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

Applying Standards to Level II Case Scenarios in CFA Ethics

Updated 7 October 2026

Level II ethics questions sit inside item sets. A vignette describes several actions by one or more people. You decide which Standard, if any, is violated and what the person should do next. Solve them by reading each action separately, matching it to a Standard, then choosing the response that follows the Code and Standards exactly.

Understand Applying Standards to Level II Case Scenarios

Ethics at Level II is tested in the same item-set format as every other topic. You get a vignette, often with several people and several actions, followed by four multiple-choice questions. You cannot answer from memory alone. You must find the facts in the vignette and apply the Standards to them.

The seven Standards are: 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, and VII Responsibilities as a CFA Institute Member or CFA Candidate. Each Standard has sub-parts. Your job is to name the right sub-part, such as II(A) Material Nonpublic Information or III(C) Suitability.

Most vignettes are multi-issue. One paragraph may contain a real violation, an action that looks bad but is permitted, and a gap in facts. The exam rewards candidates who judge each action on its own. A person can act correctly on one point and break a Standard on another.

Questions usually take three forms: Did the person violate a Standard, and which one? What should the person or supervisor do now? Which statement about the action is correct? For the action question, the best answer is usually the one that stops the problem, protects clients and markets, and follows the Standards' own recommended procedures, such as disclosure, seeking compliance advice, or dissociating from a breach.

The key skill is precision. Small facts decide the answer: whether information is material and nonpublic, whether a client's objectives were known, whether a gift was disclosed, whether the person was a supervisor with authority. Read for these facts and mark them.

Key formulas to remember

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
Memorise the order and the sub-parts. You must name the exact Standard, not just the group.
Material nonpublic information test
Violation of Standard II(A) if information is material AND nonpublic AND you act or cause others to act on it
Material means it would affect the security's price or an investor's decision. Public information or mosaic-theory analysis is not a violation. Passing such information to someone who then trades can itself be a breach, because you cause others to act.
Stricter rule applies
If law and the Code and Standards differ, follow the stricter
Standard I(A). Follow whichever is stricter. If law is stricter, follow the law. If the Code and Standards are stricter, follow them. If law is silent, follow the Code and Standards.
Disclosure and consent pattern
Conflict or outside work: disclose conflicts (VI(A), VI(C)), get written consent from all parties involved for additional compensation arrangements (IV(B)), then proceed
Used across IV(B), VI(A), VI(C). VI(A) requires disclosure of conflicts and VI(C) requires disclosure of referral fees, but disclosure is not always in writing. IV(B) Additional Compensation Arrangements requires written consent from all parties involved. That means your employer and any others affected, such as a client who is paying. Consent from the employer alone is not enough. IV(A) Loyalty also matters if outside work could compete with your employer. Disclosure alone is not always enough; check what the Standard requires. A gift meant to influence your judgement should be declined, not just disclosed.
Supervisor duty
Supervisor must make reasonable efforts to prevent and detect violations by those under supervision
Standard IV(C). Having compliance procedures and enforcing them matters.

How to solve Applying Standards to Level II Case Scenarios questions

Use this method on every ethics item set. It stops you from missing a second issue or choosing a response that sounds good but is not what the Standards require.

  1. 1Read the questions first so you know what to look for: violation, action, or statement.
  2. 2Read the vignette and mark each separate action by each person. Note who the person is, such as analyst, portfolio manager, or supervisor.
  3. 3For each action, ask which Standard it touches. Name the sub-part, such as III(B) Fair Dealing.
  4. 4Check the key facts for that Standard: material, nonpublic, client objectives known, disclosed, consent given, compensation received.
  5. 5Decide if the action is a violation, permitted, or incomplete. Permitted actions are common traps.
  6. 6For action questions, pick the response that matches the Standards' recommended procedure: stop the activity, disclose, seek compliance advice, or dissociate.
  7. 7Eliminate options that go too far, such as reporting to regulators when internal escalation is the first step, or that do too little, such as only verbal disclosure.
  8. 8Check that your answer addresses the person asked about, not another person in the vignette.

Quickest way: Action, Standard, Fact, Fix

When to use it: Use when you have limited time per item set and the vignette is long with several issues.

  1. Underline each action as you read and write the Standard code beside it.
  2. Circle the deciding fact: material, nonpublic, disclosed, known objectives, or compensation.
  3. Write V for violation or OK beside each action before reading the options.
  4. Read the options and choose the one matching your note.
  5. For fix questions, prefer the answer that is the Standards' own remedy: disclose, separate, seek compliance guidance, dissociate, or stop trading. Where a gift is meant to influence you, the remedy is to decline.
  6. Move on after one pass. There is no penalty for wrong answers, so never leave a question blank.

Common mistakes in Applying Standards to Level II Case Scenarios

  • Naming the wrong Standard because the facts overlap

    Many actions touch two Standards, such as a broker's trip tied to trade flow touching I(B) Independence and Objectivity and III(A) Loyalty, Prudence, and Care. Candidates also stretch a Standard to cover facts it does not address, such as treating the timing of a recommendation release as a V(B) issue.

    Fix: Choose the Standard that best fits the main wrong in the facts and read how the options word it. Learn each Standard's core duty in one sentence. For selective release of a recommendation change, the timing issue falls under III(B) only. V(B) Communication with Clients and Prospective Clients concerns the content and basis of recommendations, not when they are released.

  • Calling a permitted action a violation

    Candidates assume anything that sounds risky is wrong, such as using mosaic-theory analysis or trading on public information.

    Fix: Test each element. If information is public or the action is disclosed and allowed, it is not a violation. Look for the missing element.

  • Choosing an extreme response

    Options like resigning or reporting to regulators look decisive.

    Fix: Choose the recommended first step: stop, disclose, escalate to supervisor or compliance, or dissociate. Go further only if the Standards call for it.

  • Ignoring the role of the person

    Candidates apply the rule to the analyst when the question concerns the supervisor, or the reverse.

    Fix: Write the person's role beside each action. Supervisors have IV(C) duties that others do not.

  • Missing the second issue in a multi-issue vignette

    Candidates stop after finding one clear violation.

    Fix: Go through every paragraph and tag each action. Several questions in one set often test different issues.

  • Treating law as the full answer

    Candidates assume legal compliance means no violation.

    Fix: Apply Standard I(A). Follow the stricter of law and the Code and Standards, and do not knowingly participate in illegal acts.

Worked examples

Example 1

Vignette: Mara Silva is a research analyst at a global asset manager. At a lunch, the CFO of a listed client company tells her that a large acquisition will be announced next week and has not been made public. Mara tells her portfolio manager colleague Jonas, who buys the stock for several client accounts. Mara also updates her published rating on a different stock and phones her three largest clients before releasing the report to all. Q1: Which Standard did Mara's passing on of the information, and Jonas's purchases, most likely violate? Q2: What should Mara have done after hearing the CFO? Q3: Which Standard does Mara's phone calls violate?

Show the solution
  1. Q1: The acquisition news is material because it would likely move the price, and it is nonpublic because it has not been announced. Jonas traded on it for clients.
  2. That breaches Standard II(A) Material Nonpublic Information. Mara breached II(A) by causing Jonas to trade, because she passed the information on. Jonas breached it by acting on it.
  3. Q2: Mara should not act or cause others to act on the information. She should not have passed it on. She should encourage the company to disclose it publicly and consult compliance.
  4. Q3: Calling the largest clients before the report is released to all gives them an advantage over other clients. The breach is Standard III(B) Fair Dealing, which requires fair treatment when disseminating recommendation changes. The issue is the timing of the release, so it falls under III(B) only. V(B) concerns the content and basis of recommendations, not when they are released.

Answer: Q1: Standard II(A). Q2: Not pass on or act on the information, encourage public disclosure by the company, and consult compliance. Q3: Standard III(B) Fair Dealing.

Example 2

Vignette: Priya Nair is a portfolio manager at a firm in a country where the law has no rule on gifts from brokers. A broker offers her a trip, valued at a significant amount, in return for sending more trades. Priya accepts without telling her employer. Her supervisor, Daniel, knows the firm has no gift policy but has never put one in place. Q1: Which Standard does Priya's acceptance most likely violate? Q2: What should Priya have done? Q3: Which Standard has Daniel most likely breached?

Show the solution
  1. Q1: A valuable trip tied to trade flow could compromise her independence and objectivity. That is Standard I(B). Not telling her employer also raises Standard VI(A) on disclosure of conflicts.
  2. The best single match is I(B) Independence and Objectivity, because the gift is meant to influence her judgement and brokerage decisions.
  3. Q2: She should decline the trip because it is intended to influence her trading decisions. Disclosure and employer consent would not make a quid pro quo for trade flow acceptable. Directing trades to a broker for personal benefit also breaches her duties to clients under Standard III(A) Loyalty, Prudence, and Care, which includes seeking best execution. Law being silent does not make it acceptable; the Code and Standards apply.
  4. Q3: Daniel is a supervisor. He must make reasonable efforts to prevent and detect violations. Having no policy and no procedures means he has not done so. That is Standard IV(C) Responsibilities of Supervisors.

Answer: Q1: Standard I(B) Independence and Objectivity (with a disclosure issue under VI(A)). Q2: Decline the trip, because it is meant to influence her trading; disclosure and employer consent would not make it acceptable, and directing trades for personal benefit also breaches III(A). Q3: Standard IV(C).

Exam tips

  • Tag every action in the vignette with a Standard code as you read. Do it before looking at the options.
  • Watch for permitted actions. A vignette often includes one correct behaviour next to a violation, and a question may ask which is correct.
  • In action questions, favour the answer that follows the Standards' recommended procedure rather than the most dramatic step.
  • Pay attention to the person's role. Supervisor questions usually point to IV(C) and need action beyond the individual's own conduct.
  • Spend roughly equal time per item set. If stuck, pick your best match and move on, since wrong answers carry no penalty.

Applying Standards to Level II Case Scenarios: frequently asked questions

How do I identify which Standard is violated in a Level II ethics vignette?

Break the vignette into separate actions and match each one to the Standard whose core duty it touches. Then check the deciding facts, such as material and nonpublic information, disclosure, or known client objectives. Name the sub-part, not just the group.

Are Level II ethics questions different from Level I?

Yes. At Level II they sit in item sets, with a vignette followed by four multiple-choice questions. The facts are longer and often involve several issues, so you must find the relevant details in the text and apply the Standards.

What is the best way to practise ethics case questions?

Work vignettes that contain several issues and write the Standard beside every action before checking the answer. Then review the ones you got wrong and note which fact you missed. Repeat until naming the Standard is quick.

What should I do when two Standards seem to fit?

Pick the one that matches the main wrong described in the facts and the way the answer options are worded. Often one option names a Standard and a fix that fit together, while the other fits only partly.