CFA® Level I Ethics Guide
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The CFA Institute considers Ethics to be one of the most critical topics in the CFA Program. Ethics is a significant part of all three CFA exam levels. Let’s review what Ethics entails.
What are the seven standards of professional conduct?
1. Professionalism
Knowledge of the Law
Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of a conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations.
Independence and Objectivity
Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.
Misrepresentation
Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
Misconduct
Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.
2. Integrity of Capital Markets
Material Nonpublic Information
Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to work on the news.
Market Manipulation
Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.
3. Duties to Clients
Loyalty, Prudence, and Care
Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must work for the benefit of their clients and place their clients’ interests before their employers or interests.
Fair Dealing
Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.
Suitability
When Members and Candidates are in an advisory relationship with a client, they must:
- Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints before making any investment recommendation or taking investment action and must reassess and update this information regularly.
- Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action.
- Judge the suitability of investments in the context of the client’s total portfolio.
Performance Presentation
When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.
Preservation of Confidentiality
Members and Candidates must keep information about current, former, and prospective clients confidential unless:
- The report concerns illegal activities on the part of the client or potential client,
Disclosure is required by law, or - The client or prospective client permits disclosure of the information.
4. Duties to Employers
Loyalty
In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.
Additional Compensation Arrangements
Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.
Responsibilities of Supervisors
Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.
5. Investment Analysis, Recommendations, and Actions
Diligence and Reasonable Basis
Members and Candidates must:
- Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.
- Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.
Communication with Clients and Prospective Clients
Members and Candidates must:
- Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.
- Disclose to clients and prospective clients significant limitations and risks associated with the investment process.
- Use reasonable judgment in identifying which factors are essential to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients.
- Distinguish between fact and opinion in the presentation of investment analysis and recommendations.
Record Retention
Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.
6. Conflicts of Interest
Disclosure of Conflicts
Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.
Priority of Transactions
Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.
Referral Fees
Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.
7. Responsibilities as a CFA Institute Member or CFA Candidate
Conduct as Participants in CFA Institute Programs
Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.
Reference to CFA Institute, the CFA Designation, and the CFA Program
When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program.
Common CFA Ethics FAQs
How to differentiate between the seven standards of conduct?
Each of the components stands on their own, no need to worry about differentiating them, just memorize each Standard.
What are the global investment performance standards? (GIPS)
GIPS was created to provide a standardized platform for performance reporting to rid the industry of misleading practices. By complying with GIPS, investment firms provide investors with full, fair, and ethical disclosure of historical performance.
What are the six major components of the CFA code of ethics?
Members of CFA Institute and candidates for the CFA
designation must:
- Act with integrity, competence, diligence, and respect and ethically with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and others in the global capital markets.
- Place the integrity of the investment profession and the interests of clients above their interests.
- Use reasonable care, exercise independent professional judgment when conducting investment analysis, make investment recommendations, take investment actions, and engage in other professional activities.
- Practice and encourage others to practice professionally and ethically that will reflect credit on themselves and the profession.
- Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
- Maintain and improve their professional competence and strive to maintain and enhance the competence of other investment professionals.
How can students think outside the box to prepare for the subtle nature of ethics questions on exams?
- The Code of Ethics and the Standards of Professional Conduct are two very distinct things, keep them separate in your mind.
- It is not enough to know that it sounds wrong; it probably is. Memorize the Code of Ethics and the Standards of Conduct, as questions can focus on very subtle distinctions.
- Every time you study for the exam, end with five ethics questions.
- Not everything presented in the exam will be a violation.
What are the helpful resources available to prepare for the CFA Level 1 exam?
While third-party exam prep providers are helpful, this is the one area to spend time memorizing exactly how the CFA institute phrases things.
The Standards of Practice Handbook exam is very good prep.
How is this portion of the test weighted?
15%, which implies 36 exam questions, so don’t take this section lightly.
https://www.cfainstitute.org/en/programs/cfa/curriculum/study-sessions
CFA Level 1 Ethics Tips
Be sure to study.
Seriously, many candidates don’t study Ethics because they think that they already know how to be ethical. They worry that they have more significant, more robust areas to focus on (e.g., Quant, Financial Reporting and Analysis, Fixed Income, etc.). Many also believe that ethics is intuitive and straightforward if you’re a good person and doesn’t need to be “studied.” While not hard to grasp, Ethics is subtle, sophisticated, and very CFA-specific.
Do as many practice problems as you can find
Sufficient practice will give you a feel for how the questions are structured and asked. Although they are multiple-choice questions, Ethics questions are unusual in that the question often contains a small vignette or scenario. The question typically then asks you to interpret the scenario. Studying as many practice questions as possible should give you an appreciation of just how subtle they are – and how careful you need to be in your thinking.
Read the question carefully.
Because of the subtleties, you need to learn to read the questions very carefully. Seemingly small details about the characters, their actions, and/or their relationships can make a huge difference in your ability to answer correctly. Two things to specifically look for are relationships and timing.
Relationships are often the key.
A Standard’s application often hinges on a character’s role in the scenario; that is, whether a character is a client, former client, potential client, or an employer, previous employer, soon-to-be-former employer, etc. Pay attention to those roles and relationships and understand how they affect applications of the Standard.
Timing can be everything.
Pay attention to the sequence of events in a scenario. Often, that affects applications of the Standards. It is essential to understand what an individual does, but what s/he knew when s/he did it, or who s/he was when s/he did it.
Why it's so essential to ace the Ethics section of the exam.
Of course, it’s essential to ace the entire exam, but here are specific reasons to know Ethics without any doubts:
- It’s a large portion of the exam
- It’s not that difficult to ace it if you have studied and practiced. That is, there is potentially a more significant return on your study investment.
- If you are a borderline pass, your Ethics score can nudge you into the passing zone.
- In sum, it’s low-hanging fruit – and there are lots to be had – if you have prepared.
Ethics is a significant part of the CFA exam and is taken very seriously by the CFA Institute, and yet it is an area often neglected by candidates. Many candidates believe they are ethical, and therefore reason there is little use in committing much study time to the topic when other “tougher” sections loom large. Many also believe that Ethics is very intuitive and straightforward, but again, CFA exam questions on the subject are subtle, sophisticated, and very CFA-specific. For the well-prepared student, the exam’s Ethics portion provides great study time value with significant payback opportunities at test time.
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