CFA Level 1 · Module 01 Ethical and Professional Standards · Chapter 6
Standard III owed duties to clients. Standard IV owes duties to the employer, the firm that pays you and whose resources and reputation you use. It has three sub-sections: a broad duty of loyalty, a rule on accepting compensation from outside the employment relationship, and a duty that falls on anyone who supervises others. Together they govern how you behave inside the firm, how you leave it, and what you owe the people you manage.
The duty of loyalty to an employer is real, but it is narrower than the duty to clients and it has an important ceiling: it never requires you to break the law or violate the Code and Standards. Where an employer’s instruction would have you act unethically or illegally, the duty to comply with the law and protect clients and the market comes first. Holding that boundary in mind keeps Standard IV in proportion.
As throughout the module, MidhaFin teaches the duties in its own words and illustrates them with invented scenarios. No example, firm, or figure below is drawn from the source curriculum or any prep provider.
Standard IV starts from a simple idea: your employer is entitled to your loyalty in matters related to your work. You should act for the firm’s benefit, apply your skills and diligence on its behalf, protect its confidential information, and avoid conduct that harms it. This is the ordinary bargain of employment, and most of the time it aligns neatly with serving clients well.
But the duty has a firm ceiling. Loyalty to an employer never obliges you to do something illegal or unethical. If a manager instructs you to mislead a client, conceal a violation, or break the law, the duty to comply with the law and the Code and Standards overrides the duty of loyalty, and acting against the employer’s wishes in order to stay lawful is not disloyalty in the sense the Standard forbids. Keep the ordering clear: loyalty operates within the law, never above it.
It is also worth noticing how Standard IV completes the picture begun in Standard III. Standard III said the client comes first when client and employer conflict; Standard IV says that, short of such a conflict, you genuinely owe your employer loyalty, effort, and discretion. The two are not in tension: most of the time, serving clients well is precisely what a good employer wants, and being a loyal, competent employee is how you are able to serve clients at all. The conflicts that make good exam questions are the exceptions, a client harmed to please a boss (Standard III governs), or a boss harmed for personal gain (Standard IV governs), and keeping the two Standards clearly separated in your mind is what lets you answer either one cleanly without muddling the duties they protect.
When an employer’s interest and a legal or ethical duty collide, the legal and ethical duty wins, and doing the lawful thing is not a breach of IV(A). Standard IV protects an employer’s legitimate interests, not its wish to have an employee help it do wrong. If a scenario pits “keep the boss happy” against “obey the law or protect a client”, the law and the client come first.
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.
Verbatim wording of the Standard as published by CFA Institute; all explanation and examples below are MidhaFin’s own.
Standard IV(A) requires that, in matters related to your employment, you act for your employer’s benefit and do not deprive it of the advantage of your skills and abilities, divulge its confidential information, or otherwise cause it harm. The Standard is deliberately broad because the ways an employee can damage a firm are many, but the guidance clarifies several everyday situations.
Independent practice. You may undertake work outside your employment, for example taking on independent clients, but not in a way that competes with your employer or harms it, and you should get consent that specifies what you will do, for whom, and for how long. Preparing to compete is different from actually competing: quietly getting ready to launch a venture while still employed can be acceptable, provided you do not use the firm’s resources against it, solicit its clients, or neglect your duties in the meantime.
The distinction between independent practice and preparation is one candidates often blur, so hold it carefully. Independent practice means actually taking on outside work for compensation while still employed, which requires the employer’s informed consent because it directly touches the firm’s interests. Preparation to leave means the arranging steps that do not yet compete, registering a business, arranging finance, or lining up office space, which are generally permissible because they take nothing from the employer and serve no client yet. The moment preparation tips into using firm time or resources, soliciting firm clients, or diverting business, it stops being harmless groundwork and becomes a breach. A clean departure is entirely possible; it just has to respect the boundary between getting ready and competing.
The nature of the relationship. Whether you are an employee or an independent contractor affects the specific duties, but the core obligations, not to harm the firm, not to take its property, and to honour any agreements, apply either way. What you owe is defined by your actual arrangement with the firm, so a scenario often turns on what the contract or engagement actually permits.
It helps to be concrete about what “causing harm” covers, because the Standard is broad. Depriving the employer of the advantage of your skills, for example by moonlighting in a way that leaves you unable to do your job, is a harm. Divulging the firm’s confidential information, its strategies, client data, or proprietary research, is a harm. Using the firm’s resources to build a competing venture, misusing its name, or steering business away from it while you draw its salary are all harms. The unifying idea is that during employment you owe the firm your effort and your discretion, and you must not turn either against it. What the Standard does not do is trap you in the job forever; it regulates how you behave while there and how you separate from the firm, not whether you are entitled to leave it in the first place.
Setup. Rohan, an analyst at the fictional Chenab Advisors, is planning to start a competing firm. While still employed, he copies the firm’s client contact list and quietly emails several key clients inviting them to move with him once he launches.
Answer: Rohan violates Standard IV(A). He may prepare to compete and, absent an enforceable agreement, solicit clients after he leaves, but taking the client list and soliciting current clients while still employed breaches loyalty.
Departure is the most heavily tested part of Standard IV(A), because the line between what belongs to you and what belongs to the firm is easy to blur. The governing principle is that your own skills, experience, and general knowledge are yours, and information that is publicly available is free to use, but the firm’s property, its records, client lists, and trade secrets, stays with the firm.
So after you leave, you may draw on the expertise you built and on what you can reconstruct from memory or public sources, and, absent an enforceable non-solicitation or non-compete agreement, you may generally compete and approach clients. What you may not do is take the firm’s files, copy its client database, remove research or models it owns, or use confidential information you gathered there. While still employed, you must not solicit the firm’s clients at all. And any agreement you signed, such as a non-solicitation clause with a waiting period, binds you after departure just as it did before.
The reasoning behind the memory-versus-records line is worth understanding rather than memorizing. Your knowledge and skill are genuinely yours: the firm hired them, it did not buy them, so they leave when you do. A client list, a database, a research file, or a valuation model is the firm’s property, built with its resources and on its time, so it stays behind even if you personally helped to create it. Reconstructing a client contact from memory sits on the permitted side; exporting the contact database does not, even though the end result looks similar, because one uses what is yours and the other takes what is the firm’s. When a scenario hinges on this line, ask whether the departing member is carrying their own knowledge or carrying the firm’s property.
The departure rules turn on three questions, and you can resolve most scenarios by asking them in order. Did the member sign an agreement (non-solicit or non-compete)? Did they take the firm’s property, or only their own knowledge? And did any solicitation happen while still employed or only after leaving? Property taken, an agreement breached, or solicitation before departure each signals a violation; knowledge carried, no agreement, and solicitation only after leaving is compliant.
| Yours to take | The firm’s, leave it behind |
|---|---|
| Your skills, experience, and expertise | Client lists and contact databases |
| General knowledge and what you recall from memory | Records, files, research, and models the firm owns |
| Publicly available information | Confidential and proprietary information |
| The right to compete after leaving (absent an agreement) | Any client solicitation while still employed |
Setup. Tara resigns from the fictional Beas Capital to join a competitor. She did not sign any non-solicitation agreement. She takes nothing from Beas, and after she has left she contacts former clients she remembers and invites them to move their business.
Answer: Tara complies with Standard IV(A). With no agreement, no misappropriated property, and solicitation only after departure, competing for former clients is permitted.
Social media complicates the departure rules because professional and personal networks blur. Contacts and connections that belong to the firm, or were built using firm resources for firm business, are treated like other firm property, while genuinely personal connections are not. Members should follow their firm’s policies on using social media with clients and on how a departure is announced, and should be careful that a post reaching current clients does not become a solicitation while they are still employed.
Two practical questions recur. First, whose connections are they? A network of client relationships built through a firm-approved, firm-branded professional account looks more like firm property, while purely personal connections predating or unrelated to the employment are the member’s own; many disputes sit in the grey middle, which is exactly why firms are urged to set clear social-media policies in advance. Second, when does a post become solicitation? A broad, factual announcement that you are moving is generally acceptable, but a message aimed at current clients urging them to follow you, sent while you are still employed, crosses into prohibited solicitation. The safest approach is to keep departure communications factual, to follow the firm’s stated policy, and to reserve any active outreach to clients until after you have left and any agreement permits it.
Whistleblowing is the situation where loyalty to the employer and a higher duty pull apart. If acting in the employer’s interest would require breaking the law, harming clients, or violating the Code and Standards, the duty to protect the integrity of the market and the interests of clients takes priority, and disclosing or refusing to participate is not a breach of IV(A). The key is motive and cause: the action must be to comply with the law or protect clients and the market, not to benefit yourself personally or to retaliate. Whistleblowing driven by self-interest does not get this protection.
The motive test matters because it separates protected disclosure from an ordinary breach of loyalty dressed up as principle. An employee who leaks confidential information to damage a manager they dislike, or to win an advantage in a dispute, cannot shelter behind whistleblowing; the disclosure served them, not the law or clients. An employee who reports a genuine fraud through appropriate channels, accepting that it may cost them, is protected precisely because the disclosure served the clients being harmed and the integrity of the market. In practice the safest course is to raise the concern internally first, through compliance or senior management, and to escalate outside the firm only when the internal route fails or would itself perpetuate the harm.
Setup. Imran, an analyst at the fictional Ravi Securities, discovers that a senior manager is systematically misreporting client fund values to hide losses. Reporting it will anger the firm and may cost him professionally, and staying silent would keep his managers happy.
Answer: reporting the fraud does not violate Standard IV(A). Because acting for the employer would mean concealing illegal harm to clients, the higher duty governs, and whistleblowing to protect clients is proper.
Setup. Kabir, a portfolio manager at the fictional Gomti Asset Management, has accepted an offer from a rival. In his final week, still on Gomti’s payroll, he forwards the firm’s proprietary valuation models and a spreadsheet of client holdings to his personal email, and he messages three of the firm’s largest clients suggesting they move with him.
Answer: Kabir violates Standard IV(A). Taking the firm’s models and client data and soliciting current clients while still employed breaches the duty of loyalty, regardless of how imminent his departure is.
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.
Verbatim wording of the Standard as published by CFA Institute; all explanation and examples below are MidhaFin’s own.
Standard IV(B) addresses money and benefits that come from outside the employment relationship. You must not accept gifts, benefits, compensation, or consideration that competes with, or might reasonably be expected to create a conflict of interest with, your employer’s interest, unless you obtain written consent from all parties involved. The concern is that outside rewards can quietly redirect your effort or loyalty away from the employer who is relying on it.
The cure is disclosure and consent in writing. If a client offers you a performance bonus for managing their account especially well, or a third party offers ongoing compensation that could pull your attention toward their interests, you must disclose the arrangement, including its nature, the parties, the amount or benefit, and its duration, and obtain written permission from your employer (and the other parties) before accepting. Written consent turns a hidden conflict into an acknowledged, managed one; silence is the violation.
Why is a client’s private bonus a problem when the client is the very person you are meant to serve? Because it can distort your loyalty among clients and against your employer. A manager who stands to earn a personal reward from one client may be tempted to favour that client’s account over others, to take extra risk chasing the bonus target, or to devote disproportionate attention to the paying relationship, none of which the employer or the other clients agreed to. Disclosure and written consent let the employer weigh those risks and decide whether the arrangement can be managed. The point is not that outside reward is inherently corrupt; it is that a hidden incentive is unaccountable, and Standard IV(B) simply insists the incentive be brought into the open and approved.
It is worth distinguishing IV(B) from the gift rule under Standard I(B). Standard I(B) is about protecting your independence and objectivity as an analyst from anything that could bias your professional judgment; Standard IV(B) is about protecting your employer from outside compensation that competes with its interests. A benefit can touch both, but the questions differ: under I(B) ask whether the benefit could compromise your objectivity, and under IV(B) ask whether the compensation conflicts with your employer and was disclosed and approved in writing. When a scenario involves an ongoing outside payment for doing your job in a particular way, IV(B) and its written-consent requirement is usually the sharper tool.
Setup. A grateful client tells Zoya, a manager at the fictional Sutlej Wealth, that if her account beats a target next year, the client will pay Zoya a generous personal bonus and cover a holiday. Zoya likes the idea and says nothing to her firm.
Answer: accepting quietly would violate Standard IV(B). The arrangement is permissible only with written consent from all parties after full disclosure.
Setup. Naina, an analyst at the fictional Godavari Capital, agrees to advise a family friend’s private company on the side for an annual retainer. She mentions it in passing to her line manager, who nods, but nothing is put in writing and the retainer’s amount and duration are never disclosed to the firm.
Answer: Naina violates Standard IV(B). An informal verbal approval does not satisfy the written-consent-from-all-parties requirement, and the undisclosed amount and duration leave the conflict hidden.
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.
Verbatim wording of the Standard as published by CFA Institute; all explanation and examples below are MidhaFin’s own.
Standard IV(C) places a duty on anyone who supervises others: you must make reasonable efforts to ensure that those subject to your supervision or authority comply with applicable laws, rules, regulations, and the Code and Standards. Crucially, this duty has two halves, prevention and detection. It is not enough to tell staff to behave; a supervisor must take reasonable steps to prevent violations and to catch those that occur despite good intentions.
The supervisory duty reaches anyone with authority over others, not only those with “manager” in their title. If you have the power to direct or influence the conduct of colleagues, an analyst overseeing juniors, a team lead, a compliance officer with authority over a process, the duty attaches to that authority. It is also a duty that scales with the scope of what you oversee: the more people and the more complex the activities under you, the more robust the procedures you are expected to maintain. Recognizing when a person actually holds supervisory authority is often the first step in an IV(C) question, because the duty follows the authority.
Prevention and detection both depend on adequate compliance procedures. A supervisor relies on a compliance system to set expectations, monitor conduct, and surface problems. If that system is missing or inadequate, the supervisor cannot discharge the duty, and the guidance is direct: a member asked to supervise without an adequate compliance system in place should decline to accept the supervisory responsibility in writing until the firm provides one, rather than take on a role they cannot properly perform. A supervisor may delegate specific tasks, but delegation does not transfer away the ultimate responsibility.
The delegation point deserves emphasis because it is a favourite exam trap. A supervisor is entitled to rely on others, a compliance department, a specialist, a junior manager, to carry out parts of the oversight, and doing so is sensible and often necessary. What delegation cannot do is discharge the supervisor’s own responsibility: if the person to whom a task was delegated fails, and the supervisor took no reasonable steps to confirm the task was being done, the supervisor has still fallen short. Reasonable reliance means checking that the delegate is competent and that the work is actually happening, not handing off a duty and looking away. So a manager who “left compliance to the compliance team” and never verified that monitoring occurred cannot use the delegation as a shield when misconduct slips through.
Because the duty includes detection, the mere fact that a violation occurred does not automatically condemn the supervisor, if reasonable preventive and detective procedures were in place and followed. What breaches IV(C) is failing to establish or enforce such procedures, ignoring warning signs, or having a system so weak that misconduct can run undetected. Once a possible violation surfaces, the supervisor must respond: investigate, limit the activity while doing so, and take steps to prevent a recurrence.
What makes a compliance system adequate is worth spelling out, because IV(C) leans on it so heavily. A workable system is documented and communicated so staff know what is expected, is enforced consistently rather than selectively, provides a way to monitor conduct and surface exceptions, and includes a channel for reporting concerns and a process for investigating them. When such a system exists and is followed, a supervisor has met the duty even if a determined individual still breaks a rule. When it is absent, the supervisor is exposed, because there was no reasonable effort to prevent or detect the very thing that went wrong. In short, the Standard judges the supervisor on the quality of the system and the diligence of its enforcement, not on the impossible standard of guaranteeing that no one under them ever misbehaves.
| Element | What it provides |
|---|---|
| Documented and communicated | Staff know the rules and what is expected of them |
| Consistently enforced | Rules apply to everyone, not selectively |
| Monitoring and surveillance | Conduct is reviewed so exceptions are surfaced |
| Reporting and investigation | Concerns can be raised and are properly looked into |
Read IV(C) as prevention plus detection, backed by adequate procedures. A supervisor is not automatically liable because a subordinate broke a rule; they are liable for failing to put reasonable compliance systems in place, for ignoring red flags, or for accepting a supervisory role without the tools to do it. If a scenario shows a manager who “did not know” because there was no real monitoring, that absence is itself the violation.
Setup. Vikram leads a research desk at the fictional Kaveri Securities. He reviews reports carefully after they are published and disciplines anyone he catches breaking a rule, but the desk has no pre-publication review, no monitoring of personal trading, and no written procedures. A junior analyst front-runs a recommendation for several months before Vikram happens to notice.
Answer: Vikram violates Standard IV(C). Detecting violations once they have already occurred does not discharge the duty; the absence of preventive procedures is itself the breach.
Standard IV rewards knowing, for each sub-section, the specific practice that keeps the duty. The table below gathers the main ones together so you can revise the whole of the Standard efficiently as a set of duty-and-procedure pairs before test day.
| Sub-section | Key recommended practices |
|---|---|
| IV(A) Loyalty | Act for the employer’s benefit; do not take records, client lists, or confidential information; do not solicit clients while employed; honour agreements; remember loyalty never requires illegal or unethical acts |
| IV(B) Additional Compensation | Disclose any outside compensation that could conflict with the employer, including its nature, parties, amount, and duration; obtain written consent from all parties before accepting |
| IV(C) Responsibilities of Supervisors | Ensure adequate compliance procedures exist; prevent and detect violations; decline supervision without an adequate system; respond to and investigate red flags; delegation does not remove responsibility |
Route Standard IV questions by the relationship. Conduct that harms the employer, taking property, soliciting clients while employed, competing improperly, points to IV(A). Outside money or benefits that could conflict with the employer point to IV(B), where written consent from all parties is the cure. A manager who failed to prevent or detect a subordinate’s misconduct, or who lacked adequate compliance, points to IV(C).
May a member prepare to start a competing firm while still employed?
Yes, preparation is allowed, provided the member does not use the employer’s resources against it, does not solicit the firm’s clients while still employed, does not take the firm’s property, and does not neglect their current duties. Actually competing, or soliciting clients, must wait until after departure, and any agreement signed still binds.
On leaving a firm with no non-solicitation agreement, what may a member take?
Their own skills, experience, and general knowledge, what they can recall from memory, and publicly available information. They may not take the firm’s client lists, records, research, models, or any confidential or proprietary information. Absent an enforceable agreement, they may then compete and approach clients after leaving.
A client offers a member a private performance bonus. What does IV(B) require?
The member must disclose the arrangement, its nature, the parties, the amount, and the duration, and obtain written consent from all parties, including the employer, before accepting. Additional compensation that could conflict with the employer’s interest is not permitted without that written consent.
Is a supervisor automatically in breach of IV(C) whenever a subordinate violates a rule?
No. The duty is to make reasonable efforts to prevent and detect violations, supported by adequate compliance procedures. A supervisor who established and enforced reasonable procedures is not automatically liable when a violation still occurs. The breach lies in failing to put such procedures in place, ignoring red flags, or supervising without an adequate system.
A departing member recalls a former client’s phone number from memory and calls them, while a colleague exports the firm’s client contact database to a personal drive. Which is permitted under IV(A)?
Reconstructing a contact from memory is permitted, because your knowledge and memory are your own and travel with you when you leave. Exporting the client database is not, because the database is the firm’s property, built with its resources, even though the end result looks similar. The line is whether the member is carrying their own knowledge or carrying the firm’s records.
A member discloses an outside compensation arrangement to the employer alone and receives a verbal go-ahead. Does that satisfy IV(B)?
No. IV(B) requires written consent from all parties involved, not a verbal approval and not the employer only. The member must disclose the nature, the parties, the amount, and the duration, and obtain written consent from every party before accepting the arrangement.
A manager catches and disciplines every rule-breaker after the fact but maintains no preventive compliance procedures. Has the manager met the duty under IV(C)?
No. IV(C) requires reasonable efforts to both prevent and detect violations, and prevention depends on adequate compliance procedures. Punishing violations only after they surface, with nothing in place to stop them, meets just half the duty; the missing preventive system is itself the shortfall.
IV(A) Loyalty, IV(B) Additional Compensation Arrangements, and IV(C) Responsibilities of Supervisors. Together they govern how a member behaves inside the firm, how they leave it, what outside compensation they may accept, and what they owe the people they supervise.
No. The duty of loyalty under IV(A) has a firm ceiling: it never requires illegal or unethical conduct. When an employer’s interest conflicts with the law, the Code and Standards, or the protection of clients, those higher duties govern, and acting lawfully against the employer’s wishes is not the disloyalty the Standard forbids.
Yes, preparation is allowed. A member may quietly get ready to compete provided they do not use the employer’s resources against it, do not solicit the firm’s clients while still employed, do not take the firm’s property, and do not neglect current duties. Actual competition and client solicitation must wait until after departure, and any non-solicitation or non-compete agreement still binds.
Their own skills, experience, general knowledge, what they recall from memory, and publicly available information. They may not take the firm’s client lists, records, research, models, or confidential and proprietary information. Absent an enforceable agreement, they may compete and approach clients after leaving, but never solicit clients while still employed.
Not when it is done to comply with the law or to protect clients and the integrity of the market. In those cases the higher duty overrides loyalty to the employer, and disclosing or refusing to participate in misconduct is proper. The protection depends on motive: whistleblowing for personal gain or retaliation is not protected.
Only after disclosing the arrangement, its nature, the parties, the amount or benefit, and its duration, and obtaining written consent from all parties involved, including the employer. Standard IV(B) prohibits accepting compensation or benefits that compete with, or could conflict with, the employer’s interest without that written consent.
Make reasonable efforts to both prevent and detect violations by those under their supervision, which requires adequate compliance procedures. A supervisor may delegate tasks but keeps ultimate responsibility, must respond to warning signs, and, if asked to supervise without an adequate compliance system, should decline the role until one is in place rather than accept a responsibility they cannot discharge.
Through scenarios routed by relationship: harm to the employer such as taking property or soliciting clients while employed points to IV(A); outside money or benefits that could conflict with the employer point to IV(B), where written consent from all parties is the cure; and a manager’s failure to prevent or detect a subordinate’s misconduct, or a lack of adequate compliance, points to IV(C).
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