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CFA Level II · CFA Level II Exam

Code of Ethics and Standards of Professional Conduct for CFA Level 2

The Code of Ethics sets six principles of conduct, and the Standards of Professional Conduct turn them into seven rules covering professionalism, capital markets, duties to clients and employers, investment analysis, conflicts of interest, and CFA membership. To solve a case, find the facts, name the Standard breached, and choose the action that fully complies.

What this chapter covers

This chapter is the foundation of the Ethical and Professional Standards topic. It covers the Preamble and Code of Ethics, how the Code and Standards evolved and are adopted, the seven Standards, and how to apply them to cases. Each Standard has sub-parts, such as I(A) Knowledge of the Law or III(A) Loyalty, Prudence, and Care.

At Level II, ethics is tested inside item sets. You read a vignette, often describing several people and several actions, and then answer the four multiple-choice questions based on it. You must spot which behaviour violates which Standard, and which response is the best one. Recalling the text is not enough. You must apply it to the facts given.

The chapter connects to the rest of the paper because ethical issues arise in every area. Research reports touch equity valuation. Performance figures touch portfolio construction. Material nonpublic information touches trading in any asset class. Treat this chapter as the lens you carry into every other topic.

Ethical and Professional Standards carries a topic weight of 10-15%, the same band as Financial Statement Analysis, Equities, Fixed Income and Portfolio Construction. Yet the content is more compact and more learnable than quantitative topics. Candidates who know the Standards precisely and practise case application gain reliable points. Since there is no minimum score per topic, strong ethics results can offset weaker areas, but the Minimum Passing Score of 2600 still applies to your overall result. A slow, shallow read of this chapter is a costly mistake.

Code of Ethics and Standards of Professional Conduct: topics in the order to study them

  1. 1Preamble and Code of EthicsStart here because the six principles are the reasoning behind every Standard, and you will use them to judge unclear cases.
  2. 2Evolution and Adoption of the Code and StandardsRead this second. It is short, explains why the Standards exist and how firms and members adopt them, and sets up the structure you meet next.
  3. 3Overview of the Seven Standards of Professional ConductStudy this third. You need each Standard and its sub-parts firmly in memory before you can apply them to facts.
  4. 4Applying the Code and Standards to Case SituationsFinish with this because it is where marks are earned. Practising cases only works once you know the Standards by name and content.

How to prepare Code of Ethics and Standards of Professional Conduct

Treat this chapter as a skill, not a memory task. Learn the text exactly, then practise cases until naming the right Standard becomes automatic.

  1. Read the Code of Ethics and the Preamble once, slowly. Write the six principles in your own words and link each to one or two Standards.
  2. Learn the seven Standards by number and title, then list the sub-parts under each. Use a one-page sheet and recite it from memory without looking.
  3. For each Standard, note its core duty, the typical violation, and the recommended compliance steps. Keep the wording as close to the official text as you can.
  4. Work through cases by first listing the facts, then naming every Standard that may apply, then checking which actions are required, permitted or prohibited.
  5. Practise full item sets under timed conditions. Read the question first, then find the relevant facts in the vignette. Aim for about 12 minutes per set (about 3 minutes per question), because 22 sets share 4 hours 24 minutes.
  6. Review every wrong answer by writing the Standard you missed and the exact phrase in the vignette that signalled it. Repeat weak Standards weekly until you stop missing them.

Common mistakes in Code of Ethics and Standards of Professional Conduct

  • Memorising Standard titles but not the sub-parts

    Fix: Learn each sub-part with a one-line meaning. Questions often turn on a sub-part, such as the difference between III(A) and III(C), so test yourself on those links.

  • Choosing an answer because it sounds ethical rather than because it matches the Standard

    Fix: Name the Standard before you look at the options. Then pick the option that matches its stated requirement.

  • Missing a second violation in the same vignette

    Fix: List every person and action in the vignette, and check each against all seven Standards before answering.

  • Adding facts that are not in the vignette

    Fix: Answer only from the text provided. If the vignette does not say a person knew something, do not assume it.

  • Leaving ethics revision until the last week

    Fix: Schedule short ethics case sets every week from the start. Spaced practice builds the pattern recognition that cases require.

Last-day revision: Code of Ethics and Standards of Professional Conduct

  • The Code has six principles. The Standards have seven sections. Know both lists cold.
  • The 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.
  • When law and the Standards differ, follow the stricter one. This is Standard I(A).
  • Standard II(A) covers material nonpublic information: do not act or cause others to act on it.
  • Standard III(A) requires loyalty, prudence and care toward clients. Client interests come before employer and personal interests.
  • Standard III(B) requires fair dealing. Treat clients fairly when disseminating recommendations or taking investment action. Fair does not always mean equal.
  • Standard V(A) needs a diligent and thorough basis for recommendations, plus reasonable support and appropriate communication.
  • Standard VI(A) requires disclosure of conflicts so clients and employers can judge your objectivity.
  • Standard VII(B) says you must not misrepresent the CFA designation or what the Program implies.
  • In a case, compare each action with the Standard and pick the answer that fully complies, not one that merely reduces harm.
  • Use the vignette facts only. Do not add assumptions about what a person probably knew or intended.
  • Read all three options before choosing. The best answer often includes both stopping the problem and fixing it, such as disassociating or escalating.

Code of Ethics and Standards of Professional Conduct in other exams

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

Code of Ethics and Standards of Professional Conduct: frequently asked questions

How many Standards of Professional Conduct are there?

There are seven. They cover professionalism, integrity of capital markets, duties to clients, duties to employers, investment analysis and recommendations, conflicts of interest, and responsibilities as a CFA Institute member or candidate. Each has sub-parts you should know.

How is ethics tested at Level II?

It appears as item sets with a vignette followed by four multiple-choice questions based on it. You must apply the Standards to the facts given and pick the best response. Straight recall of the text is rarely enough.

What should I do when local law conflicts with the Standards?

Under Standard I(A), you follow the stricter of the applicable law and the Code and Standards. If the law is stricter, comply with the law. If the Standards are stricter, comply with the Standards.

How much time should I spend on this chapter?

Ethical and Professional Standards has a topic weight of 10-15%, so give it regular, steady study time. Use frequent short case practice rather than one long block, and increase it if your case scores stay low.