality as the end of the analysis. Fix: Remember Standard I(A): when law and the Code differ, follow the stricter. Conduct can be legal and still breach the Standards.

Exam tips

Learn the six components as plain ideas and be able to link each to at least one Standard.
In item sets, the Code question is often a stepping stone: name the component, then choose the action that fixes the breach.
When law and the Code differ, the stricter one wins. Expect this to be tested.
Ignore options that rely on facts the vignette does not give. Answer only from the text.
There is no penalty for wrong answers, so never leave an ethics question blank.
Expect this topic to appear as part of ethics item sets, not as a stand-alone recall question. Find the person's status first: member, candidate or neither.
When law and the Code differ, pick the stricter. The one exception is where law prohibits following the Code and Standards: then follow the law and adhere to the Code and Standards as far as possible. This is the most testable rule in this area.
Do not memorise edition changes. Know the stable structure of the Code and seven Standards and apply it.