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CFA Level I Exam · Application of the Code and Standards: Level I

How to Solve CFA Level I Ethics Case Questions

Updated 7 October 2026

Ethics case questions give you a short scenario and ask which Standard is violated or what action is appropriate. Read the facts, match each to a Standard of Professional Conduct, test the conduct against the Standard's wording, then pick the option that best protects clients, markets and your integrity.

Understand Applying the Code and Standards to Case Situations

Every ethics case question tests one skill: matching facts to a Standard. The Code of Ethics and Standards of Professional Conduct has seven Standards, I to VII. Each covers a theme: Professionalism, Integrity of Capital Markets, Duties to Clients, Duties to Employers, Investment Analysis, Conflicts of Interest, and Responsibilities as a CFA Institute Member or Candidate.

A case is a short story about an analyst, a portfolio manager or a firm. Something in the story is either right or wrong. Your job is to decide which. The question usually asks one of three things: which Standard is violated, whether the conduct violates the Standards, or what the person should do.

The exam rewards precise matching, not general good sense. Several options may sound ethical. Only one fits the Standard's actual requirement. For example, Standard II(A) bars acting on material nonpublic information. It is not enough that the information feels sensitive. It must be both material and nonpublic.

You also need the rule on conflicts between law and the Standards. Under Standard I(A), you comply with the stricter of applicable law or the Code and Standards. Where the law is less strict than the Standards, you follow the Standards. This single rule decides many global scenarios.

Finally, learn the typical remedies. Disclose a conflict. Dissociate from a violation you cannot stop. Report concerns up the chain. Do not trade on inside information. Good answers tend to be the ones that are specific, timely and protect the client or the market. But the correct option is always whatever the Standard actually requires, which can sometimes be to wait, verify or simply not trade.

Key formulas to remember

Stricter-rule principle (Standard I(A))
Follow the stricter of: applicable law OR the Code and Standards
If law is weaker than the Standards, follow the Standards. If law is stricter, follow the law.
Material nonpublic information test (Standard II(A))
Information is restricted only if: material AND nonpublic
Material means it would likely affect a security's price or an investor's decision to trade. Nonpublic means not disseminated to the marketplace.
Disclosure rule for conflicts
Conflict exists → disclose clearly and prominently, in plain language
Disclosure of conflicts is required under Standard VI(A). Standard VI(C), Referral Fees, separately requires disclosure of any compensation or benefit paid or received for recommending products or services, to the employer, clients and prospective clients, as appropriate. Standard IV(B), Additional Compensation Arrangements, is a different duty. It requires written consent from your employer before you accept compensation or benefits from others that might conflict with your employer's interests. That is consent, not a conflict-disclosure duty. Disclosure is often required, but it does not cure every violation.
Violation-to-action ladder
Stop the act → seek compliance/supervisor help → dissociate if it continues
Dissociation is the minimum when you cannot prevent a violation. Resigning is not always required.
Case-matching checklist
Who is affected? → What did they do? → Which Standard? → Does the wording fit?
Use it on every vignette to avoid choosing a Standard that merely sounds related.

How to solve Applying the Code and Standards to Case Situations questions

Use the same method on every ethics case. It keeps you from being drawn to options that sound good but do not match the Standard.

  1. 1Read the last line first so you know whether the question asks for a violation, a Standard or an action.
  2. 2Read the scenario and underline the actor, the action and who is affected (client, employer, market, or the CFA program).
  3. 3Name the Standard that covers the theme, for example client loyalty, MNPI, record keeping or priority of transactions.
  4. 4Test the conduct against the Standard's wording. Ask whether every required element is present, such as material AND nonpublic.
  5. 5Check whether local law matters. If the law is weaker than the Standards, the Standards still apply.
  6. 6Eliminate the two weakest options. Remove options that do nothing when action is required, that break another Standard, or that go beyond what the Standard requires.
  7. 7Choose the option that best protects clients and market integrity, and re-read the question to confirm it answers what was asked.

Quickest way: Three-pass ethics shortcut

When to use it: Use it when you have about 90 seconds per question and the scenario is wordy.

  1. Pass 1: read the question stem, then scan the story for the one fact that looks wrong.
  2. Pass 2: name the Standard in a few words, such as 'MNPI' or 'priority of transactions'.
  3. Pass 3: of the three options, drop any that is illegal or violates a different Standard, or that fails to do what the Standard requires; pick the one that fixes the problem within the Standard.
  4. If two options remain, ask which one the Standard actually requires. Often this is the earlier, more direct step, such as disclosing or refusing, but it can also be not trading or verifying facts first.
  5. Do not spend extra time on a hard case. Choose the best answer, move on, and return only if time remains.

Common mistakes in Applying the Code and Standards to Case Situations

  • Choosing the answer that sounds most ethical rather than the one the Standard requires.

    Several options look responsible, so candidates rely on general judgment.

    Fix: Tie your choice to a named Standard and its wording. If you cannot name it, the option is probably a distractor.

  • Treating any sensitive information as material nonpublic information.

    Candidates forget that both tests, material and nonpublic, must be met.

    Fix: Check each test separately. Public information, or information that would not affect price or decisions, does not trigger Standard II(A).

  • Following local law when it is weaker than the Standards.

    Candidates assume legal compliance is enough.

    Fix: Apply Standard I(A): follow the stricter of law or the Code and Standards.

  • Thinking disclosure fixes every conflict.

    Disclosure is a common remedy, so it feels like a universal answer.

    Fix: Ask whether the Standard requires more, for example obtaining written employer consent under Standard IV(B), refusing the act, or putting client trades ahead of personal trades under Standard VI(B).

  • Picking a Standard because a keyword appears in the story.

    Words such as 'confidential' or 'gift' trigger a quick match.

    Fix: Ask what the conduct actually did. A gift to a client relates to independence and objectivity; a client's private data relates to confidentiality.

  • Choosing to ignore a colleague's violation or wait and see.

    Candidates worry about overreacting.

    Fix: Ignoring a violation is rarely what the Standards require. Tend to prefer answers that act promptly, such as raising it with supervisors or compliance and dissociating if the activity continues, but confirm this against the Standard's wording.

Worked examples

Example 1

An analyst at a global asset manager is a friend of the CFO of a listed company. At dinner, the CFO says that the company will announce a large, unexpected profit warning in two days. The analyst has not seen this in any filing. What should the analyst do?
A. Sell client holdings in the company before the announcement.
B. Make no trades on the information and advise the firm's compliance department.
C. Tell clients to reduce exposure but not trade personally.

Show the solution
  1. The question asks for an action, so identify the Standard. The theme is trading on inside information: Standard II(A), Material Nonpublic Information.
  2. Test the facts. A profit warning would likely move the share price, so it is material. It has not been announced, so it is nonpublic. Both elements are met.
  3. Standard II(A) says members must not act or cause others to act on material nonpublic information.
  4. Option A is acting on MNPI, so it violates the Standard.
  5. Option C causes others to act on MNPI, which also violates the Standard.
  6. Option B avoids acting and involves compliance, so it follows the Standard.

Answer: B. The information is both material and nonpublic, so the analyst must not trade or cause others to trade, and should involve compliance.

Example 2

A portfolio manager in a country whose law has no rule on trade allocation receives a block of shares from an oversubscribed new issue. She allocates most of it to a large client whose fees are higher and gives smaller clients nothing. Which Standard is most likely violated?
A. Standard III(B), Fair Dealing.
B. Standard V(C), Record Retention.
C. Standard I(D), Misconduct.

Show the solution
  1. Identify the theme: allocation of a limited investment opportunity among clients.
  2. Standard III(B) requires members to deal fairly and objectively with all clients when providing investment analysis, making recommendations, taking investment action or engaging in other professional activities.
  3. Favouring a high-fee client and giving smaller clients nothing from an oversubscribed issue treats clients unequally.
  4. Local law having no rule does not matter, because Standard I(A) requires following the stricter of law or the Standards.
  5. Option B concerns keeping records, which the facts do not raise. Option C concerns dishonest or deceitful acts, which is not the core problem described.

Answer: A. The most likely violation is Standard III(B), Fair Dealing, because clients were not treated fairly and objectively in the allocation.

Exam tips

  • Read the question stem first. 'Which Standard' and 'what should the member do' call for different answers.
  • Say the Standard's name to yourself before reading the options. It stops distractors from steering you.
  • Remember that every option is a standalone choice among three. If one option clearly breaks a Standard, remove it first and decide between the remaining two.
  • In global scenarios, apply the stricter-rule principle of Standard I(A) before anything else.
  • Options that act early and directly are often right, but this is only a tendency. The correct option is whatever the Standard requires, and sometimes that means not trading, waiting or verifying facts.
  • Practise by labelling real cases with a Standard in a few seconds. Speed on matching is what frees time for the quantitative sections.

Practice questions from Application of the Code and Standards: Level I

Applying the Code and Standards to Case Situations: frequently asked questions

How do I identify a violation of the CFA Standards in a case question?

Find the one action in the story that looks wrong, then match it to the Standard that covers that theme. Check that every element of the Standard's wording is met. If so, you have a violation.

Do ethics case questions have one clearly correct answer?

Yes. Each question has three options and exactly one is best according to the Standards. Two options may sound reasonable, so choose the one that fits the Standard's requirement most directly.

What if local law conflicts with the Standards?

Under Standard I(A), you follow the stricter of the law and the Code and Standards. If the law is weaker, the Standards still apply to you. If the law is stricter, follow the law.

How should I practise ethics vignette questions?

Work short scenarios and name the Standard before reading the options. Then write one line explaining why the other two options fail. Review every miss to find which Standard you confused.