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CFA Level II · CFA Level II Exam

Application of the Code and Standards for CFA Level II Vignettes

This chapter teaches you to apply the CFA Institute Code of Ethics and Standards of Professional Conduct to item-set vignettes. You read the facts, spot the conduct at issue, name the Standard that applies, and pick the action that complies. The skill is application, not recall of wording.

What this chapter covers

This chapter is about using the Code of Ethics and the Standards of Professional Conduct, not memorising them. At Level II, ethics questions arrive inside item sets. You get a vignette describing people, firms and decisions, then questions asking whether conduct violates a Standard, which one, and what the member should do.

The chapter starts with the structure of the Standards of Practice Handbook and the Code of Ethics. It then covers Knowledge of the Law, which tells you what to do when local law and the Code differ, including the case where a country has no securities laws or regulations. The last topic is applying the Standards to case scenarios, where you practise on realistic vignettes.

Ethics issues can appear inside other topics. A portfolio manager's trade allocation, an analyst's research report, a valuation shortcut or a client's constraints can all carry an ethics issue. Learning to spot these makes you faster and safer in the whole paper. Ethical and Professional Standards has a topic weight of 10-15%.

Ethical and Professional Standards carries a topic weight of 10-15%, the same band as Financial Statement Analysis, Equities, Fixed Income and Portfolio Construction. Marks here are won by method and careful reading, so the return on effort is high. There is no minimum passing score per topic, so your result depends on your overall scale score against the Minimum Passing Score of 2600. Ethics answers also often hinge on one word in the vignette, so practice directly lifts your accuracy.

Application of the Code and Standards: Level II: topics in the order to study them

  1. 1Standards of Practice Handbook and Code of Ethics OverviewStart here to learn the structure: the Code, the seven Standards and their sub-sections, so you can name the right Standard later.
  2. 2Knowledge of the Law: Global Application of the CodeNext learn how the Code works across jurisdictions, because many vignettes involve a member, firm and client in different countries.
  3. 3Countries with No Securities Laws or RegulationsStudy this after the general rule, as it is a special case of Knowledge of the Law and easier once the main principle is clear.
  4. 4Applying Standards to Level II Case ScenariosFinish with scenarios, because applying the Standards only works once you know the Standards and the law rule.

How to prepare Application of the Code and Standards: Level II

Treat this chapter as a skill you train with vignettes, not a list to memorise. Aim to move from reading the facts to naming the Standard and the correct action in a steady routine.

  1. Read the Code of Ethics and the list of Standards until you can state each Standard's core duty in one sentence.
  2. Learn the Knowledge of the Law rule: comply with the stricter of applicable law and the Code, and do not knowingly take part in or assist a violation. A member who knows of a violation must dissociate from it. That may mean ceasing the activity or reporting to supervisors or compliance, not only avoiding participation.
  3. Work out what the rule means when a country has no securities laws or regulations, and what the member must still do under the Code.
  4. Practise vignettes by first listing who did what, then asking which Standard that conduct touches. Name the Standard before reading the answer options.
  5. Compare the options carefully. The correct answer is usually the action that fully meets the duty, not a partial step.
  6. Review every error by writing which fact in the vignette you missed and which Standard it pointed to.
  7. Mix ethics vignettes into your other topic practice so you learn to spot issues inside portfolio, valuation and research scenarios.

Common mistakes in Application of the Code and Standards: Level II

  • Memorising Standard wording without practising application

    Fix: Spend most of your time on vignettes. After each one, state the Standard and the reason in your own words.

  • Following local law when it is weaker than the Code

    Fix: Comply with the stricter of applicable law and the Code. If the Code is stricter than the law, the member follows the Code. If the law is stricter, the member follows the law. The member must also not knowingly participate in or assist any violation. If the member knows of a violation, they must dissociate from it, which may mean ceasing the activity or reporting to supervisors or compliance.

  • Thinking the Code does not apply where there are no securities laws

    Fix: Remember the member must still meet the Code. Missing law removes a legal standard, not the ethical one.

  • Picking the first plausible Standard

    Fix: List the facts, then choose the Standard most directly tied to the conduct in the question.

  • Choosing a half-measure answer

    Fix: Check whether the action actually stops the violation or fulfils the duty, and prefer the one that does.

  • Ignoring ethics inside other topic item sets

    Fix: Scan every vignette for conflicts, undisclosed information, or client duties, even in valuation or portfolio sets.

Last-day revision: Application of the Code and Standards: Level II

  • 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.

Application of the Code and Standards: Level II in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Application of the Code and Standards: Level II: frequently asked questions

What is Application of the Code and Standards at CFA Level II?

It is the part of Ethical and Professional Standards where you apply the Code of Ethics and Standards of Professional Conduct to realistic vignettes. You decide whether conduct is a violation, which Standard applies and what the member should do.

How are ethics questions asked at Level II?

They appear in item sets, each with a vignette followed by four multiple-choice questions. You must answer from the facts given in the vignette, not from general knowledge.

What if local law and the Code conflict?

Follow the stricter of the two. A member must also not knowingly take part in or assist a violation of applicable law, rules, regulations or the Code.

How much of the exam is ethics?

Ethical and Professional Standards has a topic weight of 10-15%. It is one of the higher-weighted areas, and it can also appear inside item sets of other topics.

How should I practise this chapter?

Work through vignettes and name the Standard before looking at the options. Then review each mistake by finding the exact fact you overlooked.