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CFA Level II Exam · Guidance for Standard II: Integrity of Capital Markets

Ethics and Integrity of Capital Markets for CFA Level II

Updated 7 October 2026 · Fact-checked

Standard II: Integrity of Capital Markets requires members and candidates to protect market integrity. Under II(A) you must not act or cause others to act on material nonpublic information. Under II(B) you must not distort prices or trading volume to mislead. To solve questions, identify the conduct, test it against each Standard, then choose the compliant action.

Understand Ethics and Integrity of Capital Markets

Capital markets work only if investors trust them. Prices must reflect real supply, demand and publicly available information. If some people trade on secrets or push prices with false signals, others lose confidence, pull out, and the cost of raising capital rises. Ethical conduct by investment professionals protects fair, transparent and efficient markets.

Standard II has two parts. Standard II(A): Material Nonpublic Information says you must not act or cause others to act on material nonpublic information that could affect an investment's value. Standard II(B): Market Manipulation says you must not engage in practices that distort prices or artificially inflate trading volume with intent to mislead market participants.

Information is material if its disclosure would likely affect the security's price or if reasonable investors would want it before deciding. It is nonpublic if it has not been made available to the marketplace. II(A) applies when information is both material and nonpublic and you act, or cause others to act, on it. If the information is public or immaterial, trading on it is not a II(A) violation. Analysts may still build a view from public data and immaterial nonpublic pieces (the mosaic theory). The mosaic theory works only when the pieces are public or immaterial.

Manipulation covers two broad types: information-based (spreading false rumours to move prices) and transaction-based (trades that give a false impression of price or activity, including exploiting a dominant market position). Intent to mislead is still required. Legitimate trading, even large trading, is not manipulation unless it is intended to mislead.

On Level II you meet these ideas inside vignettes. You read a story, spot the conduct, name the Standard and pick the action that keeps markets fair. Remember that where local law and the Code differ, you follow the stricter one.

Key formulas to remember

Standard II(A) test
Violation if: information is material AND nonpublic AND you act or cause others to act on it
If the information is public or immaterial, trading on it is not a II(A) violation. If it is both material and nonpublic, acting or causing others to act on it is a violation. Also consider the source and any duty of confidence.
Standard II(B) test
Violation if: practice distorts price or artificially inflates volume AND intent to mislead market participants
Intent to mislead is a required element of II(B). Large or aggressive trades with a genuine investment purpose are not manipulation.
Stricter rule applies
Follow the stricter of the law and the Code and Standards
Use when a vignette says local rules are looser than the Code.

How to solve Ethics and Integrity of Capital Markets questions

Use the same short routine for any question on integrity of capital markets in a vignette.

  1. 1Read the question first, then scan the vignette for the person, the information and the action taken.
  2. 2Decide whether the issue is information (II(A)) or price and volume distortion (II(B)).
  3. 3For information, test materiality: would it likely move the price or matter to a reasonable investor?
  4. 4Test whether it is nonpublic: has it been broadly disseminated to the market?
  5. 5Check the action: did the person trade, recommend, or cause others to trade? Merely holding the information is not a violation of II(A), but the person must not act on it and should follow firm policy, such as escalating to compliance.
  6. 6For manipulation, look for intent to mislead and a distorting effect on price or volume.
  7. 7Match the facts to the options and choose the action that complies with the stricter of law and Code, such as stopping trading, encouraging disclosure, or escalating to compliance.
  8. 8Name the Standard in your reasoning to confirm the answer.

Quickest way: Two-question screen

When to use it: Use when time is short and the vignette is long.

  1. Ask: is this about a secret (II(A)) or a distortion (II(B))?
  2. Secret: apply material plus nonpublic. If both are true, the safe answer is not to act and to seek disclosure or compliance guidance.
  3. Distortion: look for intent to mislead, which is a required element of II(B). Without it, the conduct is not manipulation under the Standard.
  4. Eliminate options that let the person profit from the information or the false impression.

Common mistakes in Ethics and Integrity of Capital Markets

  • Treating any nonpublic information as a violation

    Students remember 'nonpublic' and skip materiality.

    Fix: Always test both material and nonpublic. Immaterial nonpublic details can feed the mosaic.

  • Saying that possessing material nonpublic information is itself a violation

    The wording sounds like possession is the problem.

    Fix: Possession alone is not a violation of II(A). The violation is acting or causing others to act on it. The member should not act, should encourage the firm to adopt compliance procedures such as firewalls, and may escalate to compliance. Whether the stock goes on a restricted list is a matter of firm policy, not something the Standard requires.

  • Calling every large trade manipulation

    Large volume looks suspicious.

    Fix: Look for intent to mislead and a distorting effect. Genuine large trades are allowed.

  • Ignoring the stricter-rule principle

    Students assume local law settles the case.

    Fix: If the Code is stricter than local law, follow the Code.

  • Mixing up II(A) and II(B)

    Both protect markets, so they blur together.

    Fix: II(A) concerns information; II(B) concerns distorting prices or volume.

Worked examples

Example 1

Vignette: Rina, an analyst at a fund in Singapore, learns from a friend at a listed company that an unannounced takeover bid for the company will be made next week. The bid is expected to lift the share price sharply. Rina has not traded. Q1: Is the information material and nonpublic? Q2: What should Rina do?

Show the solution
  1. Materiality: a takeover bid would likely move the price, so it is material.
  2. Nonpublic: it has not been announced, so it is nonpublic.
  3. Source: the friend at the company likely breached a duty of confidence by sharing it. This strengthens the case that the information must not be used.
  4. Rina has not traded, so no violation has occurred yet, but Standard II(A) bars her from acting or causing others to act on it.
  5. The compliant action is to not trade, tip or recommend the stock. She should also encourage her firm to adopt compliance procedures, such as firewalls, if it has none. She may escalate the matter to compliance, which could place the stock on a restricted list under firm policy.

Answer: Q1: Yes, both material and nonpublic. Q2: Do not trade, tip or recommend the stock. Encourage the firm to adopt compliance procedures and, if appropriate, escalate to compliance, which may restrict the stock under firm policy, in line with Standard II(A).

Example 2

Vignette: A portfolio manager holds a thinly traded small-cap stock at quarter end. In the last ten minutes of trading she places several small buy orders at rising prices, with the stated aim of lifting the closing price so her fund's reported performance looks better. Q1: Which Standard is most relevant? Q2: Is this a violation?

Show the solution
  1. The conduct affects the price, not the use of secret information, so Standard II(B) applies.
  2. The orders are placed to push the closing price up, which distorts price.
  3. The stated aim is to improve reported performance, which shows intent to mislead stakeholders about value.
  4. Both distortion and intent are present.

Answer: Q1: Standard II(B), Market Manipulation. Q2: Yes, it is a violation because the trades distort the price with intent to mislead.

Exam tips

  • Name the Standard in your head before reading the options; it narrows the choices fast.
  • Look for the word 'acts' or 'trades': II(A) needs action on the information, not mere knowledge.
  • In manipulation vignettes, hunt for a stated purpose. Intent usually appears as a motive such as boosting performance or a bonus.
  • Prefer answers that stop the conduct and escalate to compliance over answers that ignore or hide the issue.
  • No marks are lost for wrong answers, so always answer every question.

Ethics and Integrity of Capital Markets in other exams

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

Ethics and Integrity of Capital Markets: frequently asked questions

Why do ethics matter for capital markets in CFA Level II?

Markets rely on trust that prices reflect fair information. Unethical conduct erodes that trust and raises the cost of capital. Standard II turns this idea into rules you apply to vignettes.

What does Standard II cover?

Standard II(A) covers material nonpublic information and II(B) covers market manipulation. Together they protect the integrity of capital markets.

Is it a violation to hold material nonpublic information?

Possession alone is not a violation of II(A). The violation occurs when you act, or cause others to act, on it. If you hold such information, do not act on it, encourage your firm to adopt compliance procedures such as firewalls, and consider escalating to compliance. Any restricted list is a firm-policy step, not a requirement of the Standard.

How does ethical conduct support market efficiency?

Efficient prices need fair access to information and honest trading signals. Banning trading on secrets and price distortion helps prices reflect genuine information.