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

Overview of the Seven Standards of Professional Conduct

Updated 7 October 2026 · Fact-checked

The seven Standards of Professional Conduct 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 Candidate. To solve a case, find the facts, match the Standard, test the conduct, then pick the answer.

Understand Overview of the Seven Standards of Professional Conduct

The CFA Institute Code of Ethics and Standards of Professional Conduct apply to every member and candidate. The Code is a short set of principles. The Standards turn those principles into seven numbered rules, each with lettered parts, such as I(A) or III(C).

Think of the seven as seven questions about your behaviour. I Professionalism: Do you follow the law, stay independent, tell the truth and avoid misconduct? II Integrity of Capital Markets: Do you avoid trading on material nonpublic information and avoid manipulating prices or volume? III Duties to Clients: Do you put clients first, treat them fairly, recommend suitable investments, present performance fairly and protect confidentiality?

IV Duties to Employers: Are you loyal to your employer, do you get written consent from all parties involved before accepting additional compensation arrangements that may conflict with the employer's interests, and (if you supervise) are you responsible for the people under you? V Investment Analysis, Recommendations, and Actions: Is your work diligent with a reasonable basis, is it communicated clearly, and do you keep records? VI Conflicts of Interest: Do you disclose conflicts, put client and employer trades ahead of your own, and disclose referral fees? VII Responsibilities as a CFA Institute Member or Candidate: Do you protect the integrity of the programme and refer to the designation correctly?

Professional competence is part of the Code of Ethics and is applied through Standard V(A) Diligence and Reasonable Basis. It is not a lettered part of Standard I.

The difference students ask about most is clients versus employers. Duties to clients (III) are about how you treat the people whose money you manage. Duties to employers (IV) are about your obligations to the firm that pays you. When the two conflict, the Standards generally expect you not to harm clients, and you must not break the law or the Code. Loyalty to the employer never excuses misleading clients.

At Level II, you do not get stand-alone questions. Each ethics item set is a vignette describing people and actions. Each question asks whether someone violated a Standard, which one, or what they should do. Your task is to read the facts and apply the Standard exactly, naming it.

Key formulas to remember

Standard I: Professionalism: I(A) Knowledge of the Law, I(B) Independence and Objectivity, I(C) Misrepresentation, I(D) Misconduct; Covers legal compliance, honest dealing and personal conduct. When law and Code differ, follow the stricter one.
Standard II: Integrity of Capital Markets: II(A) Material Nonpublic Information, II(B) Market Manipulation; Information must be both material and nonpublic to trigger II(A). Mosaic-style analysis of public and non-material facts is allowed.
Standard III: Duties to Clients: III(A) Loyalty, Prudence, and Care, III(B) Fair Dealing, III(C) Suitability, III(D) Performance Presentation, III(E) Preservation of Confidentiality; Client interests come before employer and personal interests. Confidentiality has exceptions, such as illegal activity or a legal requirement.
Standard IV: Duties to Employers: IV(A) Loyalty, IV(B) Additional Compensation Arrangements, IV(C) Responsibilities of Supervisors; Applies to the employment relationship. IV(A) Loyalty means you must not harm your employer. Independent practice that could result in compensation or create a conflict with your employer needs the employer's consent, and written consent is the Handbook's recommended practice. IV(B) requires written consent from all parties involved before you accept gifts, benefits, compensation or consideration from third parties that compete with or might create a conflict with the employer's interests.
Standard V: Investment Analysis, Recommendations, and Actions: V(A) Diligence and Reasonable Basis, V(B) Communication with Clients and Prospective Clients, V(C) Record Retention; Focus on the quality, communication and documentation of research and decisions.
Standard VI: Conflicts of Interest: VI(A) Disclosure of Conflicts, VI(B) Priority of Transactions, VI(C) Referral Fees; Disclosure must be full and clear. Client and employer transactions come before personal ones.
Standard VII: Responsibilities as a CFA Institute Member or Candidate: VII(A) Conduct as Participants in CFA Institute Programs, VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program; Covers exam conduct, confidential programme information and how you describe your credentials.

How to solve Overview of the Seven Standards of Professional Conduct questions

Use the same routine on every ethics item set. It keeps you from reacting to the story and makes you match facts to rules.

1Read the question stems first so you know whether you are judging a violation, naming the Standard, or choosing an action.
2Read the vignette and underline who did what, and who is affected: client, employer, market or the CFA programme.
3Match the conduct to a group: client treatment points to III, firm obligations to IV, research and records to V, disclosure and personal trades to VI, information and prices to II, and honesty or law to I.
4Narrow to the lettered Standard, for example III(B) Fair Dealing or V(C) Record Retention.
5Test the conditions of that Standard. For example, is the information material and nonpublic? Was the conflict disclosed? Was there a reasonable basis?
6Check whether more than one Standard is breached, then choose the option that names the correct Standard and reasoning.
7For recommended-action questions, choose the step that protects clients and markets first, such as disassociating, disclosing or escalating to compliance.
8Eliminate options that excuse a breach because it was legal, common practice, or approved by a manager.

Quickest way: Who is harmed? Then pick the letter

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

Skim the questions, then scan the vignette for names and actions only.
Ask: who is harmed or at risk, client, market, employer or programme?
Map to the Standard group: client III, market II, employer IV, analysis V, conflict VI, honesty or law I, programme VII.
Check the one condition that decides it, such as material, nonpublic, disclosed or suitable.
Pick the option that agrees with the Standard text, and avoid options that rely on the action being legal or normal.

Common mistakes in Overview of the Seven Standards of Professional Conduct

Confusing duties to clients (III) with duties to employers (IV).
Both involve working relationships, so the story seems to fit either.
Fix: Ask whose interest is at stake. Treatment of the people you serve is III. Obligations to the firm, such as outside work, extra pay and supervision, are IV.
Treating legality as the end of the analysis.
Candidates assume that if no law is broken, there is no violation.
Fix: Remember Standard I(A): when law and the Code differ, follow the stricter. Conduct can be legal and still breach the Standards.
Applying II(A) to any nonpublic information.
The word nonpublic stands out and the materiality test gets forgotten.
Fix: Require both materiality and nonpublic status. Information that would not affect price or a reasonable investor's decision is not caught by II(A).
Choosing the wrong Standard because of an overlapping fact.
One story can touch several Standards, such as misrepresentation in a research report.
Fix: Pick the Standard the question asks about or the one most directly breached. Name it exactly and check whether a second Standard also applies.
Picking a harsh action, such as reporting to authorities, when a simpler step is expected.
Candidates think the strongest response is always right.
Fix: Follow the Standard's guidance on action. Often it is to disclose, seek compliance advice, decline to act or disassociate, with escalation when the issue persists.
Ignoring V(C) Record Retention and VI(C) Referral Fees as minor.
They appear less often than the big Standards, so students skip them.
Fix: Learn the one-line rule for every lettered Standard. Short Standards are easy marks if you recognise the trigger.

Worked examples

Example 1

Vignette: Mira Shah is a portfolio manager at a global asset manager. Through a contact at the board level, she learns that Dalton Foods, a listed company, will announce a merger next week. The merger is not public and would clearly move the share price. She buys Dalton shares for several client accounts on the strength of this information. Separately, she buys Dalton shares for her own account and places the order before her clients' orders are entered, so her trade executes first. Later, she trades for a long-standing family friend's account ahead of the other clients because he calls often. Q1: Which Standard is most directly breached by her purchases for client accounts based on the merger information? Q2: Which Standard is breached by trading for her friend first? Q3: Which Standard is most directly breached by entering her own order ahead of her clients' orders?

Show the solution

Q1: The merger information is material, because it would move the price, and nonpublic, because it has not been announced. Trading on it is Standard II(A), Material Nonpublic Information.
Q2: Favouring one client over others by order timing is about equal treatment of clients. This is Standard III(B), Fair Dealing.
Q3: Placing her own transaction ahead of client transactions is Standard VI(B), Priority of Transactions. Client transactions must come before personal ones.
Each question targets a different act, so each has one best Standard even though the same stock is involved.

Answer: Q1: II(A) Material Nonpublic Information. Q2: III(B) Fair Dealing. Q3: VI(B) Priority of Transactions.

Example 2

Vignette: Arjun Rao is an analyst at an investment firm. His supervisor asks him to publish a buy rating on a company. Arjun has not completed his analysis but has read a broker's summary. He publishes the rating and does not keep notes. The firm's bonus for the analyst team depends on how many clients buy the stock, which is not mentioned in the report. Q1: Which Standard does the publishing without analysis most directly breach? Q2: Which Standard applies to failing to keep notes? Q3: Which Standard applies to the undisclosed bonus link?

Show the solution

Q1: He lacks a reasonable basis for the rating because he did no diligence of his own beyond a summary. This is V(A), Diligence and Reasonable Basis.
Q2: Keeping records that support analysis and recommendations is V(C), Record Retention.
Q3: A bonus tied to clients buying the stock is a conflict that could affect objectivity. The report omits it. This is VI(A), Disclosure of Conflicts.
The supervisor's request does not remove his duty. Following instructions is not a defence for a rating without a reasonable basis.

Answer: Q1: V(A) Diligence and Reasonable Basis. Q2: V(C) Record Retention. Q3: VI(A) Disclosure of Conflicts.

Exam tips

Memorise the Standards as seven headings with their lettered parts, so you can name the exact Standard in a few seconds.
Read the question stem before the vignette. It tells you whether to find a violation, a Standard or a recommended action.
Underline dates, who knew what, and whether anything was disclosed. Those facts usually decide the answer.
When two options both name a real violation, pick the one that fits the main act in the question rather than a side detail.
Do not leave ethics for last. Each item set uses the same time as any other, and there is no penalty for a wrong answer, so always answer.

Overview of the Seven Standards of Professional Conduct: frequently asked questions

What are the seven Standards of Professional Conduct?

They 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 Candidate. Each has lettered parts that you need to know by name.

What is the difference between duties to clients and duties to employers?

Duties to clients (III) concern loyalty, fair treatment, suitability, performance presentation and confidentiality toward the people you serve. Duties to employers (IV) concern loyalty to your firm, extra compensation arrangements and supervision. If they appear to clash, you must still not mislead or harm clients or break the law.

How do I solve CFA Level II ethics vignettes?

Read the questions first, then find the actions and the people affected in the vignette. Match them to a Standard, test its conditions, and choose the option that names the right Standard or action. Avoid answers that rely on the conduct being legal or common.

Are ethics questions at Level II different from Level I?

Yes. At Level II they are placed in item sets built on a vignette, and you answer from the facts given. You still need to know each Standard, but you must apply it to a situation rather than recall it alone.