Your Cheat Sheet to… CFA Level I: Ethical & Professional Standards

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By Christine

The Cheat Sheet articles are a series of articles, each focusing on one specific topic area of the CFA exam for one specific CFA level. In each Cheat Sheet article, we will cover the basics of what you need to know before diving into the material – what it’s about in a nutshell, how significant is it in the CFA exams, real-life applications, and tips for the CFA exams. You should aim to read each relevant Cheat Sheet ​article (if available) before you start studying the topic area to get you to a flying start.

For this article, we will look at Ethical & Professional Standards for CFA Level I, and why it is definitely not a topic you should take lightly.

What is the weighting of this topic in the CFA exams?
The Ethics topic area makes up 15% of the tested material in the CFA Level I exam, or 36 questions in total. This makes it the second most significant topic area after Financial Reporting and Analysis. There is less material to go through though – Ethics only comprises of 4 out of the 60+ readings for the CFA exam, so it makes sense to really concentrate on Ethics for the CFA exam.

What is Ethics about, in a nutshell?
Known officially as Ethical and Professional Standards, the Ethics portion of the Level I CFA exam is focused on educating candidates on the CFA Institute’s Code of Ethics & Standards of Professional Conduct – basically schooling future and current investment managers on how to behave.

Equally important is also the Global Investment Performance Standards (GIPS®), which is the standard on how firms are supposed to record, compare and present investment performance.

Ethics, in a nutshell, is there to teach you:

  • How investment managers should conduct themselves.
  • How firms should represent their investment performance.

Why should I care about this in real life?
Investment managers hold a lot of responsibility (not to mention a lot of their clients’ money). The CFA Institute prides its Code of Ethics and Standards of Professional Conduct to be the ethical benchmark for investment professionals worldwide. Ensuring ethical conduct is one of the key principles underpinning the concept of a CFA charter, and by holding a CFA charter, you are pledging to the CFA Institute and your clients that you will hold your conduct strictly by the Code.

If all CFA charterholders hold themselves by the strict standards set by the Code, the CFA charter will (and does) represent a standard for ethical conduct as well as professional competence in the investment industry.


Tips for the exam you should know

​Should I start my studies with Ethics?

Ethics is presented first in the CFA Institute curriculum for a reason. Having said that, Ethics is quite a stand-alone topic area, and most candidates either start with it, or leave it for last. Rob Thakur from Fitch Learning recommends addressing Ethics last. We think that even if you’re planning to start Ethics later, you should at least have a quick scan through at the start to see what you’re up against. Definitely don’t leave it too late to the point that you don’t have time to cover it at all!

There’s less to read on this topic, but Ethics can be challenging to answer. A typical question will run the candidate through a theoretical scenario and ask the candidate to assess if any Ethics & Professional Standards were violated. 

Answering questions can be tricky.

There’s less to read on this topic, but Ethics can be challenging to answer. A typical question will run the candidate through a theoretical scenario, such as this:


Ethics Scenario Example

Andrew Colohan, CFA, is an investment manager for Investy McInvestments. He is currently focusing on two large tech companies, Widgets Inc and Gadgets plc. Poring through both companies’ annual statements, he realises that both companies are ripe for a merger with each other.

Later in the week, Andrew is lunching at his favourite place, Greasily Done. He spots both CEOs of Widgets Inc and Gadgets plc having what seems to be a working lunch there as well.

Andrew concludes that a merger between Widgets and Gadgets is imminent, and adjusts his investment strategy and recommendations to take advantage of this knowledge.

The question would then ask the candidate to assess if any Ethics & Professional Standards were violated. Although sometimes you might be able to sense something wrong was done in a question’s scenario, you’ll also need to know exactly what was wrong, and why. In this case, there was no Ethics violation – Andrew pieced together his information via mosaic theory, diligently and without jumping to conclusions, so he performed ethically and competently.

​Particularly confusing questions can also involve what instinctively seems to be a Ethics-violating incident (such as an investment manager contacting clients of her former company as prospective clients), but may turn out to be Ethics compliant (if it turns out she remembers them independently, and took no client data with her when she left her former company).

Ethics is especially important to the CFA exam.

Turned off Ethics by now? You shouldn’t. 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. Taken from the CFA website:

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.

This means that if you’re a borderline fail, you can be lifted into the passing zone by a strong performance in Ethics. Similarly, if you were a borderline pass, you could be failed if your Ethics performance was particularly weak. However, overall the CFA Institute has stated that you’re more likely to be be ‘passed’ through ethics adjustment than ‘failed’.

Practice makes perfect.

The best way to really get your head around Ethics is to practice. A lot. You can get through a lot of practice really quickly, as questions really involve reading and little or no calculation.

You can also get more tips to getting better at Ethics by reading this article.

More Cheat Sheet articles will be published over the coming weeks. Get ahead of other CFA candidates by: 

Zee Tan
Author: Zee Tan

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