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Level III Core · Application of the Code and Standards: Level III

Applying the Standards to CFA Level III Ethics Cases

Updated 9 October 2026 · Fact-checked

Applying the Standards means reading a vignette, finding each action by the member, matching it to a Standard, and deciding if it is a violation or compliant. You then give the corrective action. Work fact by fact, apply the stricter of law and Code, and justify in one sentence.

Understand Applying the Standards to Level III Case Scenarios

The Level III ethics item sets and essays give you a short story about an investment professional. Your job is not to recall a Standard from memory. Your job is to test the facts against the Code and Standards and decide what is right.

Each vignette usually contains several actions. Some comply and some do not. The exam often mixes them, so one action may be fine while the next breaks a Standard. Read each action on its own.

Violation means the member's conduct fails a Standard. Compliance means the conduct meets it. A bad outcome is not proof of a violation. A good outcome does not cure one. The Standards judge the process, the duty and the disclosure, not the result.

Many cases cross borders. The member may work in one country, serve clients in another and hold a CFA charter. The Code requires you to know the laws that apply and follow the stricter of the law and the Code. If local law is weaker, follow the Code. If local law is stricter, follow the law. If applicable law prohibits compliance with part of the Code, follow the law while complying with the Code to the extent not prohibited. Members must not knowingly participate in or assist any violation of law, and should dissociate from it.

Corrective action is the second half of many questions. Typical answers: disclose the conflict, stop the activity, report to a supervisor or compliance, dissociate from the activity, update records, correct the misstatement, or put a policy in place. Pick the action that fixes the specific breach.

Key rules to remember

Stricter-rule principle
Required conduct = 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.
Violation test
Facts → Standard → Duty met? → Violation or Compliance → Action
Judge the conduct and process, not the outcome.
Dissociation rule
Cannot stop the conduct → dissociate (and escalate)
Dissociation can include ceasing work on the matter or resigning. Merely knowing and staying silent is not enough.
Supervisor duty
Supervisor responsible if reasonable procedures are not made and enforced
Standard IV(C). Having a compliance system on paper is not enough if it is not enforced.
Fair dealing and suitability link
Suitability uses the client's IPS: objectives and constraints
Standard III(C). Recheck suitability when the client's situation or the IPS changes.

How to solve Applying the Standards to Level III Case Scenarios questions

Use the same routine on every ethics vignette. It keeps you from missing a second issue hidden in the story.

  1. 1Read the question stem first so you know whether you must find a violation, choose a corrective action, or judge compliance.
  2. 2Read the vignette and mark each action by the member, each party involved and each country mentioned.
  3. 3For each action, name the Standard it touches. Ask: what duty does the member owe here, and to whom?
  4. 4Test the facts against the exact conditions of that Standard, for example disclosure made, client consent, material and nonpublic, reasonable basis.
  5. 5Apply the stricter-rule principle if more than one jurisdiction or a conflict between law and the Code appears.
  6. 6Decide: violation or compliance. Do not let a good or bad outcome change the answer.
  7. 7Choose the corrective action that fixes that specific breach, such as disclose, cease, escalate, correct or dissociate.
  8. 8Write or select the answer using the command word. State the Standard, the reason in one sentence, and the action.

Quickest way: Action, Standard, Verdict in three lines

When to use it: Use it when time is short, usually on essay sets where you must justify in few words.

  1. Write the action in a few words.
  2. Write the Standard number and name.
  3. Write the verdict and one reason, then the fix if asked.
  4. Answer only the number of responses requested, in the order given.
  5. If the command word is Identify, name the Standard. If it is Justify, add the reason. If it is Recommend, give the action.

Common mistakes in Applying the Standards to Level III Case Scenarios

  • Judging by the outcome instead of the conduct.

    A profitable result makes the action feel acceptable.

    Fix: Ask only whether the duty was met when the member acted. Profit does not cure a violation.

  • Following local law when it is weaker than the Code.

    Candidates assume law always governs.

    Fix: Apply the stricter rule. If the Code is stricter, follow the Code.

  • Naming the wrong Standard because several seem to fit.

    One fact can touch more than one Standard.

    Fix: Choose the one that matches the core duty in the facts, and name a second only if the question asks for all.

  • Giving a vague fix such as 'act ethically'.

    Candidates know something is wrong but not what to do.

    Fix: Name a concrete step: disclose in writing, stop trading, escalate to compliance, correct the report, or dissociate.

  • Calling every disclosure a full cure.

    Disclosure solves many conflicts, so it gets overused.

    Fix: Disclosure does not fix misrepresentation, use of material nonpublic information or market manipulation. These need the conduct to stop.

  • Missing the compliant action in a mixed vignette.

    Candidates expect every action to be a violation.

    Fix: Test every action separately. If the member did the right thing, say compliant.

Worked examples

Example 1

A portfolio manager based in Country A manages money for a client in Country B. Country A law does not require disclosure of fees received from a broker for directing client trades. Country B law requires disclosure. The manager has not disclosed. Has the manager violated the Code and Standards, and what should the manager do?

Show the solution
  1. Action: receiving fees from a broker for directing client trades, which is a benefit to the manager, and not disclosing it.
  2. Primary Standard: VI(A) Disclosure of Conflicts. The broker benefit is a conflict of interest that must be disclosed to clients so they can judge the manager's objectivity. The facts stress only the non-disclosure, so VI(A) is the primary violation.
  3. Link to I(A) Knowledge of the Law: the manager must know the laws that apply and follow the stricter of law and Code. Which country's law applies depends on the facts, and the client's location alone does not settle it. If Country B law applies, it is the stricter rule here.
  4. Apply the stricter rule: the Code requires disclosure of the broker benefit whichever law applies. If Country B law also applies, it requires disclosure too. Weaker Country A law does not excuse silence.
  5. III(A) Loyalty, Prudence and Care may also be engaged, because directing brokerage in return for a personal benefit can compromise best execution. The facts do not say whether execution suffered, so treat III(A) as a possible second issue and not the main violation.
  6. Verdict: violation, because the manager did not disclose.

Answer: Yes, a violation of VI(A) Disclosure of Conflicts. Standard I(A) Knowledge of the Law supports the point: the manager must follow the stricter requirement. The Code requires disclosure in any case, and if Country B law applies, it is the stricter rule. III(A) may also be engaged if the benefit compromised best execution. The manager should disclose the broker arrangement to the client in writing.

Example 2

An analyst learns from a company's CFO at a private lunch that earnings will fall well below market expectations next week. The analyst's firm holds the stock. The analyst tells the portfolio manager, who sells the holding for all client accounts before the release. Identify which Standard is violated and the corrective action.

Show the solution
  1. Facts: information is from a company insider, not public, and likely to move the price, so it is material nonpublic.
  2. Standard II(A) prohibits acting or causing others to act on material nonpublic information.
  3. The analyst violated II(A) by passing the information on, which caused another person to act on it.
  4. The portfolio manager violated II(A) if he or she knew, or should have known, that the information was material and nonpublic. The facts do not say what the portfolio manager knew, so state this condition rather than assume it.
  5. Disclosure to the client or firm does not cure this, so the use of the information must stop.
  6. Corrective action: no one should trade on or pass on the information further, and the matter should be escalated to compliance. The analyst should encourage the firm to place the security on its restricted list (or watch list) so that trading in it is restricted. Compliance should review the completed trades and the firm's information barrier (firewall) procedures, and should consider whether disclosure to the regulator is needed.

Answer: Standard II(A) Material Nonpublic Information is violated. The analyst violated it by causing another to act on the information. The portfolio manager violated it if he or she knew or should have known the information was material and nonpublic. No one should use or pass on the information further, and the matter should be escalated to compliance. The security should be placed on the firm's restricted list, and compliance should review the completed trades and the information barrier procedures and consider whether disclosure to the regulator is needed.

Exam tips

  • Read the command word, shown in bold in essays. Identify, Justify and Recommend need different amounts of writing.
  • Underline every country and every date in the vignette. Multi-jurisdiction cases test the stricter-rule principle.
  • In item sets, eliminate options that judge by outcome or that offer only disclosure for a breach that needs the conduct to stop.
  • Expect a mix of compliant and non-compliant actions in one vignette. Do not assume all are wrong.
  • Show only what is asked. Extra responses beyond the number requested are not evaluated.

Applying the Standards to Level III Case Scenarios in other exams

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

Applying the Standards to Level III Case Scenarios: frequently asked questions

How are Level III ethics questions different from Level I and II?

They are applied to longer vignettes with several actions and often more than one jurisdiction. You must judge each action, pick the Standard and recommend a fix. Rote recall of Standard names is not enough.

What is the difference between a violation and compliance in ethics scenarios?

A violation means the member's conduct failed the duty in a Standard. Compliance means the duty was met. The result does not decide it. The conduct and process do.

How do I handle conflict between local law and the Code?

Follow the stricter of the two. If the law is weaker, follow the Code. If the law is stricter, follow the law. If you cannot avoid taking part in conduct that breaks the law, dissociate.

How should I practise ethics item sets?

Do full vignettes under time and for each action write the Standard, the verdict and the fix. Then review misses by asking which fact you overlooked.