CFA® Ethics
The CFA Ethics 2024 curriculum covers the CFA Institute Code of Ethics and Standards of Professional Conduct and their application to real-world ethical situations faced by professionals. Ethics is the most heavily weighted topic on the CFA Level 1 exam and remains critical through Levels 2 and 3.
Even though there are no formulae to memorize in the Ethics readings, it’s consistently regarded as one of the more difficult CFA topics due to the questions' subjectivity and the material's complexity. Aside from its importance throughout each level of the CFA, Ethics is unique for the ‘Ethics adjustment’ implemented by the CFA Institute. If a candidate is on the edge of failing, a strong Ethics score may warrant a pass.
What to Expect in CFA Level 1 Ethics?
CFA Level 1 Ethics is the most heavily weighted topic on the exam, weighing 15-20%. The topic introduces the CFAI’s six Codes of Ethics and seven Standards of Professional Conduct (the Code and Standards). Candidates are expected to use these Codes and Standards as a framework for ethical decision-making throughout their financial careers. While there are no formulae to memorize, Ethics is commonly regarded as one of the most challenging CFA Level 1 topics due to the breadth of material and its relatively subjective nature. The topic material closes with a short introduction to Global Investment Standards (GIPS); some of this material is optional.
Exam Weighting
The CFA Ethics topic has an exam weighting of 15-20%, meaning that approximately 27-36 of the 180 CFA Level 1 exam questions focus on this topic.
| Topic Weight | No. of Learning modules | No. of Formulas | No. of Questions |
|---|---|---|---|
| 15-20% | 5 | 0 | ca. 28 |
Level 1 Ethics 2024 Syllabus, Readings, and Changes
CFA Level 1 exam has not seen much fluctuation with the ethics portion since last year. The minimal changes include merging two or more readings (now called learning modules) leading to lesser LOS this year.
| No. of Learning Modules: 5 | No. of LOS: 21 | |
|---|---|---|
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Summary
Introduces the CFAI® Code of Ethics and Standards of Professional Conduct and how to apply such standards to particular situations. Concludes with an overview of the Global Investment Performance Standards (GIPS). |
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Ethics and Trust in the Investment Profession
Financial analysis is about more than formulae and forecasting. Financial markets and businesses could not function without trust in individuals and institutions. This reading introduces the concept of investing as a profession and the importance of ethical behavior in investing. Candidates will learn to create trust through maintaining standards, abiding by codes, and applying an ethical framework to their daily professional decisions.
Code of Ethics and Standards of Professional Conduct
Candidates often struggle with Ethics because it relies more on subjectivity and intuition than formulae. However, the Standards of Practice Handbook makes the theoretical side of Ethics more concrete by providing guidance on common ethical dilemmas that investment professionals face on a daily basis.
- This reading describes the importance of building a positive community of reputable investment professionals who strive to meet and surpass industry expectations.
- Candidates will learn that Ethics is not just about one individual’s good choices but the aggregate of ethical decisions made by a community of members.
“Through members’ and candidates’ adherence to these principles as a whole, the integrity of and trust in the capital markets are improved.”
Guidance for Standards I–VII
Candidates are expected to understand how to apply the Code of Ethics and Standards of Professional Conduct to real-world situations that they may face as professional financial analysts.
Guidance for Standards is broken down into seven general sections, each with its own subcategories:
- Professionalism
- Integrity of Capital Markets
- Duties to Clients
- Duties to Employers
- Investment Analysis, Recommendations, and Actions
- Conflict of Interest
- Responsibilities as a CFA Institute Member or CFA Candidate
The readings will instruct students on procedures designed to prevent violations and conduct themselves appropriately in situations involving their professional integrity.
Introduction to the Global Investment Performance Standards (GIPS)
The Global Investment Performance Standards are voluntary ethical guidelines applied to investment performance reporting and designed by the CFA Institute in partnership with GIPS Standards sponsors and industry experts. Investment firms and asset owners abide by GIPS as a commitment to transparency for investors.
- This reading provides an introduction to GIPS standards and explains the reasoning behind their creation.
- Candidates will become familiar with the benefits of industry-wide standards and their elevation of the community as a whole.
Ethics Application
- This reading provides candidates with the opportunity to exercise their newly acquired ethics thinking.
- Candidates will apply their knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct to a series of real-world scenarios. After selecting an answer, the reading presents the correct response and the rationale behind it.
CFA Ethics Level 1 Sample Questions and Answers
The sample questions are typical of the probing multiple-choice questions on the L1 exam. During the exam, you have about 90 seconds to read and answer each question, carefully designed to test knowledge from the CFA Curriculum. UWorld’s question bank is built to expose you to exam-like questions and illustrate and explain the concepts tested thoroughly.If a professional organization has standards of conduct in addition to its code of ethics, the purpose of the standards is most likely to describe:
- shared principles.
- laws and regulations.
- acceptable behaviors.
Zhao Fen, CFA, is an independent investor. She holds a large position of Formula Industries, a lightly traded stock with low liquidity, in one of her two personal accounts. If Zhao wishes to exit the position, which of the following would most likely violate the Standards?
- Using an intermediary to sell the position outside of the market to avoid price impacts.
- Selling her holdings as one position, which would likely cause a large drop in the price.
- Trading the stock between personal accounts to attract interest from other market participants.
Letitia Armando, CFA, works for a global investment bank. She is transferred to an office in an emerging market country. The local office staff suggest that Armando pay an unofficial “administrative fee” to local regulatory officials in return for ensuring that the bank receives approval on new public offerings. Armando researches local law and finds that it does not prohibit such payments and that, in fact, it is the accepted local practice. If Armando pays the officials, will she most likely violate Standard I: Professionalism?
- No, since the payments are not illegal
- No, since the standard requires compliance with local law
- Yes, since the payments compromise the officials’ objectivity
What to Expect in CFA Level 2 Ethics?
CFA Level 2 Ethics is one of the most heavily weighted topics on the exam, with a weighting of 10-15%. The topic material reiterates about 80% of the material found in the CFA Level 1 Ethics. Level 2 introduces the “item set” format for the entire exam, including Ethics. This form of testing ensures that candidates have a deeper understanding of the material.
Exam Weighting
The CFA Level 2 Ethics topic has an exam weighting of 10-15%, such that approximately 8-12 of the 88 CFA Level 2 exam questions or 2 – 3 item sets focus on this topic.
| Topic Weight | No. of Learnings Modules | No. of Formulas | No. of Questions |
|---|---|---|---|
| 10-15% | 3 | 0 | 8 – 12 |
Level 2 Ethics 2024 Syllabus, Readings, and Changes
The key 2024 CFA exam change for the CFA Level 2 candidates involves the introduction of Practical Skills Modules (PSMs) beginning in May 2024.
| No. of Learning Modules: 3 | No. of LOS: 6 | |
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Summary
Dives deeper into the CFAI Code of Ethics and Standards of Professional Conduct and how candidates can use these codes and standards to resolve ethical conflicts in the investment profession. Candidates will confront numerous case applications. |
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Code of Ethics and Standards of Professional Conduct
- This reading dives deeper into the nuances of the Standards of Practice Handbook presented in the analog chapter in CFA Level 1 Ethics.
- Candidates will study the six components of the Code of Ethics and the seven Standards of Professional Conduct.
Guidance for Standards I–VII
Candidates must demonstrate their knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct through its application. The seven standards were presented in a similar reading for Level 1. The reading recommends various procedures that candidates will use to prevent code and standard violations and best practices from upholding them.
Application of the Code and Standards: Level 2
- Like the related reading in CFA Level 1 Ethics, this reading will show how to apply the CFAI Codes and Standards to various real-world situations.
- Candidates will learn about the ethical decision-making process and readily identify where particular Codes and Standards are considered relevant.
CFA Ethics Level 2 Sample Questions and Answers
The sample questions here are typical of the L2 exam’s complexity and depth: formatted as item sets, with a vignette to deliver a scenario that tests the CFA L2 Curriculum. On the actual exam, each vignette applies to four questions; we’ve thrown in a couple extra to learn more. And be sure to review the illustrated explanations we’ve provided for each question: UWorld’s question bank is designed to expose you to exam-like questions and explain the concepts tested thoroughly.Passage
Tom Johnson, CFA, is a portfolio manager at Universal Advisors, a US-based wealth management firm that serves high-net-worth individuals and families. Universal’s equity portfolio offering includes separately managed accounts (SMAs) in which clients own individual securities. Johnson manages the portfolio with an aggressive high-risk, high-reward strategy, investing mostly in small-cap growth stocks. To reduce transaction costs and to simplify trading and settlement, Universal buys only US-listed securities for client accounts.
Johnson instructed Francois Martin, a CFA Level II candidate and new equity analyst at the firm, to conduct research on Vent Industries, a French wind turbine manufacturer. Vent is dually listed on exchanges in France and in the US. Martin, a French national who recently moved to the US, is already familiar with the company since he has been following it personally for the past two years.
After completing due diligence on Vent, Martin is thoroughly impressed by the investment prospects and suggests that Johnson add the US-listed shares of Vent to client portfolios. Johnson, as the sole decision-maker, reviews Martin’s research and financial models but wants to think about the suggestion before reaching a conclusion.
Martin is so impressed with Vent’s investment prospects that he wants to buy it for his personal account. For guidance, Martin references Universal’s publicly available personal transaction disclosure, which states only the following:
“Investment personnel are subject to policies and procedures regarding their personal trading.”
Needing more detail, Martin checks with the firm’s compliance officer, who informs him that the firm does have policies and procedures designed to prevent potential conflicts of interest related to personal trading. Universal does not require that employees obtain preclearance before trading, but the firm’s policies do require:
- a two-day blackout period before and after client trades, and
- a quarterly report by its investment decision-making personnel on transactions and holdings.
Based on this information, Martin immediately places an order to buy Vent shares listed in France through his personal French brokerage account, which he established prior to joining Universal. Three days later, Johnson decides to invest for clients in the US-listed shares of Vent and places the order through Universal’s trading desk.
Johnson is a board member for a local hospital endowment; for this, he receives modest compensation. Universal has approved Johnson’s board participation and compensation. Johnson is considered to be a thoughtful and successful investor. The other board members, unhappy with the fees and performance of the endowment’s existing income-oriented large-cap equity manager, asked Johnson a year ago if he would be willing to manage the equity portion of the
endowment. Johnson responded by stating:“The hospital provides so much to this community, I would be happy to manage the endowment’s equity portfolio. It won’t even take much time; I will manage the endowment portfolio as an exact replica of Universal’s equity portfolio.”
The next month, without informing Universal, Johnson began managing the endowment portfolio as a mirror image of Universal’s equity strategy.
Recently, Johnson evaluated the investment prospects of an upcoming IPO for a small-cap biotech firm. The company does innovative cancer research, but it is still years away from profitability. After conducting thorough due diligence, Johnson has concluded this is a great investment opportunity; he would like the hospital endowment to participate, believing the other board members would be excited about the company’s cancer research.
Johnson speaks to Universal’s lead underwriter and requests that 5% of the firm’s IPO allotment be allocated to the endowment. A few days later, when the IPO is priced and allocated, Universal receives 95,000 shares and the endowment receives 5,000 shares.
Do Universal’s personal transaction disclosure policies comply with CFA Institute’s required and recommended procedures?
- No.
- Yes, since no disclosure is required.
- Yes, since they meet the minimum disclosure requirements.
Which of Universal’s procedures for personal investing by employees is inconsistent with CFA Institute’s required and recommended procedures?
- There is no preclearance requirement.
- Transaction and holdings disclosures are not frequent enough.
- The blackout period is insufficient to prevent front-running of client trades.
According to Standard VI(B) Priority of Transactions, when Martin bought shares of Vent, he most likely:
- violated the Standards.
- did not violate the Standards since the trade was outside the blackout period.
- did not violate the Standards since the transaction was in a different market than client transactions.
What to Expect in CFA Level 3 Ethics?
CFA Level 3 Ethics is one of the most heavily weighted topics on the exam, with a weighting of 10-15%. The topic material reiterates and expands on content from the CFA Level 1 and Level 2 Ethics. However, there are two additional sections:
- Asset Manager Code of Professional Conduct
- Global Investment Performance Standards (GIPS)
Level 3 questions are mixed between “constructed response” (essay) and 44 item-set, multiple-choice questions. The exam tests the candidates’ ability to apply ethical frameworks to complex situations and explain the reasoning behind their conclusions.
Exam Weighting
The CFA Level 3 Ethics topic has a weighting of 10-15%. There could be a blend of item set questions (44 total) and constructed response (essay) questions.
| Topic Weight | No. of Readings | No. of Formulas | No. of Questions |
|---|---|---|---|
| 10-15% | 5 | 0 | ca. 6 ( 1 – 2 item sets; 4 – 8 questions and/or constructed responses) |
Level 3 Ethics 2024 Syllabus, Readings, and Changes
The Level 3 exam’s curriculum hasn’t changed much from that of 2023. However, there are 2 additional readings in 2024, thus subsequently increasing the LOS.
There are no study sessions announced as of now.
| Study Session | No. of Readings | No. of LOS |
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| 15 | 5 | 20 |
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Summary
Provides a framework for ethical conduct via principles covered in the CFAI Standards of Practice Handbook. Demonstrates practical application of such concepts in everyday situations. |
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Code of Ethics and Standards of Professional Conduct
At this point, candidates should be familiar with the Standards of Practice Handbook and how to apply its content to real ethical dilemmas faced by investment professionals on a daily basis. This reading will focus more on procedures for preventing Ethics violations and applying concepts to more complex situations.
Guidance for Standards I–VII
Candidates must demonstrate their knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct through its application. The seven standards were presented in the “Guidance for Standards I–VII” section for Level 1.
Application of the Code and Standards: Level III
Like the related sections in CFA Level 1 and Level 2 Ethics, this reading will show how to apply the CFAI Codes and Standards to various real-world situations. Candidates will learn about the ethical decision-making process and readily identify where particular Codes and Standards are considered relevant.
Asset Manager Code of Professional Conduct
The CFA Institute Asset Manager Code enumerates the ethical responsibilities regarding asset management. The six categories are:
- Loyalty to clients
- Investment process and actions
- Trading
- Risk Management, compliance, and support
- Performance reporting and valuation
- Disclosures
Organizations typically have unique standards of conduct. The CFA Institute Asset Manager Code makes it easy for clients to identify which organizations follow a particular set of ethical principles. The reading introduces candidates to this code, how to follow it, and why it is important.
Overview of the Global Investment Performance Standards (GIPS)
Candidates will be familiar with GIPS from the related Level 1 reading. GIPS is a voluntary ethical guideline for reporting investment performance, designed by the CFA Institute in partnership with GIPS Standards sponsors and industry experts. Investment firms and asset owners abide by GIPS as a pledge of ethical integrity and transparency to investors.
Candidates will learn more about the valuation hierarchy of the GIPS standards, the role of investment mandates and objectives, and the need for globally accepted standards for investment management firms.
Code of Ethics and Standards of Professional Conduct
A carryover from what was included in Level 1, the candidates will now learn how to describe the structure of the CFA Institute Professional Conduct Program and the disciplinary review process for the enforcement of the CFA Institute Code of Ethics and Standards of Professional Conduct.
Additionally, the candidates will also be familiarized with the ethical responsibilities required by the Code and Standards, including the sub-sections of each standard.
Study Tips for CFA Ethics
1. Read the question carefully and highlight key details
Pay close attention to the anecdote in the question. Frequently, a candidate makes mistakes by forgetting key phrases such as 'always,' 'never,' or 'didn't. You'll want to return to the “story” after reading each question and note keywords and phrases.
2. Be sure you understand what is being asked
Most Ethics questions test the Standards by presenting a scenario and asking candidates to identify a violation, explain how an action is a violation, or identify an appropriate course of action.
3. Make sure you read the Ethics section several times
Ethics questions are nuanced and confusing, and settling on the correct answer takes time. The good news is that once you've done so, you'll be rewarded in Levels 2 and 3. Much of the Ethics content is the same at all levels. It will take some repetition to get you to think about it the right way. Instead of cramming it all in at the end, try doing some questions every day for a few weeks.
4. Understand the differences between the seven Professional Conduct Standards and the six Codes of Ethics
The curriculum defines a code of ethics as a general guideline for behavior, while standards of conduct are more specific recommendations of what constitutes “minimally acceptable behavior.”
You must distinguish between the CFA Code of Ethics and the Standards. The following are the six Codes of Ethics:
- Act with integrity and in an ethical manner
- Place the profession and interest of clients over personal interest.
- Conduct all professional activities (such as investment analysis, recommendations, etc.) with reasonable care and independent judgment.
- Work in a professional manner and encourage others to do so.
- Promote the integrity of capital markets and support the rules governing the markets
- Maintain and improve professional competence
Here are the seven primary Professional Conduct Standards (there are 22 subsections in total, which are not listed)
- Professionalism (A)-(D)
- Integrity of capital markets (A)-(B)
- Duties to clients (A)-(E)
- Duties to employers (A)-(C)
- Investment analysis, recommendations, and actions (A)-(C)
- Conflicts of interest (A)-(C)
- Responsibilities as a CFA Institute member or CFA candidate (A)-(B)
5. Don't rely on memorization alone
Because some industry-specific scenarios (such as the Standards and Codes) are challenging to generalize, CFA Level 1 Ethics requires a little more knowledge. But you don't need to memorize things like the numbering of the Standards. Instead, you should figure out how the reasoning works, such as what is allowed and what is not allowed.
6. Don't rely on “being ethical”
Many candidates make the mistake of thinking that because they are ethical and behave ethically, they do not need to study. Or that Ethics is the least important material to invest time in; instead, they can skim the learning modules right before the exam. Remember that CFA Institute is not testing you but your ability to identify ethical standards, apply them appropriately, and avoid violating them. You must be familiar with the Standards and their applications in the investment profession. Also, keep in mind that ethics is the largest single topic area on the L1 exam.
7. It's a Must to Do a Lot of Ethics Practice Questions
Answering Ethics questions requires familiarity with both the question style and the source material — knowing what keywords to avoid, predicting typical pitfalls, and sifting out extraneous data.
- Practicing a large number of questions ahead of time will help you avoid any unpleasant shocks on the exam.
- Read all of the Ethics practice questions and answers in the CFA curriculum. Learn how rules are interpreted and applied.
- Complete all the 'blue box' questions before moving on to the End of Chapter (EOC) questions.
- For further questions, check out the CFA Institute's online Learning Ecosystem and Standards of Practice Manual.
- Then, if you have time, review them again before looking at UWorld’s Qbank.
- It is better to comprehend the theory, return to the CFA curriculum notes and revisit relevant sections to reinforce your CFA Ethics knowledge.
- Also, complete as many Ethics questions as possible, then read the explanation solutions for correct and incorrect answers. Slowly but steadily, you'll get the hang of it, honing your "ethical intuition" along the way.
8. If you have time, make summary notes or flashcards
This helps you save time throughout the practice questions phase and when swiftly revising Ethics subjects. It also saves a lot of time for Levels 2 and 3 when you should be focusing on more complex topics.
For more information, visit our CFA Level 1 Study Guide and CFA Level 2 Study Schedule
