CFA Level 1 · Module 01 Ethical and Professional Standards · Chapter 2
The previous reading explained why the investment profession runs on trust and why a written code is what makes that trust credible. This reading is where that code becomes concrete. It sets out the actual instrument every CFA Institute member and candidate agrees to live by: the Code of Ethics, a short set of high-level principles, and the Standards of Professional Conduct, a longer set of specific, enforceable rules. Together they are usually called the Code and Standards, and they are the single most heavily tested body of material at Level 1.
Your job in this chapter is not to argue about ethics in the abstract but to learn a structure precisely. You need to be able to name the six components of the Code, name the seven Standards in order, and explain what each sub-section of each Standard requires. The exam rewards exactly this: it asks which Standard a situation falls under, whether a described action complies or violates, and what the specific sub-sections say. Everything that follows is built to make that structure stick.
One note on how MidhaFin teaches this reading. The official Code and Standards are the intellectual property of CFA Institute and their exact wording lives in the Standards of Practice Handbook, which is the document you should read for the precise legal text. What this lesson does is teach the meaning of every principle and every sub-section in plain language, with original illustrations invented by MidhaFin, so that you understand and remember what each one requires. When you sit the exam you are tested on the substance of the responsibilities, and that substance is what this page delivers.
The Code and Standards come in two layers, and the difference between them is worth getting straight before anything else. The Code of Ethics is a short statement of high-level, aspirational principles: what an ethical investment professional aims to be. It is written in broad terms, such as acting with integrity or placing client interests first, and it sets the tone. The Standards of Professional Conduct are the practical rules that follow from those principles: what an ethical investment professional must actually do and must not do, spelled out in enough detail to be enforced.
The reading describes the two as an interwoven tapestry, and that image is useful. The Code tells you the direction; the Standards tell you the specific steps. A principle in the Code, such as maintaining professional competence, reappears as a concrete rule in the Standards, in this case Standard I(E) Competence. When you meet a rule in the Standards, it always traces back to a principle in the Code, and when you read a principle in the Code, the Standards are where it is made operational and testable.
Both apply to the same people: all CFA Institute members, including CFA charterholders, and all candidates enrolled in the CFA Program. Acceptance is personal and mandatory, not optional, and candidates are bound from the moment they register, not only once they earn the charter. Firms are encouraged to adopt the Code and Standards as their own, and many do, but the obligation that the exam cares about is the individual one: you, personally, must comply.
A single rule about scope will save you on many questions: where the Code and Standards and an applicable law point in different directions, you follow whichever is stricter. If the law demands more than the Code and Standards, you obey the law; if the Code and Standards demand more than the law, you meet the higher bar of the Code and Standards. The Code and Standards are also global by design, written to hold regardless of local custom or the leniency of a particular jurisdiction, so “it is accepted practice here” is never a defence. And membership is not the trigger for being bound: registering as a candidate is enough, which is why a candidate who has not yet passed a single exam is already fully subject to every Standard on this page.
When you see a question, first decide which layer it is testing. If it asks what a member should aspire to in broad terms, it is pointing at the Code. If it asks whether a specific action was permitted, it is pointing at a Standard and almost always at a particular sub-section. Naming the layer first stops you from answering a specific-rule question with a vague principle.
The Code of Ethics is made up of six statements. You are expected to be able to identify them, so learn them as a set of six duties, each pointing outward to a different group the professional serves. In MidhaFin’s plain-language rendering they are as follows, and the table after captures them for quick review.
First, act with integrity, competence, diligence, and respect, and in an ethical manner, toward everyone you deal with: the public, clients and prospective clients, employers, employees, colleagues in the profession, and other market participants. Second, place the integrity of the profession and the interests of clients above your own personal interests. Third, use reasonable care and exercise independent professional judgment when you analyze investments, make recommendations, take investment actions, and carry out other professional work. Fourth, practise in a professional and ethical way, and encourage others to do the same, so that your conduct reflects credit on you and on the profession. Fifth, promote the integrity and viability of the global capital markets for the ultimate benefit of society. Sixth, maintain and improve your own professional competence and strive to help other investment professionals improve theirs.
| # | In one line | What it commits you to |
|---|---|---|
| 1 | Conduct toward others | Act with integrity, competence, diligence, respect, and in an ethical manner toward the public, clients, employers, colleagues, and other market participants |
| 2 | Priority of interests | Put the integrity of the profession and clients’ interests ahead of your own |
| 3 | Independent judgment | Use reasonable care and independent professional judgment in analysis, recommendations, and actions |
| 4 | Reflect credit | Practise, and encourage others to practise, in a way that reflects credit on you and the profession |
| 5 | Promote market integrity | Promote the integrity and viability of global capital markets for the ultimate benefit of society |
| 6 | Maintain competence | Maintain and improve your own competence and help other professionals improve theirs |
For precision, the exact published wording of the six components is worth reading once as a block. Members of CFA Institute (including CFA charterholders) and candidates for the CFA designation (“Members and Candidates”) must:
Two details in the Code wording are frequent exam targets. The fifth principle ends with the phrase “for the ultimate benefit of society”, and a question may offer a version of the principle that stops short of those words to see whether you know the full statement. The sixth principle covers not only your own competence but also a duty to help raise the competence of others, which candidates often forget. Read the six as precisely as you would read a formula.
The Standards of Professional Conduct are organized into seven numbered groups, each with lettered sub-sections. Learning the seven titles in order, and how many sub-sections each carries, gives you the map you will hang every detail on. The exhibit below is the master reference for the whole reading; the sections that follow walk through each Standard and its sub-sections in turn.
| Standard | Title | Sub-sections |
|---|---|---|
| I | Professionalism | A Knowledge of the Law; B Independence and Objectivity; C Misrepresentation; D Misconduct; E Competence |
| II | Integrity of Capital Markets | A Material Nonpublic Information; B Market Manipulation |
| III | Duties to Clients | A Loyalty, Prudence, and Care; B Fair Dealing; C Suitability; D Performance Presentation; E Preservation of Confidentiality |
| IV | Duties to Employers | A Loyalty; B Additional Compensation Arrangements; C Responsibilities of Supervisors |
| V | Investment Analysis, Recommendations, and Actions | A Diligence and Reasonable Basis; B Communication with Clients and Prospective Clients; C Record Retention |
| VI | Conflicts of Interest | A Avoid or Disclose Conflicts; B Priority of Transactions; C Referral Fees |
| VII | Responsibilities as a CFA Institute Member or Candidate | A Conduct as Participants in CFA Institute Programs; B Reference to CFA Institute, the CFA Designation, and the CFA Program |
In the official wording, the seven Standards of Professional Conduct are titled as follows. Each is developed with its lettered sub-sections in the dedicated chapter that follows.
You will not be asked to recite the Standards word for word, but you must be able to match a scenario to the correct Standard and sub-section, and to say whether conduct complies or violates. A reliable method: identify who is harmed or misled (a client, an employer, the market, CFA Institute) and that usually points you to the right Standard number before you pick the sub-section.
Standard I covers the professional’s relationship to the rules of the game and to their own conduct and skill. It has five sub-sections. I(A) Knowledge of the Law requires you to understand and comply with all applicable laws, rules, and regulations, including the Code and Standards themselves. Where the law and the Code and Standards differ, you follow whichever is stricter. You must not knowingly help in any violation, and if you find yourself connected to one you must dissociate from it.
I(B) Independence and Objectivity requires you to keep your judgment your own. You must use reasonable care to stay independent and objective, and you must not offer, solicit, or accept any gift, benefit, or compensation that could reasonably be expected to compromise your own or anyone else’s independence or objectivity. I(C) Misrepresentation forbids knowingly making any untrue statement about your analysis, recommendations, actions, or other professional activities, which includes plagiarism and misstating your qualifications or performance. I(D) Misconduct is broader than professional work: it prohibits any conduct involving dishonesty, fraud, or deceit, and any act that reflects badly on your professional reputation, integrity, or competence. I(E) Competence, added in 2023, requires you to acquire and maintain the knowledge and skill your role demands.
Setup. Farah, an equity analyst at the fictional Kaveri Research, is invited by a company she covers on an all-expenses-paid trip to tour a remote mine, with luxury travel and a gift she estimates is worth several months of salary. The company hopes for favourable coverage.
Answer: accepting the trip and gift would violate Standard I(B). The fix is to visit on terms that preserve her independence, not to rely on the company’s largesse.
Standard II protects the fairness of the market itself, and it has two sub-sections. II(A) Material Nonpublic Information states that if you possess information that is both material (likely to affect an investment’s value or an investor’s decision) and nonpublic (not yet available to the market), you must not act on it or cause others to act on it. This is the insider-trading rule in ethical form. II(B) Market Manipulation prohibits practices intended to mislead market participants by distorting prices or by artificially inflating trading volume, whether through false information or through trades designed to create a misleading picture of activity.
Setup. Vikram, a fixed-income manager at the fictional Saraswati Capital, learns from a director friend, before any announcement, that a large issuer is about to be downgraded after a failed refinancing. He considers selling the firm’s holding ahead of the news.
Answer: selling ahead of the announcement would violate Standard II(A). The duty to preserve market integrity overrides the chance to avoid a loss.
Standard III is the largest set of client-facing duties, with five sub-sections. III(A) Loyalty, Prudence, and Care establishes that you owe clients loyalty, must act with the care and prudence of a careful professional, and must place clients’ interests ahead of your employer’s and your own. III(B) Fair Dealing requires you to treat all clients fairly and objectively when providing analysis, making recommendations, or taking action; fair does not mean identical, but it forbids favouring some clients over others in ways that disadvantage the rest.
Standard III(A) fixes a strict order of loyalty that many other questions rely on: the client comes first, the employer second, and your own interest last. Whenever a scenario pits these three against each other, the client-first ranking is the tie-breaker. Hold this order in mind and a large share of Duties-to-Clients and Conflicts questions answer themselves.
III(C) Suitability has two branches. In an advisory relationship, you must first learn the client’s circumstances, their experience, risk and return objectives, and constraints, keep that picture current, and then recommend only what suits the client’s situation and written objectives, judged in the context of the whole portfolio rather than security by security. When you instead manage to a stated mandate or strategy, your actions must stay consistent with that mandate. III(D) Performance Presentation requires that performance information you communicate be fair, accurate, and complete. III(E) Preservation of Confidentiality requires you to keep client information confidential, with narrow exceptions: when the information concerns the client’s illegal activities, when disclosure is required by law, or when the client permits it.
Setup. Neha, an adviser at the fictional Rohtak Wealth, has a retired client whose written objective is steady income with low risk. A new structured product offers a high headline yield but carries significant capital risk and a long lock-up. Neha’s desk is promoting it heavily.
Answer: recommending the product would violate Standard III(C). Neha must recommend only what fits the client’s documented low-risk income mandate.
Standard IV governs the relationship with your employer and has three sub-sections. IV(A) Loyalty requires you, in matters related to your work, to act for your employer’s benefit: not to deprive the employer of your skills, not to divulge confidential information, and not to otherwise cause the employer harm. It is the Standard behind questions about leaving a firm, soliciting clients, and taking records. IV(B) Additional Compensation Arrangements prohibits accepting gifts, benefits, or compensation that competes with, or could create a conflict with, your employer’s interest, unless you get written consent from all parties involved. IV(C) Responsibilities of Supervisors requires anyone with supervisory authority to make reasonable efforts to ensure that those under them comply with applicable laws, rules, regulations, and the Code and Standards; supervision is an affirmative duty, not merely a duty to react after a violation is found.
Candidates often read Standard IV(C) as a duty only to catch and punish wrongdoing. It is broader: a supervisor must take reasonable steps to prevent violations, for example by putting adequate compliance procedures in place. Focusing only on detection, and ignoring prevention, is itself a supervisory failure.
Setup. Ishaan, a portfolio manager at the fictional Aravalli Asset Managers, has quietly agreed to join a competitor. Before resigning he copies the firm’s proprietary model spreadsheets and a list of his current clients to take with him, reasoning that he built much of the work himself.
Answer: copying the models and client list would violate Standard IV(A). Loyalty permits him to compete after he leaves, not to remove the employer’s confidential property on the way out.
Standard V covers how you research, communicate, and document your work, and it has three sub-sections. V(A) Diligence and Reasonable Basis requires you to work with diligence, independence, and thoroughness, and to have a reasonable and adequate basis, supported by appropriate research, for any analysis, recommendation, or action. V(B) Communication with Clients and Prospective Clients is a rich sub-section: you must disclose the nature of the services you provide and their costs to the client; disclose the basic format and general principles of your investment process and promptly flag material changes to it; disclose significant limitations and risks; use reasonable judgment about which factors are important and include them; and clearly distinguish fact from opinion. V(C) Record Retention requires you to develop and keep the records that support your analysis, recommendations, actions, and client communications.
The 2023 addition to Standard V(B), the duty to disclose the nature and cost of services, is a favourite for new-material questions. If a scenario turns on a client not being told what they are paying for or how much, think V(B) first.
Standard VI addresses conflicts and has three sub-sections. VI(A) Avoid or Disclose Conflicts, revised in 2023, now requires you to avoid conflicts where reasonably possible and, where a conflict cannot reasonably be avoided, to make full and fair disclosure of any matter that could impair your independence and objectivity or interfere with your duties. Such disclosures must be prominent, in plain language, and genuinely communicate the relevant information. VI(B) Priority of Transactions requires that transactions for clients and employers take priority over transactions in which you are the beneficial owner; your personal trading must never come ahead of the people you serve. VI(C) Referral Fees requires you to disclose to your employer, clients, and prospective clients, as appropriate, any compensation or benefit received from or paid to others for recommending products or services.
Setup. Sameer, a planner at the fictional Deccan Advisory, refers clients to a tax firm that quietly pays him a fee for each referral. He does not mention the arrangement to his clients because, he reasons, the tax firm is genuinely good.
Answer: the undisclosed referral fee violates Standard VI(C). Disclosure, not the merit of the referral, is what the Standard requires.
Standard VII protects the integrity of CFA Institute, its programs, and the designation, and it has two sub-sections. VII(A) Conduct as Participants in CFA Institute Programs prohibits any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation, or the validity and security of CFA Institute programs; disclosing confidential exam material or cheating falls here. VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program prohibits misrepresenting or exaggerating what membership, the designation, or candidacy means. You may state facts about your status, but you must not imply that the charter predicts investment performance or confers more than it does, and candidates must describe candidacy accurately rather than claiming to hold the designation.
A frequent VII(B) error is writing the designation incorrectly or as a noun, or implying superior results. The charter is described with the proper form, for example “CFA charterholder”, and never in a way that promises better returns. Overstating what the credential means is a violation even when every underlying fact is true.
Setup. Priya passed the Level I exam three weeks ago and updates her profile to read “CFA Level 1 certified” and adds that clients who work with a CFA “can expect stronger returns”. She is proud of the milestone and sees no harm in it.
Answer: both statements violate Standard VII(B). Passing an exam may be stated as fact, but candidacy must not be dressed up as a certification, and the charter must never be linked to superior performance.
In 2023 the CFA Institute Board of Governors made three changes to the Standards, and because they are recent they are prime exam material. The first added an entirely new sub-section, Standard I(E) Competence, making explicit a duty that the Code had always implied: members and candidates must act with, and maintain, the competence their role requires. It does not mandate any particular course of study; competence can be demonstrated in many ways, and the required level varies with the complexity of the work.
The second revised Standard V(B) Communication with Clients to add a requirement that you disclose the nature of the services you provide and the costs the client will bear for them, so that clients can make fully informed decisions about engaging you. The third renamed and revised Standard VI(A) to “Avoid or Disclose Conflicts”, changing the emphasis so that avoiding a conflict, not merely disclosing it, is the preferred course, with disclosure required whenever a conflict cannot reasonably be avoided.
| Change | Standard | What it now requires |
|---|---|---|
| New sub-section | I(E) Competence | Acquire and maintain the competence your professional role demands |
| Expanded duty | V(B) Communication | Disclose the nature of services provided and their costs to the client |
| Renamed and revised | VI(A) Avoid or Disclose Conflicts | Avoid conflicts where reasonably possible; disclose those that cannot be avoided |
All three 2023 changes push in the same direction: toward the client’s ability to make informed decisions and toward higher, more explicit professional duties. If a question describes newly emphasized conduct, competence, service-and-cost disclosure, or avoiding rather than merely disclosing a conflict, it is testing the 2023 revisions.
A code with no teeth would not sustain trust, so CFA Institute enforces the Code and Standards through the Professional Conduct Program (PCP), overseen by the Board of Governors and working alongside the Disciplinary Review Committee (DRC), a volunteer committee of CFA charterholders. Professional Conduct staff investigate possible misconduct; the DRC reviews contested cases through hearing panels and imposes sanctions.
Investigations begin from several sources. Members and candidates must self-disclose, on an annual Professional Conduct Statement, matters such as involvement in civil litigation or a criminal investigation, or being the subject of a written complaint. Written complaints from others can trigger an inquiry. Staff may act on questionable conduct reported through the media or regulators. And CFA Institute monitors exams, analyzing scores and materials and watching for disclosure of confidential exam content, which is itself a violation.
Once an inquiry opens, staff may request a written explanation, interview the people involved, and collect documents. The inquiry can close with no sanction, a cautionary letter, or a proposed disciplinary sanction. If the member or candidate accepts the finding, the matter resolves; if not, it goes to a DRC hearing panel that decides whether a violation occurred and what sanction fits. Sanctions escalate from public censure to suspension of membership and the right to use the CFA designation, up to revocation of membership and the designation; candidates can be suspended or barred from the CFA Program.
| Stage | Who acts | What can happen |
|---|---|---|
| Trigger | Self-disclosure, written complaint, public source, exam monitoring | An inquiry is opened |
| Investigation | Professional Conduct staff | Written explanation, interviews, document review |
| Outcome (uncontested) | Professional Conduct staff | No sanction, a cautionary letter, or an accepted sanction |
| Outcome (contested) | Disciplinary Review Committee panel | Finds whether a violation occurred and sets the sanction |
| Sanctions | CFA Institute | Public censure; suspension; revocation of membership and the CFA designation |
An analyst accepts an expensive personal gift from a company whose stock she rates. Which Standard is most directly at risk, and why?
Standard I(B) Independence and Objectivity. A gift large enough to be reasonably expected to compromise her objectivity is prohibited, because the Standard protects the independence of her professional judgment regardless of whether the rating actually changes.
Name the seven Standards in order.
I Professionalism; II Integrity of Capital Markets; III Duties to Clients; IV Duties to Employers; V Investment Analysis, Recommendations, and Actions; VI Conflicts of Interest; VII Responsibilities as a CFA Institute Member or Candidate.
What did the three 2023 revisions change?
They added Standard I(E) Competence; expanded Standard V(B) to require disclosure of the nature and cost of services; and renamed Standard VI(A) to “Avoid or Disclose Conflicts”, emphasizing avoidance over mere disclosure.
A member possesses material nonpublic information. Under Standard II(A), what may they do with it?
Neither act on it nor cause others to act on it. Possessing the information is not itself the violation; trading on it or tipping others to trade is what Standard II(A) prohibits.
Under Standard III(A), rank the priority of interests between the client, the employer, and the member’s own interest.
The client comes first, the employer second, and the member’s own interest last. This client-first ordering is the tie-breaker whenever a scenario pits the three against one another.
How did the 2023 revision change the emphasis of Standard VI(A)?
It was renamed “Avoid or Disclose Conflicts” and now asks members to avoid conflicts where reasonably possible, and only to rely on full and fair disclosure where a conflict cannot reasonably be avoided. Previously the Standard spoke only of disclosure.
An applicable local law is less strict than the Code and Standards on a point of conduct. Which governs, and what must a member do if connected to a violation?
The stricter requirement governs, so here the Code and Standards apply, not the more lenient law. Under Standard I(A) the member must not knowingly participate in or assist the violation and must dissociate from it.
The Code of Ethics is a short set of six high-level, aspirational principles describing the conduct an ethical investment professional aims for. The Standards of Professional Conduct are seven groups of specific, enforceable rules, each with lettered sub-sections, that put those principles into concrete practice. The Code sets the direction; the Standards set the testable requirements.
Act with integrity, competence, diligence, and respect toward others; place the profession’s integrity and clients’ interests above your own; use reasonable care and independent professional judgment; practise and encourage practice that reflects credit on the profession; promote the integrity and viability of global capital markets for the ultimate benefit of society; and maintain and improve your own and others’ professional competence.
In order: I Professionalism, II Integrity of Capital Markets, III Duties to Clients, IV Duties to Employers, V Investment Analysis, Recommendations, and Actions, VI Conflicts of Interest, and VII Responsibilities as a CFA Institute Member or Candidate. Each has lettered sub-sections that hold the specific duties.
Three things. A new Standard I(E) Competence requires members to acquire and maintain the competence their role demands. Standard V(B) was expanded to require disclosure of the nature and costs of the services provided to clients. Standard VI(A) was renamed “Avoid or Disclose Conflicts” and revised to emphasize avoiding conflicts, not just disclosing them.
All CFA Institute members, including CFA charterholders, and all candidates enrolled in the CFA Program. The obligation is personal and applies from the moment a candidate registers, not only after earning the charter. Firms are encouraged to adopt the Code and Standards, but the tested duty is the individual’s.
Through the CFA Institute Professional Conduct Program, working with the Disciplinary Review Committee. Staff investigate possible violations arising from self-disclosure, complaints, public sources, or exam monitoring; contested cases go to a DRC hearing panel. Sanctions range from public censure to suspension and revocation of membership and the CFA designation.
You follow the stricter requirement. If the applicable law is stricter than the Code and Standards, you comply with the law; if the Code and Standards are stricter than the law, you comply with the Code and Standards. You must also dissociate from any violation you become connected to.
Through scenario questions that ask you to match conduct to the correct Standard and sub-section and to say whether it complies or violates, plus recall questions on the six Code components, the seven Standards, and the 2023 changes. Identifying who is harmed or misled usually points you to the right Standard before you choose the sub-section.
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