CFA Level II Exam · Code of Ethics and Standards of Professional Conduct

How to Apply the Code and Standards to Case Situations

Updated 7 October 2026

Applying the Code and Standards means reading a vignette, finding the facts that matter, naming the Standard that is breached or met, and choosing the action that best complies. Work from the facts, not from what feels fair. Pick the answer that follows the Standards most strictly.

Understand Applying the Code and Standards to Case Situations

Level II ethics is not a memory test. Each item set gives you a short case about an analyst, a manager or a firm. You then answer questions about whether a Standard was violated, which one, and what the person should do.

The Code and Standards have 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 Candidate. A case often touches more than one. Your job is to find the one the question is really testing.

The questions come in three common forms. First, is there a violation? Second, which Standard is violated? Third, what should the person do now? The third form tests recommended procedures for compliance, such as written policies, disclosure, firewalls, documentation and escalation.

The right answer is the one that follows the Standards, even when it costs the firm money or upsets a client or boss. Local law matters too. When local law and the Code differ, you follow the stricter one. If a person has done nothing wrong, say so. Some options are traps that call a legal, well-disclosed act a violation.

The skill is reading carefully. A single word such as 'material', 'nonpublic', 'prior to', 'written' or 'knowingly' can change the answer. Practise slowly first, then build speed.

Key formulas to remember

Stricter-rule principle: Follow the stricter of (applicable law, Code and Standards); If the law is less strict than the Code, follow the Code. If the law is stricter, follow the law. Never follow a rule that requires a violation of the Code.
Three-question test: Facts → Standard → Action; Find the relevant facts, name the Standard that governs them, then pick the action that best meets it.
Knowing participation: Know of a violation and take part or fail to dissociate → you may breach Standard I(A); If you cannot stop the violation, dissociate from it. Dissociation may mean ceasing work on the matter and, if needed, resigning.
Disclosure and consent logic: Conflict or referral fee → disclose in time, before it affects the client. Extra compensation from others → written consent from your employer; Keep three Standards separate. VI(A) Disclosure of Conflicts requires timely, clear disclosure of conflicts to clients, prospects and your employer. VI(C) Referral Fees requires disclosure of any referral fee or compensation to your employer, clients and prospects. IV(B) Additional Compensation Arrangements requires written consent from your employer before you accept compensation or benefits from others that could conflict with your employer's interests.
Material nonpublic information test: Material (likely to affect price or an investor's decision) AND nonpublic → do not act or cause others to act; Standard II(A). Both conditions must hold. Public or immaterial information may be used.

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

Use the same routine on every ethics item set. It keeps you from being pulled in by emotional details.

1Read the question stems first, so you know whether you are judging a violation, naming a Standard or choosing an action.
2Read the vignette and mark the facts: who knew what, when, who benefited, what was disclosed, and what is in writing.
3Decide whether any Standard is actually breached. Check timing, materiality, whether the information was public, and whether disclosure was made.
4Name the Standard that fits best, such as I(B) Independence and Objectivity or III(B) Fair Dealing. If two fit, choose the one closest to the core problem.
5For action questions, choose the step that stops the harm and follows the recommended procedures: escalate to compliance, disclose, document, or dissociate.
6Eliminate options that are too weak (ignore it), too extreme (report to authorities straight away without internal steps), or that only help the firm.
7Check the answer against the facts once more. Do not add facts that the vignette did not give.

Quickest way: Fact, Standard, Fix

When to use it: Use it when time is short and the vignette is long. It suits most item sets where each question stands on separate facts.

Scan each question for the verb: is it a violation, which Standard, or what action?
Underline in the vignette any red-flag words: gift, referral, trade, client, nonpublic, disclose, supervise, model.
Match each red flag to a Standard in seconds, using the seven headings as a map.
Pick the option that discloses, documents, escalates or separates, rather than conceals or ignores.
If two options remain, choose the one that puts client interests and market integrity first.

Common mistakes in Applying the Code and Standards to Case Situations

Calling something a violation just because it looks unfair
You judge by feelings, not by the text of the Standards.
Fix: Find the exact Standard and the exact condition. If no condition is breached, the correct answer may be that there is no violation.
Choosing the answer that protects the firm or the boss
Real workplaces reward loyalty, so the loyal answer feels natural.
Fix: Remember that the Code places the integrity of the profession and the interests of clients ahead of the employer's. Loyalty to the employer never overrides the Standards.
Naming the wrong Standard because several are involved
A case may breach more than one Standard and the options list close neighbours.
Fix: Ask what the core wrong act is. A leak of client data is III(E), not VI(A). Choose the Standard that matches that act.
Picking an extreme action first, such as resigning or reporting externally
Strong action feels more ethical.
Fix: Recommended procedures usually begin with escalation to a supervisor or compliance and with documentation. Go further only if the firm will not act.
Missing the timing or form of disclosure
Words like 'prior to', 'written' and 'promptly' are skimmed.
Fix: Underline them. Disclosure after the fact, or only verbal where written is expected, often fails the Standard.
Adding facts that the vignette does not state
You fill gaps from your own work experience.
Fix: Answer only from the vignette. If the case does not say the information was material, do not assume it was.

Worked examples

Example 1

Vignette: Mei Tan is a portfolio manager at a global asset manager. A broker who executes many of her trades gives her a paid holiday for her family. She does not tell her firm. Over the next quarter she keeps sending most trades to that broker, which charges commissions in line with other brokers. Q1: Did Tan violate a Standard? Q2: Which Standard is most relevant? Q3: What should she have done?

Show the solution

Q1: The holiday is a gift from a party that benefits from her decisions. It could reasonably impair, or appear to impair, her independence, and she did not disclose it to her firm. The violation arises from accepting a gift that could impair independence without disclosing it to her employer. The Standard sets no size threshold, and a disclosed gift that the employer permits is not automatically a breach. The commissions being in line with other brokers does not cure the problem.
Q2: The core issue is that the gift can compromise her objectivity, so Standard I(B) Independence and Objectivity applies. Her failure to disclose the conflict also relates to VI(A) Disclosure of Conflicts.
Q3: She should have disclosed the gift to her employer promptly and followed firm policy. Prompt disclosure is required. Written disclosure is the recommended procedure. Under VI(A), she should also have disclosed it to clients where it could impair her objectivity. She should keep broker selection based on best execution. Declining the gift is the safest course, but it is not the only compliant one.

Answer: Q1: Yes, she violated the Standards, because she accepted a gift that could impair her independence and did not disclose it to her employer. The Standard has no size threshold. Q2: Standard I(B), with VI(A) also implicated. Q3: Disclose the gift promptly to her employer (in writing is the recommended procedure) and to clients where objectivity could be impaired, and choose brokers only on best execution. Declining is the safest course.

Example 2

Vignette: Arun Rao, a research analyst at a European bank, learns from a friend at a listed company, who breached a duty of confidentiality by sharing it, that the firm will announce a large and unexpected acquisition next week. The news is not public. Rao tells his supervisor, who is head of research, and asks what to do. Rao has not traded or told clients. Q1: Did Rao violate a Standard so far? Q2: What should the supervisor do? Q3: What should Rao avoid?

Show the solution

Q1: The information is material, because a large unexpected acquisition would likely move the price. It is nonpublic, and it came from an insider who breached a duty by sharing it. Receiving it is not the issue. Rao has not traded or passed it on to clients, so he has not acted on it. He has not violated Standard II(A) so far. Going to compliance directly would have been the better route. Telling his supervisor is acceptable only if it is a step towards compliance and the information goes no further.
Q2: The supervisor should immediately take the matter to compliance and should not disseminate the information any further. Only people who need to know, such as compliance, should be told. Compliance decides the appropriate steps, such as placing the security on a restricted list and setting up a firewall around the information.
Q3: Rao must not trade, cause others to trade, or share the information with clients or colleagues beyond those who need to know, such as compliance. Doing so would breach Standard II(A).

Answer: Q1: No violation so far. Receiving the information is not the breach, and compliance is the best place to take it. Q2: Pass it immediately to compliance without circulating it further. Compliance decides steps such as a restricted list and a firewall. Q3: Avoid trading on the information or sharing it beyond those who need to know.

Exam tips

Read the question stems before the vignette so you know what facts to hunt for.
Treat 'no violation' as a real option. Some cases are built to show correct behaviour.
Memorise the names of all the Standards. Many options differ only by which Standard they cite.
For 'what should be done' questions, choose escalation, disclosure and documentation before drastic steps.
Never answer from local custom. The Code and Standards, or stricter local law, are the only test.

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

How do I answer CFA Level II ethics item sets faster?

Read the question stems first, then scan the vignette for the facts that match them. Use the Fact, Standard, Fix routine each time. With practice you can answer each question in under two minutes.

What are recommended procedures for compliance?

They are the steps the Standards Handbook suggests firms and members follow to stay compliant. Examples include written policies, disclosure of conflicts, firewalls, restricted lists, documentation and escalation to compliance. On exam questions, the best action usually matches one of these.

What if two Standards seem to apply?

Pick the one that fits the central wrong act. The options often include a close neighbour, so ask what the person did that was most clearly wrong. If the question asks for all that apply, it will say so.

What if local law differs from the Code?

Follow the stricter of the two. If the law is stricter, follow the law. If the Code is stricter, follow the Code. You should never follow a law in a way that requires you to break the Code.