Code of Ethics and Standards - Standards I–VII overview and ...

Learning Outcomes

This article explains how the CFA Institute Code of Ethics and Standards of Professional Conduct (Standards I–VII) are organized, applied, and tested in the Level I exam, including:

• Clarifying the relationship between the overarching Code of Ethics and the seven Standards, and how principles flow down into specific rules and examples
• Identifying who is bound by the Code and Standards, when they apply, and which activities and types of conduct fall within their scope
• Summarizing the high-level purpose, structure, and core themes of each of the seven Standards so you can quickly match a scenario to the correct Standard
• Distinguishing how the Code and Standards interact with local law and firm policies, and determining which requirement takes precedence when rules conflict
• Recognizing common fact patterns that indicate likely violations or compliant behavior, such as misuse of material nonpublic information, unfair client treatment, or misrepresentation
• Practicing how to dissect short exam vignettes to isolate the relevant facts, identify the applicable Standard, and decide whether conduct is permitted or prohibited
• Reinforcing exam technique for Ethics questions, including eliminating distractor answer choices that cite the wrong Standard or misstate key requirements
• Building a concise mental checklist of the seven Standards that can be recalled under time pressure during the exam.

CFA Level 1 Syllabus

For the CFA Level 1 exam, you are required to understand the content, structure, and objectives of the CFA Institute Code of Ethics and Standards of Professional Conduct, with a focus on the following syllabus points:

• Identify the seven Standards of Professional Conduct and summarize what each covers
• Recognize the broad scope and main subtopics within each Standard
• Understand how the Standards apply to real-world ethical scenarios for investment professionals
• Distinguish between legal requirements, firm policies, and the higher expectations of the Code and Standards
• Recall the significance and expectations placed upon CFA charterholders and candidates regarding compliance

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which Standard primarily addresses the use of material nonpublic information?
   1. Standard I: Professionalism
   2. Standard II: Integrity of Capital Markets
   3. Standard IV: Duties to Employers
   4. Standard VI: Conflicts of Interest
2. When local law is less strict than the CFA Institute Code and Standards, a member or candidate must:
   1. Follow only local law, because it is legally binding
   2. Follow the Code and Standards, because they are stricter
   3. Follow firm policy only, even if it is less strict
   4. Decide case by case which rule is more convenient
3. Which of the following topics is most closely associated with Standard III (Duties to Clients)?
   1. Use of soft dollar or client brokerage
   2. Proper reference to the CFA charter
   3. Market manipulation
   4. Personal misconduct unrelated to professional activity
4. Responsibilities to employers and responsibilities as a CFA member or candidate are:
   1. Combined in a single Standard
   2. Covered separately by Standards IV and VII
   3. Not explicitly covered by the Standards
   4. Only relevant to CFA charterholders, not candidates

Introduction

The CFA Institute Code of Ethics and Standards of Professional Conduct set the minimum benchmark for ethical behavior by CFA Institute members and candidates. These rules define what is considered professional conduct in the investment profession and are mandatory for anyone in the CFA Program or who holds the CFA charter. The Code and Standards create both a basis for personal integrity and a framework for trustworthy relationships with clients, employers, and all participants in the global financial markets.

Key Term: CFA Code of Ethics
The set of six fundamental ethical principles that state the overarching duties of CFA Institute members and candidates: to act with integrity, competence, diligence, and respect; to place client and market integrity above personal interests; to use reasonable care and independent judgment; to practice and encourage others to practice ethically; to uphold the integrity of global capital markets; and to maintain and improve professional competence.

Key Term: Standards of Professional Conduct
The seven broad rules (Standards I–VII) that specify and illustrate particular forms of professional conduct required of CFA Institute members and candidates as a condition of participation in the CFA Program or holding the CFA designation.

The Code of Ethics is aspirational: it describes the kind of professional you should strive to be. Standards I–VII are more specific and prescriptive: they tell you what you must or must not do in particular areas such as research, trading, dealing with clients, or using the CFA designation. Both the Code and the Standards are enforceable.

Who Must Comply and When

All CFA Institute members (regular and affiliate) and all CFA Program candidates must comply with the Code and Standards:

• In all professional activities related to investment analysis, recommendations, trading, portfolio management, performance reporting, and advisory services
• In any professional role in which their conduct could affect the reputation of the investment profession
• In some serious cases, even in personal conduct (for example, fraud or dishonesty in private life) if it reflects adversely on professional integrity

Key Term: Covered Person
Any CFA Institute member or CFA Program candidate who is subject to the CFA Institute Code of Ethics and Standards of Professional Conduct in both professional and, where relevant, personal activities.

Members and candidates must also complete an annual Professional Conduct Statement, disclosing potential violations or investigations. Breaches can lead to discipline by the CFA Institute Professional Conduct Program (PCP), including suspension of candidacy or revocation of the charter.

Key Term: Professional Conduct Program (PCP)
CFA Institute’s enforcement mechanism that investigates alleged violations of the Code and Standards and can impose sanctions such as public censure, suspension, or revocation of membership or candidacy.

Relationship to Laws and Firm Policies

A frequent exam theme is how the Standards interact with local laws and employer policies:

• If applicable law is stricter than the Code and Standards: follow the law.
• If the Code and Standards are stricter than applicable law: follow the Code and Standards.
• If firm policies are stricter than both: follow firm policy.

Members and candidates must know the laws that apply to their professional activities and adopt the most stringent rule among law, firm policy, and the Code and Standards.

The Scope of Standards I–VII

The CFA Standards of Professional Conduct are divided into seven broad categories, each covering a key dimension of ethical and professional behavior for investment professionals. You should be able to recognize the title, core idea, and common applications of each Standard.

Standard I: Professionalism

Standard I sets expectations for professional conduct. It requires compliance with laws and regulations, supports independence and objectivity, and prohibits actions detrimental to the profession’s reputation.

Key Term: Professionalism (Standard I)
The Standard addressing integrity, legal compliance, independent judgment, and the avoidance of misrepresentation and misconduct that could damage the reputation of the investment profession.

Standard I includes four main areas:

• Knowledge of the Law: Understand and comply with all applicable laws, rules, and regulations; use the strictest applicable standard.
• Independence and Objectivity: Avoid gifts, benefits, or arrangements that could compromise or appear to compromise independence and objectivity in research, recommendations, or actions.
• Misrepresentation: Do not misrepresent investment performance, services, or qualifications; do not guarantee returns; do not plagiarize research.
• Misconduct: Do not engage in dishonesty, fraud, or deceit, or commit any act that reflects adversely on professional reputation, integrity, or competence.

Typical exam questions here ask whether an analyst receiving issuer-paid travel, entertainment, or gifts has compromised independence and objectivity, or whether a research report improperly copied others’ work without attribution.

Standard II: Integrity of Capital Markets

Standard II prohibits any conduct undermining the fairness and integrity of financial markets, such as using material nonpublic information or engaging in market manipulation.

Key Term: Integrity of Capital Markets (Standard II)
The Standard requiring members and candidates to avoid actions or use of information that could compromise the fairness, efficiency, or transparency of capital markets.

Standard II has two parts:

• Material Nonpublic Information: Do not trade or cause others to trade on material information that is not public.
• Market Manipulation: Do not engage in practices that distort prices or trading volume for personal or client benefit.

Key Term: Material Nonpublic Information
Information that is both material (its disclosure would likely affect a security’s price or an investor’s decision) and nonpublic (not available to the general market).

Key Term: Composite Information Approach
The approach in which an analyst lawfully combines nonmaterial nonpublic information with public information to form an investment conclusion. Trading on such a conclusion is allowed because it does not rely on material nonpublic information.

Standard II is heavily tested at Level I, especially scenarios around insider information, expert networks, and information “leaks.”

Standard III: Duties to Clients

Standard III requires CFA Institute members and candidates to put client interests above their own, act with loyalty, provide fair treatment, preserve confidentiality, and ensure diligence and suitability in investment recommendations.

Key Term: Duties to Clients (Standard III)
The Standard requiring members and candidates to always prioritize client interests, act loyally, fairly, and diligently, provide suitable advice, present performance fairly, and maintain client confidentiality.

Key themes under Standard III include:

• Loyalty, Prudence, and Care: Place client interests before your own or your firm’s; seek best execution; use client brokerage for the client’s benefit.
• Fair Dealing: Deal fairly and objectively with all clients when providing investment analysis, recommendations, or actions; no favoritism to large or important clients.
• Suitability: Make sure recommendations and actions are suitable based on the client’s financial situation, objectives, and constraints; maintain and update an investment policy statement (IPS).
• Performance Presentation: Present performance information that is fair, accurate, and complete; avoid misrepresentations of past performance.
• Preservation of Confidentiality: Keep client information confidential unless disclosure is required by law, the client permits it, or it is necessary to prevent the client’s illegal activities.

Key Term: Suitability
The requirement that investment recommendations and actions must be appropriate for a client’s financial situation, objectives, risk tolerance, and constraints, as documented in the client’s investment policy or profile.

Standard III is the core of client-focused exam questions, often combined with questions about risk tolerance, IPS updates, or performance reports.

Standard IV: Duties to Employers

Standard IV outlines member responsibilities of loyalty, diligence, and care in working for an employer, and obligations not to misappropriate resources or confidential information.

Key Term: Duties to Employers (Standard IV)
The Standard covering loyalty, proper conduct toward employers, prohibition on misuse of employer property or client lists, and duties of supervision.

Main elements include:

• Loyalty: Act for the benefit of the employer; do not harm the employer’s business; do not divert clients or opportunities while still employed.
• Additional Compensation Arrangements: Obtain written consent from all parties before accepting compensation or benefits from third parties that could create conflicts with employer interests.
• Responsibilities of Supervisors: Make reasonable efforts to detect and prevent violations by those under your supervision; implement adequate compliance systems.

Standard IV questions often involve employees planning to leave a firm, handling proprietary models or client lists, or supervisors failing to establish or enforce compliance procedures.

Standard V: Investment Analysis, Recommendations, and Actions

Standard V focuses on diligence and thoroughness in investment research, maintaining independence, and supporting recommendations and actions with appropriate research and sound judgment.

Key Term: Investment Analysis and Actions (Standard V)
The Standard mandating diligence and a reasonable basis for all analyses and recommendations, clear communication of the investment process and risks, and proper recordkeeping to support investment decisions.

Standard V covers:

• Diligence and Reasonable Basis: Exercise diligence, independence, and thoroughness; have a reasonable and adequate basis for all investment analysis and recommendations.
• Communication with Clients and Prospective Clients: Disclose basic format and general principles of investment processes, significant limitations, and risks; distinguish clearly between fact and opinion.
• Record Retention: Maintain appropriate records to support investment-related communications and actions; records belong to the firm, not the individual analyst.

Key Term: Soft Dollar Arrangements
Also called soft commissions, these are arrangements where client brokerage is used to purchase research or services. Under the Code and Standards, such arrangements must benefit the client and be disclosed.

Standard V exam questions typically test whether an analyst’s research process and documentation are sufficient, and whether communication with clients is transparent and accurate.

Standard VI: Conflicts of Interest

Standard VI requires clear and prompt disclosure of actual and potential conflicts of interest to maintain transparency and protect client interests.

Key Term: Conflicts of Interest (Standard VI)
The Standard requiring that all material conflicts, including beneficial ownership, compensation arrangements, and referral fees, are fully and prominently disclosed to clients and employers; also requires client transactions to have priority over personal trades.

Standard VI emphasizes:

• Disclosure of Conflicts: Fully disclose any matter that could impair independence and objectivity or interfere with duties to clients and employers.
• Priority of Transactions: Client transactions must take precedence over personal transactions and those of the firm.
• Referral Fees: Disclose to clients and employers any compensation, consideration, or benefit received for recommending products or services.

Key Term: Beneficial Ownership
A direct or indirect interest in securities (such as owning them, having the right to vote them, or having economic exposure through derivatives) that could create a conflict with client trades and must be disclosed when material.

Conflicts questions commonly involve front‑running (trading ahead of client orders), employee share ownership, or undisclosed referral fees.

Standard VII: Responsibilities as a CFA Member or Candidate

Standard VII mandates conduct that maintains the reputation and integrity of the CFA designation, and compliance with all program rules, policies, and procedures—including not cheating or misrepresenting work as original.

Key Term: Responsibilities as a CFA Member or Candidate (Standard VII)
The Standard requiring conduct that upholds the CFA Institute and CFA designation’s reputation and mandates full compliance with the CFA Program’s rules, exam policies, and proper reference to the designation and candidacy.

Key aspects include:

• Conduct as CFA Institute Members and CFA Candidates: Do not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation; obey all testing rules; no cheating, sharing exam content, or assisting others improperly.
• Reference to CFA Institute, the CFA Designation, and the CFA Program: Use the designation and candidacy references properly; do not overstate the meaning of the charter or imply guaranteed investment performance.

Typical exam traps include statements like “I am a CFA” (incorrect) or claims that obtaining the charter guarantees superior investment performance.

Overview of Standards I–VII in Exam-Friendly Form

Instead of a table, you can think of the seven Standards as a mental checklist:

• Standard I – Professionalism: Integrity, legal compliance, independence, and avoiding misrepresentation or misconduct.
• Standard II – Integrity of Capital Markets: Fair markets, no insider trading, no market manipulation.
• Standard III – Duties to Clients: Loyalty, fair dealing, suitability, performance presentation, confidentiality.
• Standard IV – Duties to Employers: Loyalty, restrictions on outside compensation, supervisory responsibilities.
• Standard V – Investment Analysis, Recommendations, and Actions: Diligence, reasonable basis, clear communication, recordkeeping.
• Standard VI – Conflicts of Interest: Full disclosure, priority of client transactions, referral fee transparency.
• Standard VII – Responsibilities as a CFA Member or Candidate: Program integrity and correct use of the CFA designation and candidacy.

Worked Example 1.1

A CFA candidate receives material nonpublic information about an upcoming merger from a friend at a listed company. Can she trade the shares on behalf of a client, provided she tells her supervisor?

Answer:
No. This violates Standard II (Integrity of Capital Markets), specifically the prohibition on using material nonpublic information. Disclosure to a supervisor or acting for a client does not remove the prohibition. She must not trade or cause others to trade on the information and should inform compliance if appropriate.

Worked Example 1.2

An analyst joins a new firm and brings with him records and client lists from his former employer, even though his employment agreement prohibits this. Which Standard does this likely violate?

Answer:
This behavior violates Standard IV (Duties to Employers), which prohibits misappropriation of employer property, including client lists and confidential records. It may also violate Standard I (Professionalism) by breaching legal and contractual obligations. Unless explicitly authorized, client lists and research records belong to the former employer.

Worked Example 1.3

A portfolio manager distributes a new stock recommendation to her largest institutional clients in the morning and waits until the afternoon to send it to smaller retail clients. She explains that her “best clients” deserve to receive information first. Is this consistent with the Standards?

Answer:
No. This practice breaches Standard III (Duties to Clients), specifically Fair Dealing. Members and candidates must deal fairly and objectively with all clients when disseminating investment recommendations. While not all clients must be treated identically, providing a systematic time advantage to favored clients without a legitimate reason is not permitted.

Worked Example 1.4

An analyst receives an all‑expenses‑paid trip from a company’s investor relations department in exchange for writing a research report. The analyst discloses the trip only to her supervisor, not to clients who read the report. Is this acceptable?

Answer:
No. The arrangement raises issues under Standard I (Professionalism) – Independence and Objectivity, and Standard VI (Conflicts of Interest). Gifts or benefits that could compromise or appear to compromise objectivity should be refused or limited, and any such potential conflict must be fully disclosed to clients. Disclosure only to a supervisor is insufficient.

Exam Warning

Exam Warning: A common Level I error is to confuse which Standard covers insider trading versus general research requirements. Standard II deals specifically with material nonpublic information and market manipulation. Standard V focuses on having a reasonable basis, diligent research, clear communication, and proper records. When a question involves privileged information and trading, think Standard II. When it involves research depth or documentation, think Standard V.

Revision Tip

Revision Tip: For the exam, you do not need to memorize every word of each sub‑Standard, but you should:

• Know the title and core theme of each Standard I–VII
• Be able to match common behaviors or scenarios to the correct Standard
• Remember that when rules conflict, the most stringent rule (law, policy, or Code and Standards) applies
  Practicing classification of scenarios by Standard is one of the most efficient ways to improve ethics scores.

Summary

CFA Institute’s Code of Ethics and Standards I–VII define the core professional responsibilities of all members and candidates. The Code sets high‑level ethical principles, while the Standards specify minimum acceptable behavior in seven key areas: professionalism, market integrity, duties to clients, duties to employers, investment analysis and actions, conflicts of interest, and responsibilities as a CFA member or candidate.

For Level I, you must understand who is bound by the Standards, how they interact with laws and firm policies, and the broad scope of each Standard. Most exam questions present a brief scenario and ask whether a specific action complies with the Code and Standards and, if not, which Standard is violated. Being able to quickly identify the relevant Standard and apply its basic requirements is essential.

Key Point Checklist

This article has covered the following key knowledge points:

• The CFA Code of Ethics sets out six overarching ethical principles that guide all professional behavior.
• Standards I–VII translate these principles into specific, enforceable rules that cover all major areas of investment practice.
• Standard I emphasizes professionalism, legal compliance, independence and objectivity, and prohibits misrepresentation and misconduct.
• Standard II protects the integrity of capital markets by prohibiting insider trading on material nonpublic information and market manipulation.
• Standard III defines duties to clients, including loyalty, fair dealing, suitability, fair performance presentation, and client confidentiality.
• Standard IV defines duties to employers, including loyalty, restrictions on outside compensation, and supervisory responsibilities.
• Standard V requires diligent, independent analysis, clear communication of methods and risks, and adequate record retention.
• Standard VI requires clear disclosure and management of conflicts of interest, client priority in trading, and disclosure of referral fees.
• Standard VII governs conduct as a CFA member or candidate, including exam integrity and proper references to the CFA designation and Program.
• Members and candidates must follow the strictest applicable rule among law, firm policy, and the Code and Standards.
• Violations of the Code and Standards can lead to investigation and sanctions by the CFA Institute Professional Conduct Program.

Key Terms and Concepts

• CFA Code of Ethics
• Standards of Professional Conduct
• Covered Person
• Professional Conduct Program (PCP)
• Professionalism (Standard I)
• Integrity of Capital Markets (Standard II)
• Material Nonpublic Information
• Composite Information Approach
• Duties to Clients (Standard III)
• Suitability
• Duties to Employers (Standard IV)
• Investment Analysis and Actions (Standard V)
• Soft Dollar Arrangements
• Conflicts of Interest (Standard VI)
• Beneficial Ownership
• Responsibilities as a CFA Member or Candidate (Standard VII)