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Eduzan / MODULE 01 — Ethics (Ethical and Professional Standards)

ETH 2 Code of Ethics and Standards of Professional Conduct

Finance / CFA Level 1 / MODULE 01 — Ethics (Ethical and Professional Standards) tutorial chapter - Published 2026-07-11 - MODULE 01 — Ethics (Ethical and Professional Standards)

The framework CFA Institute uses to define and enforce ethical conduct: the Code, the seven Standards, and how breaches are investigated. Check-yourself items are study aids.

Every CFA Institute member (including holders of the Chartered Financial Analyst designation) and every candidate for the CFA and CIPM designations agrees to be bound by one shared rulebook: the CFA Institute Code of Ethics and Standards of Professional Conduct, usually shortened to the Code and Standards. These rules apply to individuals regardless of job function, local law, or cultural setting, and they have served as a global reference point for measuring the ethics of investment professionals since the 1960s.

It helps to separate two layers that the reading keeps distinct. The Code of Ethics is a short set of high-level, aspirational principles: it describes the kind of professional a member should aim to be. The Standards of Professional Conduct are the practical, enforceable rules that translate those aspirations into required behavior. The reading asks you to treat the two as a single interwoven fabric rather than as separate checklists, because trust in the capital markets depends on the whole set being honored together.

The Standards of Practice Handbook

The Standards of Practice Handbook is the main teaching and interpretation resource that sits behind the Code and Standards. It explains the purpose of each provision, discusses and amplifies every standard, and suggests procedures for compliance. Its “Application of the Standard” sections work through hypothetical situations; the names used are fictional and are not meant to identify any real person or firm. Because real dilemmas are full of gray areas, the Handbook openly states that its examples cannot cover every circumstance, so members are urged to consult supervisors and their legal and compliance teams.

The Code and Standards evolve

The Code and Standards are reviewed and updated on a regular schedule so that they keep pace with a changing profession and continue to represent the highest ethical bar. CFA Institute stresses that revisions are not cosmetic; each change is meant to address a genuine concern or improve understanding. The most recent overhaul came in 2023, when the CFA Institute Board of Governors approved a set of revisions covered later in this lesson. Because the rules are widely respected, firms and regulatory authorities often adopt them, in whole or in part, which widens their reach well beyond CFA Institute membership.

The CFA Institute Standards of Practice Council (SPC), a group of charterholder volunteers drawn from brokers, advisers, banks, and insurers across many markets, maintains and interprets the rules. The SPC works to keep them representative of high conduct, relevant to a shifting industry, globally applicable, and specific enough to be useful. One caution the reading repeats: the mere existence of a written code can breed a false sense of security unless the rules are understood, enforced, and woven into daily practice.

Check yourself

What is the difference between the Code of Ethics and the Standards of Professional Conduct?

The Code sets out high-level, aspirational principles that describe the ethical ideal, while the Standards are the enforceable rules of conduct that every member and candidate is required to observe. The reading treats them as one interwoven whole rather than two separate lists.

All members and all candidates for the CFA and CIPM designations must comply with the Code and Standards, and enforcement runs through the Professional Conduct Program. The CFA Institute Board of Governors holds oversight of the Professional Conduct (PC) group, which works alongside the Disciplinary Review Committee (DRC) to enforce the rules. PC staff investigate allegations of misconduct. The DRC is a volunteer body of CFA charterholders who sit on hearing panels, review allegations, and impose sanctions; the DRC also helps set and review conduct policy. The CFA Institute Bylaws and Rules of Procedure provide the underlying structure for the whole process.

How an inquiry starts

Investigations reach PC staff through four main channels. Members and candidates must self-report, on the annual Professional Conduct Statement, anything that calls their conduct into question, such as involvement in civil litigation, a criminal investigation, or a written complaint against them. A written complaint sent to PC staff can also trigger a review. Staff may learn of questionable conduct through the media, regulatory notices, or other public sources. Finally, CFA Institute monitors testing centers, analyzes exam scores and materials after each exam, and watches online and social media to catch misconduct such as leaking confidential exam content.

Investigation and outcomes

Once an inquiry opens, PC staff may ask the subject for a written account of the matter, interview the person along with any complainants and third parties, and gather the relevant documents and records. After reviewing the material, staff can close the matter with no sanction, issue a cautionary letter, or move ahead toward discipline. When staff conclude that a violation likely occurred, the member or candidate may either accept or reject the charge and the proposed sanction.

If the subject accepts, a DRC panel still reviews the agreed outcome to confirm the findings are reasonable. If the subject rejects the charge and proposed sanction, the matter goes to a panel of DRC members, who weigh the presentations from both sides and decide whether a violation occurred and what penalty fits. Sanctions can be serious: public censure, suspension of membership and of the right to use the CFA designation, or outright revocation of membership and of that right. A candidate who breaks the rules or testing policies may be suspended or barred from continuing in the CFA Program.

Example 1 · Worked

An analyst is trying to describe, in plain terms, how the Professional Conduct Program actually operates.

Which statement best captures the process: (A) inquiries never begin from media reports; (B) every investigation ends in front of a Disciplinary Review Committee panel; or (C) an investigation may include asking the member or candidate to explain events in writing?

Solution. C is correct. Once an inquiry begins, PC staff may ask the member or candidate for a written explanation as part of the investigation. A is wrong because staff can and do open inquiries after learning of conduct through the media. B is wrong because a case reaches a DRC panel only when the member or candidate rejects the proposed charge and sanction; many matters close earlier with no sanction, a cautionary letter, or an accepted outcome.

Ethics can be described as a set of principles that guide behavior when that behavior affects other people. Commonly cited examples are honesty, fairness, diligence, and a genuine regard for the people around us. Behaving ethically means living by those values while balancing self-interest against the direct and the indirect ways one’s choices land on others.

Why does this matter so much in finance? Society gains when capital flows freely to its most productive uses, and that flow depends on trust: investors will commit capital only if they believe markets are fair, transparent, and offer a fair reward for risk taken. Laws, regulation, and enforcement help, but they cannot by themselves guarantee fair markets, so an ethical foundation has to do part of the work. When that trust erodes, investors pull back or demand a higher risk premium, which chokes off innovation, jobs, and growth, and shrinks the investment industry itself.

Ethics goes beyond regulation

Some people equate legal with ethical: follow the law and you must be acting properly. The reading rejects that shortcut. Legal behavior is what is required; ethical behavior is what is morally right, and it reaches past the minimum the law sets. Regulators are often short of the resources needed to enforce even well-designed rules, and some individuals will always find ways around them for private gain. Knowing which rule applies is necessary but not sufficient: a professional also has to recognize situations that are prone to ethical traps and manage the pressures that can cloud judgment.

An ethical framework and a culture of integrity

Because many real decisions are not clearly right or wrong, individual judgment is the decisive ingredient. The reading recommends building an ethical decision-making framework and running conduct through it before acting, rather than judging only by profit and loss. At the firm level, a written code of ethics is necessary but not enough on its own; it risks gathering dust unless it is lived. The single most powerful force is a strong culture of integrity demonstrated by senior management. Ethical decision-making is a skill that improves with practice, building the kind of muscle memory that lets fundamentally honest people make good choices even when conflicts of interest press on them.

Market sustainability and the actions of one

Modern finance is deeply interconnected, so each participant should weigh the indirect effects of their choices on the wider market. Decisions that look harmless one at a time can, in aggregate, help push the market toward a crisis. Those in positions of authority carry a special responsibility here: when they design risk policies, product lines, or compensation schemes, they should keep long-term market health in view and avoid pay structures that tempt otherwise sound people into questionable conduct. Running throughout is one enduring principle: place client interests ahead of both the professional’s own interests and those of the employer.

Is compliance with the law enough on its own

No. Compliance with regulation is a floor, not a ceiling. Regulators are frequently under-resourced, rules cannot anticipate every situation, and determined individuals will exploit gaps. A genuine culture of integrity, in which professionals do the right thing beyond what the law strictly demands, is what actually earns and sustains investor trust.

The Code of Ethics states six aspirational principles. Members and candidates commit to each of them. In plain summary, members and candidates should:

Act with integrity, competence, diligence, and respect, and in an ethical manner, toward the public, clients and prospective clients, employers, employees, colleagues in the profession, and other participants in the global capital markets.
Put the integrity of the investment profession and the interests of clients ahead of their own personal interests.
Use reasonable care and exercise independent professional judgment when doing investment analysis, making recommendations, taking investment action, and carrying out other professional activities.
Practice, and encourage others to practice, in a professional and ethical way that reflects credit on themselves and on the profession.
Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
Maintain and improve their own professional competence and work to raise the competence of other investment professionals.

A common exam trap targets the fifth principle. Its full wording extends all the way to “for the ultimate benefit of society”; stopping at “global capital markets” leaves the principle incomplete. That closing phrase is deliberate, tying the health of the markets to the welfare of society as a whole.

Example 2 · Worked

A candidate is asked to finish one of the six Code of Ethics principles from memory. The principle begins, “Promote the integrity and viability of the global capital markets …”

Which ending completes the principle exactly: (A) “… and uphold the rules governing those markets”; (B) “… for the ultimate benefit of society”; or (C) with no further words, ending at “markets”?

Solution. B is correct. The fifth principle runs “Promote the integrity and viability of the global capital markets for the ultimate benefit of society.” The phrase about society is part of the principle and signals the wider social role of well-functioning markets. Endings A and C are incomplete or invented.

The Standards turn the Code into enforceable rules. There are seven Standards, each divided into lettered sub-sections. The titles and numbering below are the official labels; knowing them cold, and knowing which behavior each one governs, is the core skill this reading tests.

The seven Standards and their sub-sections

ETH 2 Code of Ethics and Standards of Professional Conduct
Standard	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 CFA Candidate	A. Conduct as Participants in CFA Institute Programs; B. Reference to CFA Institute, the CFA Designation, and the CFA Program

Standard I: Professionalism

Members must understand and comply with all applicable laws, rules, and regulations, including the Code and Standards themselves, and where these conflict, they must follow the stricter one; they must not knowingly help in a violation and must dissociate from one (Knowledge of the Law). They must use reasonable care to keep their independence and objectivity, and must not offer, ask for, or accept any gift or benefit that could reasonably be expected to compromise anyone’s objectivity (Independence and Objectivity). They must not knowingly make misrepresentations in their professional work (Misrepresentation), must not engage in dishonesty, fraud, or deceit or any act reflecting badly on their professional reputation, integrity, or competence (Misconduct), and must act with and maintain the competence their responsibilities require (Competence).

Standard II: Integrity of Capital Markets

A member who holds material nonpublic information that could affect an investment’s value must not act on it or cause others to act on it (Material Nonpublic Information). Members must not use tactics that distort prices or pump up trading volume in order to mislead other participants (Market Manipulation).

Standard III: Duties to Clients

Members owe clients loyalty, reasonable care, and prudent judgment, and must place client interests ahead of their employer’s and their own (Loyalty, Prudence, and Care). They must deal fairly and objectively with all clients (Fair Dealing). In an advisory relationship they must judge suitability against the client’s circumstances, written objectives, and constraints, and in the context of the client’s total portfolio, updating the client information regularly; when managing to a stated mandate or style, actions must stay consistent with that mandate (Suitability). Performance information must be fair, accurate, and complete (Performance Presentation). Client information must be kept confidential unless it concerns illegal activity by the client, disclosure is required by law, or the client permits it (Preservation of Confidentiality).

Standard IV: Duties to Employers

In matters tied to their employment, members must act for the employer’s benefit and must not deprive it of their skills, leak confidential information, or otherwise cause it harm (Loyalty). They must not accept outside compensation that competes with or could create a conflict with the employer’s interest unless every party involved gives written consent (Additional Compensation Arrangements). Anyone with supervisory authority must make reasonable efforts to ensure that those under them comply with the applicable rules and with the Code and Standards (Responsibilities of Supervisors).

Standard V: Investment Analysis, Recommendations, and Actions

Members must show diligence, independence, and thoroughness and must have a reasonable and adequate basis, supported by research, for any analysis, recommendation, or action (Diligence and Reasonable Basis). Under Communication with Clients and Prospective Clients they must disclose the nature of the services provided and the associated costs; disclose the basic format and general principles of their investment process and any material changes to it; disclose significant limitations and risks; identify the factors important to their work; and distinguish fact from opinion. They must keep appropriate records to support their work (Record Retention).

Standard VI: Conflicts of Interest

Members must avoid, or make full and fair disclosure of, anything that could reasonably be expected to impair their independence and objectivity or interfere with duties to clients, prospective clients, and employer, and any such disclosure must be prominent, in plain language, and effective (Avoid or Disclose Conflicts). Client and employer transactions take priority over transactions in which the member is a beneficial owner (Priority of Transactions). Members must disclose any compensation or benefit received or paid for recommending products or services (Referral Fees).

Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate

Members and candidates must not act in any way that harms the reputation or integrity of CFA Institute, the CFA designation, or the validity and security of CFA Institute programs (Conduct as Participants in CFA Institute Programs). When referring to CFA Institute, membership, the designation, or candidacy, they must not misrepresent or exaggerate what any of these mean (Reference to CFA Institute, the CFA Designation, and the CFA Program).

Example 3 · Worked

Through a friend who serves on a company’s board, a portfolio manager learns of an unannounced takeover that will lift the target’s share price once it is public. He does not trade the stock himself, but he tells a colleague to buy it before the announcement.

Which Standard has the portfolio manager violated?

Solution. He violated Standard II(A) Material Nonpublic Information. A member who possesses material nonpublic information that could affect an investment’s value must neither act on it nor cause others to act on it; passing the tip to a colleague is causing another to act. It is not Standard II(B) Market Manipulation, which concerns distorting prices or trading volume, and not Standard V(C) Record Retention, which concerns keeping records.

Example 4 · Worked

An adviser recommends a high-yield bond to a client. Viewed in isolation the bond looks risky, but within the client’s diversified portfolio it actually lowers overall risk and fits the client’s written objectives.

Which Standard supports judging the bond in the context of the client’s whole portfolio rather than on its own?

Solution. Standard III(C) Suitability. In an advisory relationship, suitability is assessed in light of the client’s total portfolio and written objectives, not by looking at a single holding in isolation. Placing the client’s interests first is the domain of Standard III(A) Loyalty, Prudence, and Care, and avoiding false statements is Standard I(C) Misrepresentation.

Example 5 · Worked

A client offers a member a cash bonus if the member’s management of the account beats a stated return target over the year. The arrangement would compete with the interests of the member’s employer.

Under which Standard may the member accept this bonus, and what condition must be met?

Solution. Standard IV(B) Additional Compensation Arrangements. The member may accept compensation that competes with, or could create a conflict with, the employer’s interest only after obtaining written consent from all parties involved. Note that a gift capable of compromising independence and objectivity falls under Standard I(B), while this cash-for-performance arrangement tied to employment sits under Standard IV(B).

Example 6 · Worked

A research report presents the analyst’s projected twelve-month target price as though it were an established fact, without flagging that it is a forecast.

Which Standard requires the analyst to separate fact from opinion in the report?

Solution. Standard V(B) Communication with Clients and Prospective Clients. Among its requirements, members must distinguish between fact and opinion when presenting analysis and recommendations. The same standard, after the 2023 revision, also requires disclosing the nature of the services provided and the costs to the client.

During 2023, the Board of Governors approved a package of changes that touched the Standards in three places, introducing one new standard and amending two others. The twelfth edition of the Handbook adds fresh guidance and examples to explain these requirements.

A new competence standard

Within Standard I: Professionalism, the Board added Standard I(E) Competence. It requires members and candidates to act with and maintain the competence needed to fulfill their professional responsibilities. The change makes explicit what the Code of Ethics already implied. Because roles differ widely and can expand over time, the level of competence expected varies with each member’s duties, judged on the facts of each case. Importantly, the standard does not mandate any particular continuing-education or professional-development program; competence can be shown and kept up in several ways.

A new client-disclosure requirement

The second change sits inside Standard V: Investment Analysis, Recommendations, and Actions. Here, Standard V(B) Communication with Clients and Prospective Clients gained a fresh requirement to tell clients what services they are getting and what those services will cost them. The financial impact of engaging a professional had not been an explicit part of the disclosure before; the revision fills that gap so clients can make fully informed decisions about whether to engage the member and the firm.

A revised conflicts standard

The third change falls under Standard VI: Conflicts of Interest. Standard VI(A) was given the new name Avoid or Disclose Conflicts and rewritten so that a member must either steer clear of a conflict of interest or disclose it fully and fairly. Previously the standard spoke only of disclosing conflicts, even though the guidance had long treated avoidance as best practice. Adding the option to avoid emphasizes that members should sidestep conflicts whenever reasonably possible; where avoidance is not reasonable, clear and complete disclosure remains required.

Check yourself

The 2023 revisions changed three parts of the Standards. What were they?

First, a new Standard I(E) Competence was added, requiring members to act with and maintain the competence their responsibilities demand. Second, Standard V(B) was revised to require disclosure of the nature of services and their costs to the client. Third, Standard VI(A) was renamed “Avoid or Disclose Conflicts” and now requires members to avoid conflicts of interest or disclose them, whereas before it only required disclosure.

End of lesson.

Back to MODULE 01 — Ethics (Ethical and Professional Standards)

ETH 2 Code of Ethics and Standards of Professional Conduct

Overview

The Handbook, the Code, and the Standards