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

Standards of Practice Handbook and Code of Ethics Overview

Updated 7 October 2026 · Fact-checked

The Standards of Practice Handbook explains the CFA Institute Code of Ethics and the seven Standards of Professional Conduct, with guidance and examples. At Level II you read a vignette, spot the conduct, name the Standard it breaches, and pick the action that best meets the Code.

Understand Standards of Practice Handbook and Code of Ethics Overview

The Code of Ethics is a short set of principles that every CFA Institute member and candidate must follow. It covers acting with integrity, dignity and in an ethical manner, placing the integrity of the investment profession and the interests of clients above your own, using reasonable care and exercising independent professional judgment, practising and encouraging others to practise in a professional and ethical way, promoting the integrity and viability of global capital markets, and maintaining and improving your professional competence.

The Standards of Professional Conduct turn those principles into specific rules. There are 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, and VII Responsibilities as a CFA Institute Member or CFA Candidate. Each has lettered sub-standards, for example I(A) Knowledge of the Law.

The Standards of Practice Handbook is the official guide to all this. For each Standard it gives the text, guidance, recommended procedures for compliance, and application examples. The Handbook exists so that you can see how a short rule works in real situations. You are tested on the Standards as the Handbook explains them.

At Level II, ethics comes as item sets. A vignette describes people, firms and events, and each question asks whether a Standard was violated, which one, or what the person should do. The facts are rarely labelled. Your job is to find the conduct that matters, match it to a Standard, and choose the answer that best fits the Code, even when the law or local practice would allow something weaker.

The Standards set a floor of conduct that applies globally. When local law and the Code differ, you follow the stricter of the two. Keep that idea in mind for every case.

Key formulas to remember

Structure of the 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
Learn the seven headings in order. Knowing the group helps you find the right sub-standard quickly.
Sub-standards by group
I(A)-(D) | II(A)-(B) | III(A)-(E) | IV(A)-(C) | V(A)-(C) | VI(A)-(C) | VII(A)-(B)
Sub-standards are lettered, so cite them as, for example, III(C) Suitability.
Law versus Code rule
Follow the stricter of applicable law and the Code and Standards
If the law is less strict, follow the Code. If the law is stricter, follow the law. Do not break the law to follow the Code.
Components of the Handbook for each Standard
Standard text + guidance + recommended procedures for compliance + application examples
Exam answers draw on the guidance and the compliance procedures, not just the bare rule.

How to solve Standards of Practice Handbook and Code of Ethics Overview questions

Use the same routine on every ethics item set. It stops you answering from gut feel and keeps you tied to the Standards.

  1. 1Read the question stem first so you know whether it asks for a violation, a Standard, or a recommended action.
  2. 2Read the vignette and underline each action by each person. Ignore background detail that does not involve conduct.
  3. 3Ask who owes a duty to whom: client, employer, market, or the profession. This points to the Standard group.
  4. 4Name the specific sub-standard, such as II(A) or III(B), and recall its core requirement.
  5. 5Check the facts against the requirement. Look for a breach of the rule, not just bad judgment.
  6. 6Compare the options. Eliminate those that rely on 'it is legal', 'the client agreed informally', or that only partly fix the problem.
  7. 7Choose the option that fully meets the Standard, or the best corrective action, and check it does not create a new breach.

Quickest way: Three-question triage

When to use it: Use this when time is short and the vignette is long. It works for most ethics questions.

  1. Who is hurt or misled: a client, the employer, the market, or the profession? This gives you the Standard group.
  2. What is the core duty in that sub-standard: disclose, put the client first, have a reasonable basis, keep confidential, or avoid misuse of information?
  3. Which option does that duty fully and promptly? Prefer answers that disclose, document, or dissociate over answers that wait or do nothing.

Common mistakes in Standards of Practice Handbook and Code of Ethics Overview

  • Treating legal compliance as enough

    Many candidates assume that if no law is broken, there is no violation.

    Fix: Apply the stricter of law and Code. An action can be legal and still violate a Standard.

  • Naming the wrong Standard

    Standards overlap, so a single fact can look like several breaches.

    Fix: Pick the Standard whose core duty is most directly broken. Tie the fact to the duty, not to a keyword.

  • Confusing the Code of Ethics with the Standards

    The two are taught together and the words sound alike.

    Fix: The Code is the broad principles. The Standards are the seven specific rules, with sub-standards, that you cite.

  • Choosing a partial fix

    An option that does something looks safer than one that does everything required.

    Fix: Check that the action fully satisfies the Standard. Disclosing a conflict does not cure a breach of confidentiality, for instance.

  • Importing outside knowledge or local practice

    Working professionals bring their own firm's rules and market habits.

    Fix: Answer only from the vignette and the Handbook guidance. Your employer's practice is not the benchmark.

  • Missing the real conduct in a long vignette

    Item sets contain many facts, and some are distractors.

    Fix: List each person's actions in a line or two before looking at the options.

Worked examples

Example 1

Vignette: Mira Rao, a CFA charterholder, manages portfolios for a firm in Singapore. The local regulator does not require disclosure of the firm's soft-dollar arrangements to clients. Mira's firm has never disclosed them. Question 1: Which of the following best describes Mira's obligation? A) No action is needed because local law does not require disclosure. B) Follow the Standards (the III(A) guidance and VI(A)), which call for disclosure of the arrangements and of the conflict they create, even though local law does not. C) Follow only the firm's internal policy. Question 2: Which group of Standards is most relevant to the duty to clients? A) Standard II B) Standard III C) Standard VII.

Show the solution
  1. Q1: The rule is to follow the stricter of law and the Code and Standards. The law does not require disclosure, while the Standards do. The main Standard is III(A) Loyalty, Prudence and Care, which covers best execution and how soft dollars are used for the client's benefit, and its guidance calls for clients to be told about the practice. Standard VI(A) Disclosure of Conflicts adds that any conflict the arrangement creates must also be disclosed. The Standards are stricter, so they govern.
  2. Option A relies on legality alone, which is the classic error. Option C ignores the Standards.
  3. Option B applies the stricter-rule principle and names the disclosure duty, so it is correct.
  4. Q2: The issue is a duty owed to clients, and soft-dollar use sits mainly under III(A), so the group is Standard III. Standard II covers market integrity and Standard VII covers conduct as a member or candidate.

Answer: Q1: B. Q2: B.

Example 2

Vignette: Arun Das is an analyst who learns, from a friend at a listed company, that its earnings will be far below market expectations. The information is not public. Arun's manager asks for his view on the stock. Question 1: Which Standard is most directly involved? A) I(B) Independence and Objectivity B) II(A) Material Nonpublic Information C) VI(C) Referral Fees. Question 2: Which action best meets the Standards? A) Share the view only with senior clients. B) Do not act or cause others to act on the information, and encourage the company to make it public. C) Trade only in his personal account.

Show the solution
  1. Q1: The facts involve information that is material and not public, which matches II(A).
  2. I(B) is about keeping independence and objectivity in professional judgment and VI(C) is about disclosing referral fees, so neither fits.
  3. Q2: The rule bars acting or causing others to act on material nonpublic information. Options A and C both use it.
  4. Option B avoids the breach and moves toward making the information public, so it fits the Standard.

Answer: Q1: B. Q2: B.

Exam tips

  • Memorise the seven Standards in order with their sub-standards, so you can name the Standard in seconds.
  • Read the question stem before the vignette, then mark each person's actions as you read.
  • Eliminate options that depend on legality, informal consent, or doing nothing yet.
  • Answer from the Handbook guidance, not from your firm's practice or local custom.
  • Since there is no penalty for wrong answers, always pick an option, but spend your time on reading the facts carefully.

Standards of Practice Handbook and Code of Ethics Overview in other exams

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

Standards of Practice Handbook and Code of Ethics Overview: frequently asked questions

What is the purpose of the Standards of Practice Handbook?

It explains the Code of Ethics and the Standards of Professional Conduct and shows how to apply them. For each Standard it gives the rule, guidance, compliance procedures and examples. It is the reference behind the ethics questions on the exam.

How many Standards of Professional Conduct are there?

There are seven: Professionalism, Integrity of Capital Markets, Duties to Clients, Duties to Employers, Investment Analysis, Recommendations and Actions, Conflicts of Interest, and Responsibilities as a CFA Institute Member or CFA Candidate. Each has lettered sub-standards.

How do I approach ethics case questions at Level II?

Read the stem, then list each person's actions in the vignette. Decide who owes a duty to whom, name the sub-standard, and test the facts against its core requirement. Choose the option that fully meets the Standard.

What if local law is different from the Code and Standards?

Follow the stricter of the two. If the law is less strict, the Code applies. If the law is stricter, you follow the law.