Code of Ethics and Standards of Professional Conduct: formula sheet

Key formulas

Component 1: Act ethically

Act with integrity, competence, diligence, respect and in an ethical manner with all parties

Covers the public, clients, prospective clients, employers, employees, colleagues and other market participants. Use it for general conduct questions.

Component 2: Clients first

Integrity of the profession and client interests above personal interests

Use it when a member benefits personally at the expense of a client or the profession.

Component 3: Independent judgment

Reasonable care and independent professional judgment

Applies to analysis, recommendations, investment actions and other professional activities. Think of pressure from issuers, bosses or clients.

Component 4: Reflect credit

Practice and encourage others to practice in a professional and ethical manner that reflects credit on self and profession

Includes encouraging others. Use it for conduct that damages reputation.

Component 5: Markets

Promote integrity and viability of global capital markets for the benefit of society

Use it for market manipulation, misuse of inside information and similar facts.

Component 6: Competence

Maintain and improve own competence; strive to maintain and improve that of other investment professionals

Use it for skills, knowledge and training questions.

Four directions of duty

Clients | Employers | Profession | Investment community

A fast sorting tool. Decide which party is owed the duty before choosing the Standard.

Memory aid for the six components

Act, Place, Use, Practice, Promote, Maintain

These are the opening verbs of the six components in order. Say them out loud a few times. Then attach a key phrase to each: ethical conduct, clients first, independent judgment, credit to the profession, markets, competence.

Who is bound

Code and Standards apply to CFA Institute members (including charterholders) and candidates in the CFA Program

Firms are encouraged to adopt them but are not bound as members. The Asset Manager Code is a separate document for firms.

Law versus Code

Comply with the stricter of applicable law and the Code and Standards

If the law is stricter, follow the law. If the Code is stricter, follow the Code. If the law is silent, follow the Code.

Handbook structure

Handbook = Code of Ethics + Standards of Professional Conduct + guidance + application examples

The Code gives principles, the Standards give duties, and the guidance shows how to apply them.

Sanctions

Public censure, suspension of membership or candidacy, revocation of charter

Imposed through the Professional Conduct Program after a breach. Know the range, not a fixed scale.

Currency of the text

Edition to apply = the edition of the Handbook in your current curriculum

Answer using the version in the curriculum, not older versions or personal memory of past editions.

Strictest rule (I(A))

Applicable law vs Code: follow the stricter one

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

Violation by others (I(A))

Do not participate or assist; dissociate; consider reporting

Dissociation can mean telling your supervisor or compliance and stopping any involvement. If that fails, consider ceasing the activity or relationship. Reporting to authorities is encouraged but not always required by the Standards.

Independence vs objectivity (I(B))

Independence = free from improper influence; Objectivity = unbiased, fact-based judgment

Use the word that matches the problem in the vignette: pressure or benefit points to independence; biased analysis points to objectivity.

Misrepresentation test (I(C))

Knowingly false statement OR misleading omission OR plagiarism = violation

I(C) prohibits knowingly making misrepresentations. Misleading omissions and plagiarism also count. If you find a misstatement you made earlier, correct it.

Misconduct test (I(D))

Dishonesty, fraud, deceit, or acts harming professional reputation, integrity or competence

Conduct is judged on the act. A criminal conviction is not needed.

Standard II(A)

Members who possess MNPI must not act or cause others to act on it

Test two things: is it material, and is it nonpublic? Both must be true.

Materiality test

Material = likely to affect price OR important to a reasonable investor's decision

Source and reliability also matter. Be careful with information that is specific and from a credible source.

Mosaic theory

Public information + nonmaterial nonpublic information = permitted conclusion

Allowed even if the conclusion is material. Not allowed if any piece is itself material and nonpublic.

Standard II(B)

Members must not engage in practices that distort prices or artificially inflate trading volume with intent to mislead

Covers information-based and transaction-based manipulation. Intent to mislead is central.

Recommended compliance steps

Firewall + restricted/watch lists + compliance review + no trading on MNPI

A firewall is preferred over relying on individual discretion.

III(A) Loyalty, Prudence and Care

Client interests first > employer interests > own interests

Act with the care of a prudent person; fiduciary duty where it applies. Client brokerage only for goods and services that benefit clients.

III(B) Fair Dealing

Fair ≠ equal; disclose service levels; allocate limited offerings pro rata

Disseminate changes in recommendations to all clients fairly and in a timely way.

III(C) Suitability

Know client (IPS) → judge in portfolio context → update regularly

Gather objectives, constraints, risk tolerance; follow mandates.

III(D) Performance Presentation

Fair + accurate + complete

Do not misstate past performance or promise future results; GIPS compliance claims must follow GIPS.

III(E) Confidentiality exceptions

Disclosure permitted only if: law requires it, client permits it, or the information concerns illegal activity by the client (disclosure limited to what is necessary)

Otherwise keep client information confidential, including former clients. Disclosure of illegal activity is permitted, not required.

Standard IV(A) Loyalty

Do not harm the employer; act for its benefit; client interests and the law and the Code and Standards come first

Preparing to compete is allowed. Using employer property or soliciting clients before leaving is not.

Standard IV(B) Additional Compensation

Get written consent from all parties involved before accepting compensation that may conflict with employer interests

Disclosure alone is not enough. Consent should be in writing.

Standard IV(C) Supervisors

Make reasonable efforts to detect and prevent violations by people under your supervision or authority

Requires adequate compliance procedures, a prompt response to violations, and ongoing monitoring. Delegating does not remove responsibility.

Leaving an employer

Allowed: own skills, general knowledge, memory of contacts, and preparing a new firm. Not allowed: employer records, client lists, and soliciting before departure

Check whether the information was created by the employer or is in your own head, and whether solicitation happened before the exit.

Standard V(A)

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 of the investment.

Standard V(B)

Disclose process + communicate key factors + separate fact from opinion + state limitations

Applies to clients and prospective clients. Tell them promptly about material changes to the process.

Standard V(C)

Local law period if one applies; otherwise keep records at least 7 years (recommended)

Follow the applicable law or regulation if it sets a period. If there is no requirement, keep records at least seven years. Records belong to the firm unless permission is given.

Third-party research

Use only after reasonable inquiry into its soundness

Check assumptions, methods and the provider's diligence. Do not rely blindly on a reputed source.

Group research

Reasonable agreement → may support. Cannot support → ask to be dissociated

A member need not agree on every point but must believe the view has a reasonable basis.

VI(A) Avoid or Disclose Conflicts

Disclose all matters that could reasonably impair independence and objectivity or interfere with duties to clients, prospects and employer

Disclosure must be full, fair, prominent and in plain language. Avoid the conflict where possible and disclose the conflicts that remain.

VI(B) Priority of Transactions

Client and employer transactions come before personal or family transactions

Personal trades are allowed only if they do not disadvantage clients. Do not trade ahead of pending client trades. Use pre-clearance and reporting.

VI(C) Referral Fees

Disclose any compensation or benefit paid or received for referrals to employer, clients and prospects

Disclose before entering into a formal agreement for services, and describe the nature of the consideration or benefit. Covers both paying and receiving a fee.

VII(A) Conduct in CFA Programs

Do not compromise the integrity, validity or security of CFA Institute programs

Includes cheating and sharing confidential exam information, such as topics tested or not tested.

VII(B) Reference to CFA Institute, Designation and Program

Do not misrepresent or exaggerate the meaning of membership, the designation or candidacy

A candidate is not a charterholder. Passing a level does not give a designation or partial designation. Candidates may state that they are candidates in the CFA Program.

Quick revision

• The Code requires you to place the integrity of the investment profession and the interests of clients above your own interests, act with integrity, competence, diligence and respect, use reasonable care and independent judgment, and uphold the rules governing capital markets.
• Standard I: know and follow the stricter of the law and the Code and Standards, keep independence and objectivity, and never misrepresent or commit misconduct.
• Standard II: do not trade on or pass on material nonpublic information, and do not manipulate markets.
• Standard III: act with loyalty, prudence and care, and treat clients fairly.
• Suitability depends on the client's objectives and constraints, and you must update them regularly.
• Present performance fairly, accurately and completely, and keep client information confidential unless the law requires disclosure or the client permits it.
• Standard IV: be loyal to your employer, but never at the cost of breaking your duties to clients or the law.
• Standard V: use diligence and a reasonable basis for recommendations, communicate clearly, and keep records.
• Standard VI: disclose conflicts, give the transactions of clients and employers priority over your own personal transactions, and disclose referral fees.
• Standard VII: do not misuse the CFA designation or the Program, and do not compromise exam integrity.
• When more than one action is possible, choose the one that best protects clients and markets and follows the stricter rule.
• No marks are lost for wrong answers, so answer every question.

Common mistakes

• Treating the Code of Ethics and the Standards as the same thing. Fix: Remember the Code is the set of six broad principles. The Standards are the detailed rules that apply them. Cite both when you justify.
• Stating the six components in your own loose words and missing key ideas. Fix: Learn each component's key phrase, such as clients above personal interests or independent professional judgment, and use it.
• Saying the Code and Standards bind firms directly. Fix: Remember only members and candidates are bound. Firms are encouraged to adopt the Code and Standards, and asset managers have their own separate code.
• Thinking candidates are not covered until they are charterholders. Fix: Candidates are bound because they are enrolled in the CFA Program and have agreed to follow the Code and Standards. Do not confuse this with Standard VII(A), which is a separate rule on conduct as a participant in CFA Institute programs, such as cheating on an exam.
• Following the Code when local law is stricter. Fix: Remember the rule is the stricter one. If the law requires more, follow the law.
• Saying a member who knows of a colleague's violation must always report it to the regulator. Fix: The member must not participate and should dissociate. Reporting is encouraged, and may be required by law, but the Standards do not make it automatic.
• Treating any conclusion that is material as a violation of the mosaic theory. Fix: Check the inputs. If every input is public or nonmaterial nonpublic, the material conclusion is allowed.
• Assuming information is public because many analysts heard it on a private call. Fix: Information is public only when disseminated to the marketplace. Selective disclosure to a group is still nonpublic.
• Treating fair dealing as equal treatment of every client. Fix: Different service levels are allowed if disclosed and they do not disadvantage other clients. What is not allowed is favouring one client in distributing recommendations or allocations.
• Judging suitability one security at a time. Fix: Assess the investment within the whole portfolio against the IPS, including return objectives, risk and constraints.

Exam tips

• Learn the six components as short key phrases. Examiners reward the right idea, so precise wording helps you match the facts quickly.
• Always name the direction of duty first. It narrows the Standard choices in seconds.
• In essay sets, follow the command word: identify means name it, justify means give the reason. Do not write more than is asked.
• Apply the Code and Standards as written, not as common practice in your market. If the law is looser, the Code still applies.
• Read all four options before choosing. Wrong options often contain a half-true statement that omits the client's interest.
• Look at the actor first. Most wrong options in this topic get the actor wrong, such as treating a firm as a member or a candidate as exempt.
• Whenever law appears in a stem, apply the stricter-rule test before reading the options.
• For recent edition changes, learn them from the official text and be ready to link each to a Standard. Never invent details.