The Ethical and Professional Standards section is challenging for most CFA candidates given the more subjective nature of the topic and questions (vs. the rest of the curriculum), and the sheer amount of readings to go through.
Regardless whether you’re new to CFA exams or a seasoned CFA Level 3 candidate, CFA Ethics section plays an important role in all levels of the CFA program. Most CFA candidates tend to moan about it at some point, although we highly recommend not skipping this section. 😅
In this epic CFA ethics guide, we will delve into why Ethics is important, how it evolves across 3 levels of the CFA program, and our top tips to ace this section.
Let’s do it!
CFA Level 1 Ethics represents 15-20% of exam weight, i.e. 27-36 questions out of 180.
It introduces candidates to CFA Institute’s 6 Code of Ethics and 7 Standards of Professional Conduct (Code and Standards). These form a framework for ethical decision-making to help guide behavior and build trust.
Candidates are required to learn each Standard, its application and the recommended procedures.
The Ethics study session ends with a brief introduction to Global Investment Performance Standards (GIPS). Note that some parts of CFA Level 1 Ethics GIPS section are optional – refer to GIPS tips section further below.
CFA Level 2 Ethics represents 10-15% exam weight, i.e. 9-13 questions out of 88.
Interestingly, CFA Level 2 Ethics is mostly similar to Level 1’s, with the additional introduction of 3 new concepts: Soft Dollar Standard, Research Objectivity Standard, and the Prudent Investor Rule.
The other change for CFA Level 2 is that the questions are presented in a mini case study format (i.e. vignette), accompanied with multiple-choice questions.
More careful reading required here with the longer vignette text, and a common ‘trick’ here is that candidates need to know their stuff to differentiate what is required vs. recommended by the Standards.
CFA Level 3 Ethics represents 10-15% exam weight, mixed across the constructed response (essay) and vignette-based multiple choice questions.
Building off Level 1 and 2’s knowledge, CFA Ethics for Level 3 is all about application. The questions increases in complexity as there is greater emphasis on candidate’s ability to evaluate and explain how a certain conduct does or does not violate the Code and Standards.
More importantly, CFA Level 3 Ethics adds on a new section on Asset Manager Code of Professional Conduct and has a stronger emphasis on Global Investment Performance Standards (GIPS).
Ethics is an important topic that CFA candidates should master since Level 1 for 3 key reasons:
| Level | CFA Ethics’ Topic Weight (%) |
|---|---|
| CFA Level 1 | 15-20% |
| CFA Level 2 | 10-15% |
| CFA Level 3 | 10-15% |
The CFA Ethics topic weight for Level 2 and Level 3 has been stable in the past years at 10-15%. However CFA Level 1 Ethics’ topic weight has increased to 15-20% in 2021 as CFA Institute started to give a range % for Level 1 as well.
Although not the largest section, the topics and LOS statements on Ethics are very similar across all levels. This means that the information you retain in Level 1 will still be exactly applicable in Level 3 questions. Combine that with the relatively little amount of time needed to master Ethics and suddenly you have a very effort-efficient topic in your hands.
Be a master of Ethics in Level 1 and you’ll see benefits throughout the subsequent levels.
Besides its transferable knowledge across levels, Ethics is also unique in a very important way.
The CFA Institute implements a factor called the ‘ethics adjustment’ for candidates that are within the passing score. According to CFA Institute:
The Board of Governors instituted a policy to place particular emphasis on ethics.
Starting with the 1996 exams, the performance on the ethics section became a factor in the pass/fail decision for candidates whose total scores bordered the minimum passing score.
The ethics adjustment can have a positive or negative impact on these candidates’ final results.
– CFA Institute
This means that:
However, overall the CFA Institute has stated that you’re more likely to be be ‘passed’ through ethics adjustment than ‘failed’.
Yes, it is possible pass the CFA exams even if you’re rubbish at Ethics.
But, it is a very bad idea to skip CFA Ethics as an exam study topic.
Why? Because if you’re a borderline case, Ethics will be the deciding factor (see ‘Ethics Adjustment’) as CFA Institute thinks it is important to build trust, understandably.
In our recommended CFA topic study order for CFA Level 1, Level 2 and Level 3, we do suggest that candidates save Ethics for the end.
The key assumption here is of course that you make sure you stay on track with your CFA study plan, and save sufficient time at the end to address this important topic.
Whatever you do, please don’t skip this topic.
Nothing beats the CFA curriculum for studying Ethics.
Even if you use third party CFA study materials for the other topics, it’s worth using the curriculum for Ethics alone, but only if you have saved sufficient time for it as the CFA curriculum is extremely thorough.
In an ideal world:
If there isn’t enough time:
Here are the 7 main Standards of Professional Conduct (22 subsections in total, which are not listed):
Here are the 6 Code of Ethics:
In short, the Standards tell you what to do, and the Code tells you how to do it.
CFA Ethics case studies are chapters in the CFA Institute & study providers material where an extensive fictional scenario is explored and dissected from an Ethics perspective.
In these case studies, a scenario set in a professional / industry-related setting is often depicted, and one or several protagonists’ thoughts, decisions and actions are explained.
Work through the case-study chapters in detail and observe how the various standards are explored through the situations.
Actual exam questions in CFA Level 1 are small and highly simplified versions of these case studies, but in Levels 2 and 3 don’t be surprised if you are hit by 3 pages of Ethics case study vignette before you’re given your first question.
Answering Ethics questions requires a certain degree of familiarity with the question format as well as the source material – a combination of knowing what keywords to watch out for, anticipating common traps and weeding out irrelevant information.
Concepts will not be tested individually, instead, as the CFA levels progress, more and more concepts will be blended into the questions, which forms the long item set questions of Level 2 and Level 3.
Practicing loads of questions beforehand will reduce any surprises in the actual exam. For tips on where to find extra Ethics practice questions, see our list of free CFA study materials.
What we recommend for Ethics practice questions (in order of priority):
You’ll make mistakes, for sure. Just read the solution and reread the question to see which part of the question you misunderstood. Then refer back to the CFA curriculum notes to understand the theory and reread certain sections to further solidify your CFA Ethics knowledge.
As discussed earlier, the return on investment of studying Ethics properly will pay dividends in CFA Level 2 and 3.
If you have been organized with your time, it is worthwhile making summary notes for the Ethics section. You don’t have to write it, typing is fine too as writing itself isn’t the most effective way to improve memory.
This helps save time during the phase when you’re doing practice questions as well as revising Ethics concepts quickly. And it saves so much time for Level 2 and Level 3, when all your attention should be on other tougher topics.
Did you know that CFA Institute actually has a mini video series covering all the 7 CFA Ethics Standards?
Each video is on average 10-15 minutes, with 22 videos to cover the 7 Standards and their subsections. It’s perfect for visual learners or those who prefer to listen when commuting.
Perhaps more of a Level 2 and Level 3 CFA Ethics tip, do read the vignette in the question carefully when you go through the examples and EOC questions.
Quite often a mistake is made when a candidate missed out a key word like ‘always’, ‘never’ or ‘didn’t’.
Make sure you underline or circle keywords and phrases, as you need to refer to the vignette again after reading the question. Only a few sentences matter in the long vignette.
Finally, there will be times like this in the actual exam when you’re unsure of the answer.
My golden rule here for CFA Ethics questions is that “when in doubt, disclose (the action)”!
Global Investment Performance Standards (GIPS) are ethical principles for standardized calculation and presentation of investment performance set for investment companies by CFA Institute and applied voluntarily worldwide.
While only a small portion of CFA Ethics in Level 1, GIPS gets more crucial and heavily tested in CFA Level 3.
A lesser known fact is that CFA Level 1’s Reading 5 on GIPS is mostly optional:
– GIPS’s Standard 0, i.e. Fundamentals of Compliance (page 240-243 of CFA Curriculum) is a required reading;
– However, page 243-262 of the CFA Level 1 curriculum reading on GIPS is optional. This covers the other 8 out of 9 major provisions of the GIPS standards.
– That said, you need to know some basic info of the 9 major provisions of GIPS as covered in the introduction on page 240-243 of CFA curriculum.
While GIPS is admittedly a drier topic than Standards of Conduct, it is easier to ace it in a way as it is more factual and rules based. It is short to read, easy to answer once you know or memorized the facts. It may make a difference between a pass and fail so try not to skip it (especially in Level 3)!
Phwoar, that went on longer than I intended, purely because how badly I got burned in CFA Ethics section across 3 levels years ago. Hope this helps your CFA prep. If you have more questions on Ethics, comment below!
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is this updated for 2024 exams? please guide
Yes it is! 2024 and 2025
i got hit by Ethics discount badly in my CFA Level II May 2021 exam. I got 5 topics above 70%, 3 topics slightly below 70% and 2 topics between 50% - 70% for my CFA Level II May 2021 Exam. Breakdown below:
FRA >70% [10 - 15%]
Portfolio >70% [10 - 15%]
Econs >70% [5 - 10%]
Fixed income >70% [10 - 15%]
Corp Fin >90% [5 - 10%]
QM = slightly below 70% [5 - 10%]
Equity = slightly below 70% [5 - 10%]
Alternative Investment = slightly below 70% [5 - 10%]
Ethics = between 50% - 70% [10 - 15%]
Derivatives = 50% [5 - 10%]
Since my Ethics is among the lowest compared to 8 other subjects, I failed the exam with just 1 pixel below the MPS. T_T
Aw man, sorry to hear that Zarul, but thanks so much for sharing your experience with us on this. It really shows the Ethics adjustment at work as you've done so well in the other topics. I hope you try L2 again with a little more focus on Ethics, which should stand you in good stead for passing. *virtual hug*