Ethics Application

Ethical and Professional Standards, LOS weight share 0.5 percent of the 365 Level I learning outcomes.

Ethical and Professional StandardsEthics Application

The Standards you already know, run through the two scenario types the exam builds whole item sets around.

Before you watch

Answer these three first. Getting them wrong now is normal, and it helps the lesson stick. Reveal the answers when you're done, then read on.

1. A firm tells a potential underwriting client it "will use best efforts to produce research coverage" if it wins the mandate, but will not guarantee the rating. Under Standard I(B), this offer is:

Answer: B. Standard I(B) permits best-efforts coverage commitments; what it prohibits is guaranteeing a specific, favorable conclusion. Promising to look is a promise about process. Promising a Buy rating is a promise about outcome, and that is the line the exam tests.

2. A portfolio manager pays for research with client commissions. Forty percent of the research is used for client portfolio decisions; sixty percent supports the manager's personal investing. She discloses the arrangement to clients but pays for all of it in soft dollars. Under CFA Standards, is this compliant?

Answer: B. Mixed-use research requires proportional payment: the client-benefit share may run through soft dollars, but the personal-benefit share must be paid in hard dollars out of the manager's own pocket. Disclosure alone does not cure using client money for personal benefit.

3. A sell-side analyst's firm underwrote a company's IPO. Forty-five days after the IPO, the analyst publishes a Hold rating on that company. Under Standard I(B) and FINRA Rule 2241, this is:

Answer: B. The 180-day figure is the insider lock-up on officers and directors selling their own shares; it has nothing to do with analyst publication. FINRA Rule 2241 sets a 25-day quiet period for the lead underwriter's own analysts, and 45 days is well past it.

The lesson

Runtime 11 minutes 47 seconds, measured from the published video.

The reading

Five to ten minutes on this one unit: what the exam wants, the idea in plain words, then straight into the trap and the practice.

This module asks you to evaluate a described practice, policy, or piece of conduct against the Code and Standards, and to explain in plain terms whether and why it violates one. There is no new rule here; it is the whole of Ethics applied at once, in the vignette format the real exam actually uses.

By this point you know the six principles and the seven Standards on their own. This module's job is different. It trains you to read four or five sentences about a named person. Then you decide, quickly, whether what they did was fine, borderline, or a violation. And which Standard it touches.

One pattern repeats across almost every scenario: the gap between what is legal and what the Standards require. The exam's wrong choices live inside that gap. A research report that borrows another firm's work without credit is a misrepresentation violation, and it stays a violation even if the borrowed part is small and the client is happy with the report. Client satisfaction and originality are two separate questions, and only the first one is in the client's control. A guarantee of a specific investment outcome is a violation the moment it is made, however careful the underlying research was: a member may describe best efforts, never promise a result. Small gifts inside a firm's own written policy are usually fine. The same gift outside any policy, or large enough to raise a real question about independence, is not fixed just by writing it down afterward.

Two habits carry across every scenario. First, separate what is technically allowed from what is most appropriate. An exam stem asking what a member 'should most likely do' wants the best action given every duty in play. It does not want an action that merely survives a narrow reading of one rule. Second, resist the passive choice. Reporting a colleague's suspected violation to a supervisor is an active step, and so is declining a client instruction that would force a Standards violation, and so is correcting a materially wrong statement once you learn of it. Staying quiet is almost never the answer the exam wants, because it does not resolve the underlying conflict, it only delays whoever finds it next.

The trap

A scenario where 'most of the report is original work' or 'the client was satisfied with the outcome' is offered as a reason to excuse a violation; neither fact changes whether the specific act, plagiarism, a guarantee, an undisclosed conflict, itself violated a Standard.

Learning outcomes covered by this module

Verbatim from the 2026 CFA Level I topic outline. Every practice question and key rule below is tagged to one of these where the stem and explanation make the match clear.

  1. evaluate practices, policies, and conduct relative to the CFA Institute Code of Ethics and Standards of Professional Conduct
  2. explain how the practices, policies, and conduct do or do not violate the CFA Institute Code of Ethics and Standards of Professional Conduct

Key rules

Written from this module's own lesson and the 2026 CFA Level I topic outline, in teaching order, each tagged to the learning outcome it belongs to where that is clear.

General

Three pressure sources, one required response

Investment-banking pressure, corporate-issuer pressure (a company threatening to pull its business), and sales-force pressure (a client threatening to leave) are three different sources of the same violation: any rating change or softened language that is not driven by new analytical information breaches Standard I(B), regardless of who is applying the pressure.

General

Best-efforts coverage is allowed; guaranteed conclusions are not

A firm may commit to "best efforts" research coverage as part of winning an investment-banking mandate. What it may never do is guarantee a specific rating or a favorable conclusion. The line is between a promise to look (permitted) and a promise about what will be found (prohibited).

General

The analyst quiet period is not the insider lock-up

FINRA Rule 2241 sets a 25-day quiet period for a lead underwriter's analysts (10 days for co-managers) before they may publish on a company the firm just took public. The 180-day figure that shows up in the same fact patterns is a completely different rule, the lock-up restricting company insiders from selling their own shares.

General

A firewall exists precisely so research and banking cannot swap favors

Sharing a proprietary research model with the investment-banking side of the firm, even for an unrelated deal, breaches the information barrier Standard I(B) relies on to keep research independent. It is a violation regardless of the model's quality, because once banking has it, banking can pressure the analyst to keep its assumptions favorable.

General

An employer's instruction cannot require a Standards violation

Standard IV(A), Duties to Employers, requires following reasonable employer instructions, but it carves out an explicit exception: no employee must follow an instruction that requires violating the CFA Standards. A manager relaying pressure to change a rating does not create an obligation to comply.

General

The client-benefit test decides what soft dollars may pay for

Research paid for with client commissions is permissible only when it is actually used in managing client accounts, not merely capable of benefiting clients someday. Real-time data feeds and portfolio-analytics tools used in client decisions qualify; office rent, personal hardware and marketing materials do not, because they serve the manager's business, not the client's portfolio.

General

Mixed use is split, not disclosed away

When research serves both the client and the manager personally, the split must be paid proportionally: the client-benefit share may run through soft dollars, and the personal-benefit share must be paid in hard dollars. Disclosing the arrangement is a separate, additional requirement, not a substitute for the hard-dollar payment.

General

Section 28(e) is a legal floor, not an ethical ceiling

Section 28(e) of the U.S. Securities Exchange Act protects a soft-dollar arrangement from breach-of-fiduciary-duty claims under U.S. law. It is a separate, lower bar than the CFA Standards; an arrangement can be fully legal under 28(e) and still violate Standard III(A) or VI(A).

General

Best execution is multi-factor, not lowest commission

Seeking best execution means weighing price, speed, likelihood of completion, market impact and research value together, not chasing the cheapest commission. Paying an above-market commission for research that genuinely improves client outcomes can still satisfy best execution on balance.

General

Client-directed brokerage does not cancel the duty to seek best execution

When a client names the broker to use, the manager must still seek the best available execution through that broker, and must tell the client if that broker cannot deliver it. Directing brokerage in exchange for a personal benefit to the manager, such as referral compensation, remains a Standard III(A) loyalty violation even with the client's consent.

The trick

Authored only where a key rule has an arbitrary number, list, or formula shape worth a memory device; a module with none of those has no tricks here, on purpose.

Best efforts, guarantee gone

A coverage commitment is fine; a rating guarantee ends careers. The two G's: one gets the mandate, the other gets an analyst barred from the industry.

25 to 40 days versus 180 days

The analyst quiet period is short (25 days for a lead underwriter, sometimes 30 to 40 by conservative firm policy). The insider lock-up is long, 180 days. Short rule for analysts, long rule for insiders selling their own stock.

Does the research WORK FOR the CLIENT?

The one-question soft-dollar filter: W for work, C for client, not the manager. If the answer is no, or only partly, hard dollars must cover the manager's share.

Legal floor, not ethical ceiling

Section 28(e) sets the minimum a court requires. The CFA Standards sit above it. Passing 28(e) proves nothing about passing the Standards.

Blodget, $1.435 billion

Henry Blodget publicly rated internet stocks Buy while privately calling them a dog. The 2003 Global Analyst Research Settlement, $1.435 billion across ten firms, is the real-world shape of every investment-banking-pressure question on this module.

The method

Authored, ordered steps for answering this module's question types; a calculation module's calculator-dependent step ends with a bracketed BA II Plus keystroke sequence.

  1. Identify the pressure source (banking, issuer, sales force) or the money flow (whose commissions are paying for what).
  2. Ask whether the action taken was driven by new analytical information. If nothing new was found, any rating or language change is a violation regardless of who asked for it.
  3. For a coverage-commitment question, separate a promise to look (best efforts, permitted) from a promise about the answer (a guaranteed rating, prohibited).
  4. For a soft-dollar question, run the client-benefit test on the service itself, then check whether the arrangement is mixed use, and if so, whether the personal share is paid in hard dollars.
  5. Check for a second standard hiding in the same facts: an undisclosed conflict usually also breaches VI(A); an outside referral payment usually also breaches IV(B).

One card

Condensed from the key rules and tricks above, nothing new. What you'd want on one index card the night before.

Practice questions

Pick an answer, say how sure you are, then reveal. Every wrong choice gets its own explanation. 10 question(s) available for this unit.

Question 1Exam level

An equity research analyst at a bulge-bracket firm is assigned to cover a technology company that is also a client of the firm's investment banking department, which is advising the company on a pending acquisition. The IB department head asks the analyst to maintain a 'Buy' rating on the company throughout the deal process to avoid jeopardizing the firm's advisory fees. The analyst believes the company's valuation is fair at current prices and that a 'Hold' rating is appropriate. To comply with Standard I(B), the analyst should MOST appropriately:

How sure are you?

Correct: B. Standard I(B) requires analysts to maintain independence and objectivity regardless of economic or other pressure. The analyst's rating must reflect their honest assessment. Disclosure (Answer B) is a required procedure but does not substitute for independence. The analyst cannot issue a misleading 'Buy' and cure it with disclosure. Answer A directly violates I(B). Answer D is not required. The standard does not require recusal, it requires independence.
A. Disclosure is a recurring correct answer in CFA ethics questions, so candidates pattern-match to 'disclose = correct.' This is the most dangerous wrong answer. Disclosure is required IN ADDITION to independence, not instead of it. If the analyst's honest view is 'Hold,' issuing 'Buy' with a disclosure footnote is still a violation of I(B). Disclosure cannot cure a false rating.
C. Recusal sounds like the most conservative, ethical choice. 'if there's a conflict, step away.'. Standard I(B) does not require analysts to recuse themselves from covering companies where IB relationships exist. It requires them to maintain independence. Firewalls and disclosure are the firm-level mechanisms; the analyst's obligation is to issue honest research.

Unit: ethics-application

Question 2Exam level

A technology company is a major investment banking client of the firm. After an analyst downgrades the company's stock from 'Buy' to 'Sell,' the company's CFO calls the analyst's manager and threatens to move all of the company's investment banking business to a competitor if the rating is not reversed. The manager relays this message to the analyst and asks her to reconsider. Under Standard I(B), which of the following BEST describes the analyst's obligation?

How sure are you?

Correct: B. Corporate issuer pressure, including threats to withdraw banking business, is explicitly called out in the Guidance for Standard I(B) under 'Public Companies.' The analyst's obligation is to maintain the rating that reflects honest analysis. Standard IV(A) (Duties to Employers) cannot override Standard I(B). When Standards conflict, the more restrictive applies, and I(B) cannot be waived by employer instruction.
A. Standard IV(A) says members must follow employer instructions. You might conflate this with a general duty of obedience. The manager is relaying an instruction. Standard IV(A) explicitly carves out an exception: employees need not follow instructions that require violating CFA Standards.
C. Compromise sounds like professional judgment. 'Hold' is a real rating that might reflect genuine uncertainty. If the analyst's honest assessment is 'Sell,' moving to 'Hold' to placate the issuer is a violation of I(B). The issue is whether the rating change is driven by analysis or by pressure. A rating change not based on new analytical information violates the standard.

Unit: ethics-application

Question 3Harder

A sell-side analyst at a regional broker-dealer is covering an energy company that recently completed its IPO. The firm acted as underwriter in the IPO. Forty-five days after the IPO closes, the analyst publishes a research report initiating coverage with a 'Hold' rating. Which of the following statements BEST describes whether this is consistent with Standard I(B) and relevant industry guidance?

How sure are you?

Correct: B. FINRA Rule 2241 establishes a 25-day quiet period for IPO lead underwriters and a 10-day period for co-managers before analysts can publish. Some firms adopt 30 or 40-day policies as a conservative best practice. At 45 days post-IPO, the quiet period has elapsed. Publishing an honest 'Hold' rating is consistent with I(B).
A. 180 days sounds like a substantial restriction. You might confuse the lock-up period (which applies to insiders' stock sales) with the analyst quiet period. The 180-day figure is the insider lock-up period restricting officer and director stock sales post-IPO. The analyst quiet period under FINRA Rule 2241 is 25 days for lead underwriters. These are two entirely different restrictions.
C. Disclosure is always required for conflicts. You might apply this reflexively. But the question asks about Standard I(B) compliance, not Standard VI(A). Disclosure of the IB relationship is a Standard VI(A) (Disclosure of Conflicts) requirement, not a precondition for publishing under Standard I(B).

Unit: ethics-application

Question 4Harder

An investment bank's equity research department and investment banking department are separated by a firewall. A research analyst receives a call from an IB colleague asking for the analyst's proprietary revenue model for a company the analyst covers, stating it will help the IB team price a bond offering for that company. The analyst provides the model to the IB team. This action MOST likely:

How sure are you?

Correct: B. Firewalls between research and IB departments are a core recommended procedure under Standard I(B). The purpose of the firewall is to prevent exactly this: IB using research models to benefit deal work, which creates future pressure on the analyst to maintain ratings favorable to IB clients. Once the IB team has the model, they may pressure the analyst to maintain assumptions that support deal pricing. Sharing information across the firewall undermines research independence.
A. Internal information sharing within a firm sounds innocuous. 'it's our own firm's data.'. The firewall exists precisely because 'same firm' sharing creates independence problems. The bank is organized into separate business units for regulatory and ethical reasons. Internal sharing across the firewall is the violation, not external disclosure.
C. Standard II(A) (Material Nonpublic Information) involves sharing non-public information for trading advantage. A high-profile standard that candidates apply broadly. Standard II(A) addresses trading decisions based on material nonpublic information. The scenario is about sharing an analytical model, not insider information that would constitute a trading advantage.

Unit: ethics-application

Question 5Harder

A fixed income analyst at a securities firm is asked by a potential investment banking client to guarantee that the firm will issue a 'favorable' research report if the client awards the firm its upcoming bond underwriting mandate. The analyst responds that the firm 'will use best efforts to produce research coverage' on the company if it wins the mandate, but cannot guarantee the conclusions. This response is MOST consistent with:

How sure are you?

Correct: B. This is a bright-line rule in Standard I(B) Guidance: firms may commit to providing 'best efforts' research coverage as part of winning IB mandates. What is prohibited is guaranteeing favorable research conclusions or specific ratings. The analyst's statement. 'best efforts to produce research coverage' but no guarantee of conclusions. Is precisely the language permitted under I(B). This distinction appears frequently on the exam.
A. Any link between research and IB sounds like a conflict. Candidates who memorize 'IB pressure = violation' without learning the best-efforts exception will choose A. The CFA curriculum explicitly permits best-efforts coverage commitments. The prohibition is narrower: guaranteeing specific conclusions or ratings. Coverage commitments are a normal business practice.
C. Standard V(A) (Diligence and Reasonable Basis) requires analysis before recommendations. Pre-committing to coverage without analysis sounds like it violates V(A). A best-efforts coverage commitment is not a recommendation. It's a commitment to do the analysis. V(A) would be violated if the analyst issued a rating without analysis, not by agreeing to cover a company in the future.

Unit: ethics-application

Question 6Exam level

A sales associate at a broker-dealer tells the equity research analyst: 'Our largest client is extremely upset about your downgrade of MegaCorp. He's threatening to move his $50 million account to a competitor. Can you at least soften the language in your report or change it to a Hold?' The analyst's MOST appropriate response under Standard I(B) is to:

How sure are you?

Correct: B. Sales force pressure is explicitly addressed in Standard I(B) Guidance under 'Sales and Trading Pressure.' The standard is unambiguous: analysts may not change ratings or soften report language in response to client displeasure. The only basis for changing a rating or language is new information that analytically supports the change. The $50 million account size is an irrelevant pressure factor. It tests whether the candidate will bend under significant economic pressure.
A. Changing language without changing the formal rating seems like a minor concession. 'Softening language' might not feel like the same as changing the rating. Research report language is as much a communication of analyst opinion as the rating itself. Softening language to appease a client, without analytical basis, is a violation of I(B) even if the star rating doesn't change.
C. Escalation sounds like a responsible, institutional response. 'let management handle it.'. Senior management cannot authorize a Standards violation. Escalating to ask permission to violate I(B) does not protect the analyst. The analyst's obligation is to maintain the independent rating regardless of management's instructions (see Standard IV(A) exception for Standards violations).

Unit: ethics-application

Question 7Exam level

A research analyst signs a research report with the following certification: 'The views expressed in this report accurately reflect my personal views about the subject securities and issuers. No part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report.' This certification is most likely described as:

How sure are you?

Correct: A. The text quoted is the exact language of Regulation Analyst Certification (Reg AC), adopted by the SEC in 2003, which requires equity research analysts at registered broker-dealers to certify that their research reports reflect their personal views and that their compensation is not tied to specific recommendations. Reg AC was adopted as a regulatory response to the same conflicts documented in the 2003 Global Analyst Research Settlements. The CFA curriculum discusses Reg AC in the Standard I(B) context as an example of how securities law codified what CFA Standards already required.
B. Standard V(B) addresses communications with clients and requires that reports accurately reflect analyst views. This certification seems to fulfill that requirement. Standard V(B) does not require a signed certification. The specific language and the signed-certification format is Reg AC. V(B) compliance is ongoing and conduct-based, not a point-in-time certification.
C. Some firms do have internal policies that go beyond regulatory minimums, and candidates unfamiliar with Reg AC may guess this is one such policy. Reg AC is an SEC rule (17 CFR Part 242), not a voluntary firm policy. It applies to all research analysts at registered broker-dealers. Failure to include the certification carries regulatory consequences.

Unit: ethics-application

Question 8Exam level

An analyst at a sell-side firm has been covering RetailCo for three years and has maintained a 'Buy' rating throughout. RetailCo's investor relations team invites the analyst on an all-expenses-paid trip to the company's flagship stores in five cities, framing it as a 'channel check' that will provide research insight. The analyst's supervisor approves the trip. Under Standard I(B), which of the following BEST describes the analyst's situation?

How sure are you?

Correct: C. Standard I(B) Guidance specifically addresses corporate issuer-sponsored trips. The key test is whether the benefit could reasonably be expected to compromise independence. A brief, value-appropriate trip for genuine research purposes may be acceptable. An elaborate multi-city all-expenses-paid trip raises the question of whether the value is designed to influence the analyst. Supervisor approval is relevant as a firm procedure but does not make a violating trip acceptable. The word 'reasonably expected to influence' is the exact standard from the CFA curriculum.
A. Channel checks are genuinely legitimate research. Supervisor approval sounds like full institutional endorsement. The method (channel check) is legitimate; the vehicle (issuer-sponsored lavish trip) creates an independence concern. Supervisor approval does not cure a Standards violation.
B. Any benefit from an issuer sounds like a conflict. You might over-apply the independence rule. The standard is not absolute. Modest, legitimate research-facilitating benefits are acceptable. The test is whether the benefit 'could reasonably be expected to compromise independence,' not whether any benefit exists.

Unit: ethics-application

Question 9Above the exam

A portfolio manager discloses a material conflict of interest (a large personal holding in a stock she recommends) to her employer but not to her clients, reasoning that employer disclosure satisfies her obligations. Combining Standard VI(A) (Disclosure of Conflicts) with the broader duty of loyalty to clients under Standard III(A), her approach is most likely:

How sure are you?

Correct: B. Standard VI(A) requires members to disclose material conflicts of interest to CLIENTS and prospective clients, in a manner sufficient to allow them to evaluate the conflict, in addition to any internal disclosure the firm requires. Disclosing only to the employer addresses the firm's own risk management but does not satisfy the member's independent duty, under both VI(A) and the general duty of loyalty in Standard III(A), to let the client itself judge the conflict.
A. Employer disclosure and client disclosure serve different purposes and are both required; satisfying an internal firm policy does not substitute for the client-facing disclosure Standard VI(A) specifically requires so the client can evaluate the conflict for themselves.
C. A material personal holding in a security the manager is actively recommending is a textbook example of a disclosable conflict of interest under Standard VI(A); ownership size and relevance to the recommendation are exactly what make it material and reportable.

Unit: ethics-application

Question 10Above the exam

An analyst is asked by his employer to remove a negative section from a research report because a client complained. The analyst believes the negative section is factually accurate and material to the investment decision. Applying Standard I(B) (Independence and Objectivity) together with Standard V(B) (Communication with Clients and Prospective Clients), the analyst's most likely correct course of action is to:

How sure are you?

Correct: B. Standard I(B) requires members to maintain independence and objectivity and resist pressure that could compromise their judgment; caving to a client complaint by removing material, factually accurate information is exactly this kind of compromise. Standard V(B) separately requires that communications to clients distinguish fact from opinion and include the basic characteristics of the investment, which a report stripped of material negative information would fail to do.
A. An employer's business interest in keeping a client happy does not override the analyst's independent professional judgment or his duty under Standard V(B) to give clients complete, accurate information; the Standards apply regardless of internal pressure to conform.
C. Removing material information from the WRITTEN report while privately telling only one client it still applies creates an inconsistent, misleading record and does not cure the Standard V(B) problem for anyone who relies on the written report itself, including other clients who never receive the private caveat.

Unit: ethics-application

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