Guidance for Standards I-VII

Ethical and Professional Standards, LOS weight share 0.8 percent of the 365 Level I learning outcomes.

Ethical and Professional StandardsGuidance for Standards I-VII

Ethics is not memorizing seven numbered rules. It is spotting which one a fact pattern actually tests.

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 portfolio company invites an analyst who covers it to a conference dinner worth $280. The analyst's firm has no written gift policy. Under Standard I(B), the analyst should MOST likely:

Answer: B. Standard I(B) covers 'any gift, benefit, compensation, or consideration', entertainment included, and sets no dollar threshold. The test is judgment: who is the giver, and how large is the benefit. A dinner from a company the analyst covers is not automatically banned, but it is not automatically fine either.

2. A manager updates her three largest clients by phone the moment she issues a new sell recommendation, then emails the rest of her clients 45 minutes later. Under Standard III(B), this is:

Answer: C. Fair dealing permits proportional IPO allocation and service levels, but a new recommendation must be disseminated simultaneously. A deliberate head start for any client class, however large, breaks that rule.

3. An investment manager places a personal buy order for a stock five minutes before submitting the identical buy order for her clients' accounts, expecting the client order to move the price. Which standard does this violate?

Answer: B. This is front-running: trading ahead of a known client order. It is a Standard VI(B) violation, not II(A). A client's own pending order is not material nonpublic information about the company; it is information about a transaction, and client orders must always execute before the member's own.

The lesson

Runtime 15 minutes 54 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 is almost entirely judgment, not recall: the exam asks you to apply the Code and Standards to a described situation, recommend what a compliant firm's procedures should look like, and tell conforming conduct apart from a violation. Expect a short scenario followed by a question asking what the person should have done.

Every one of the seven Standards eventually gets tested through a scenario rather than through a definition, and the same three traps repeat across all of them. The first is compliance approval. A firm's compliance department signing off on a trade or a communication reduces the firm's legal exposure, but it never discharges a member's own duty to exercise independent judgment. If your compliance department approves something you know is wrong, you still are not clear.

The second trap is disclosure standing in for avoidance. Under many firms' internal policies, disclosing a conflict is enough. Under the Standards, some conflicts must be avoided outright, no amount of disclosure fixes them. A gift large enough to create a real question about your independence has to be declined, not disclosed and accepted anyway. The rule of thumb the curriculum gives: minor conflicts can be disclosed and managed; conflicts that would actually compromise independent judgment must be avoided.

The third trap is the law as a ceiling instead of a floor. Local law, your employer's policy, and the CFA Standards can all say something different about the same situation, and the rule is simple: follow whichever one asks more of you. If local law is more permissive than the Standards, the Standards still apply.

One idea deserves its own space because a single misread word changes the answer: mosaic theory. Combining public information with nonpublic information that is not material to reach an investment conclusion is legal and expected of a good analyst; that is what research is. The instant the nonpublic piece is material, meaning it would move the price if it became public, mosaic theory stops applying entirely, and no amount of additional public research cleans the resulting recommendation. It does not matter whether you sought the information out or simply overheard it; receiving material nonpublic information passively carries the same restriction as receiving it actively.

Reading a Standards vignette well means asking three questions in order: whose interest is primary here, what does the relevant Standard actually require rather than what the employer would prefer, and is there a conflict between law, policy, and the Standards that has to be resolved by following the strictest one.

The trap

'Do nothing' is almost never the right answer on a Standards vignette: when a member becomes aware of a violation or a live conflict, some action is required, at minimum escalating internally to a supervisor before any thought of going outside the firm.

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. demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity
  2. recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct
  3. identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards

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

Independence is an objective test, not a subjective one

Standard I(B) bans accepting or offering "any gift, benefit, compensation, or consideration that reasonably could be expected to compromise" independence. The test is whether a reasonable person would see a risk of compromised judgment, not whether the member was actually influenced. There is no dollar threshold anywhere in the Standard; "modest" is a judgment call based on the benefit's size and the giver's relationship to the member's work.

General

Firm policy is a floor, not a shield

An employer's gift policy (for example, a $100 cap) can be stricter than the CFA Standards, but it can never excuse conduct the Standards prohibit. "My firm's policy allowed it" is not a defense when the benefit still reasonably risks compromising independence.

General

Entertainment is a gift; there is no carve-out

The Standard's own wording, "any gift, benefit, compensation, or consideration," reaches dinners, tickets and trips exactly as it reaches physical gifts. Whether the benefit is lavish (decline or self-fund, then disclose) or modest (disclose to the employer) depends on scale and source, not on whether it is called "entertainment."

General

Disclosure does not cure a compromised rating

Standard VI(A) requires disclosing a conflict; Standard I(B) requires that the analysis itself stay independent. A disclosed investment-banking relationship does not excuse a rating that was actually changed because of banking, issuer or sales pressure. Both standards apply, and satisfying one never satisfies the other.

General

Client brokerage belongs to the client

A manager who directs client trading commissions to a broker in exchange for research (a soft-dollar arrangement) must show the research primarily benefits the specific clients whose commissions paid for it, that the commission is reasonable for what was received, and that the arrangement is disclosed. Research that mostly serves the manager's own business, or other clients, breaches the duty of loyalty even if some client benefit exists.

General

"Fairly" is not "equally"

Standard III(B) uses the word fairly, not equally. Proportional IPO allocation by account size or documented interest is compliant. What is never compliant is a timing advantage: any recommendation must reach every client at the same time, with no early call to favored accounts.

General

A client's own request does not establish suitability

Even when a client asks for an investment outright, the manager must still check it against the client's Investment Policy Statement. If it is inconsistent, the manager informs the client, documents the conversation, and declines unless the client explicitly acknowledges the inconsistency and consents after being fully informed. "The client wanted it" is never a complete answer on its own.

General

Clients first, employer second, the member last

Standard VI(B) sets a strict order of execution: client orders fill first, employer (proprietary) accounts second, and the member's own account last, including any account in which the member holds a direct beneficial interest. Front-running, placing a personal order ahead of a known client order, breaches this at the point the order is submitted, regardless of the price achieved.

General

A family account managed for the family member is a client account

The common wrong answer is that family accounts always go last. The actual rule asks two questions: is the account managed for the family member's benefit, and does the member have a direct financial stake in it (joint ownership, a dependent's account, a share of the gains)? Managed-for-them with no direct stake means client priority, the same as any other client; a direct stake means the member's own account, which goes last.

General

Referral fees: three recipients, one timing rule

A referral-fee arrangement must be disclosed to the employer, to existing clients and to prospective clients, and the disclosure to a prospect must happen before the referral is made, not in onboarding paperwork signed afterward. An undisclosed referral fee from an outside party also usually triggers Standard IV(B), which requires the employer's written consent before accepting outside compensation.

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.

Disclosure is not a free pass

Treat disclosure as necessary but rarely sufficient. It satisfies Standard VI(A)'s duty to reveal a conflict; it never by itself satisfies Standard I(B)'s duty to stay independent, or Standard III(A)'s duty of loyalty.

Employer approval does not equal CFA compliance

A firm's policy sets a ceiling on what its own employees may do; it can never lower the floor the CFA Standards require. Any answer choice that leans on "the firm's policy allowed it" is the trap, not the defense.

CPM: Clients, Partners, Me

The Standard VI(B) execution order in one line: clients first, the employer (the firm's own proprietary account) second, the member's own money last.

Is this their money or my money?

The family-account test in one question. Their money, managed on their behalf, gets client priority. Money the member has a direct stake in goes last, same as the member's own account.

The 2003 Global Analyst Settlement, $1.4 billion

Ten major investment banks paid this for analysts who privately called stocks "junk" while publicly rating them Buy, to protect investment-banking fees. Every analyst-independence question on the exam is a miniature version of this case.

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. Read the last sentence of the question first: which standard, or which two standards, is it actually asking about.
  2. Identify the mechanism in the facts: a benefit changing hands (I(B) or VI(A)), a trade sequence (VI(B)), a client-vs-client difference in treatment (III(B)), a suitability question (III(C)), or an outside payment (VI(C) plus IV(B)).
  3. Check whether the fact pattern combines two mechanisms at once (a disclosed conflict that also changed the actual recommendation): if so, the correct choice usually names both standards, not one.
  4. Reject any answer that treats firm policy, client consent, or genuine personal belief as a complete defense; none of the three overrides a Standard on its own.
  5. Confirm the timing: was the required action (disclosure, client-order priority, consent) taken before the conflict-creating event, not after it.

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

Sarah Chen, CFA, works at a brokerage firm. Her supervisor instructs her to allocate IPO shares to preferred clients before informing other eligible clients. A practice that violates CFA Standards but is not illegal in her jurisdiction. Under Standard I(A), Sarah MUST, most likely:

How sure are you?

Correct: A. The correct answer is Refuse to follow the instruction and disassociate from the activity. Standard I(A) requires members to follow the strictest applicable standard. Here, CFA Standards are stricter than local law, so CFA Standards govern. Sarah cannot participate regardless of the legality..
B. You might confuse 'legal' with 'permissible under Standards.' The exam frequently uses legal-but-unethical scenarios precisely to test this distinction. Standard I(A) requires following the strictest applicable standard. CFA Standards prohibit this practice. Legality is a floor, not a ceiling.
C. You might believe Standard I(A) requires external regulatory reporting whenever they discover a violation. Standard I(A) does NOT require reporting to external regulators unless the law specifically mandates it. Internal escalation is the required path. External reporting is only mandatory when law requires it.

Unit: guidance-for-standards-i-vii

Question 2Harder

James, a CFA candidate, discovers his firm's research department is providing material non-public information to select hedge fund clients. He is not personally involved in these communications. Under Standard I(A), James should most likely FIRST:

How sure are you?

Correct: A. The correct answer is Report the activity through his firm's internal compliance channels. Standard I(A) guidance prioritizes internal reporting first. The member has not participated but is obligated to disassociate from any activity connected to the violation and escalate internally..
B. You might interpret disassociation as simply 'not participating yourself,' which makes option A seem sufficient. Disassociation alone is insufficient when you have knowledge of an ongoing violation. The recommended procedures require attempting to stop the violation. First through internal channels.
C. The moral instinct is to report wrongdoing to authorities. You might from common-law jurisdictions also think this is legally required. Standard I(A) does not require external reporting unless a specific law mandates it. In most jurisdictions, there is no mandatory reporting obligation on employees for employer violations. Internal escalation is required first.

Unit: guidance-for-standards-i-vii

Question 3Exam level

A CFA member works at a firm in a jurisdiction where the local securities law requires less disclosure to clients than the CFA Institute Standards of Professional Conduct. Which of the following is MOST accurate?

How sure are you?

Correct: A. The correct answer is The member must follow CFA Standards because they are more strict than local law. Standard I(A) requires members to comply with the more strict of applicable law and CFA Standards. Where CFA Standards exceed legal requirements, members must meet the CFA standard..
B. This seems logical. If you comply with the law, you've met your legal obligations. Being a CFA member means voluntarily agreeing to Standards that may exceed legal minimums. Compliance with law is a floor. The CFA Code requires members to 'comply with applicable laws' AND the Standards. Whichever is stricter.
C. Seems like the responsible professional thing to do. No such reporting requirement exists in Standard I(A). The standard prescribes conduct, not lobbying obligations.

Unit: guidance-for-standards-i-vii

Question 4Exam level

Maria, CFA, works at an investment bank. She learns that her employer is operating without a required regulatory license that has recently lapsed. Her supervisor assures her the renewal is in process and instructs her to continue normal operations. Under Standard I(A), Maria should most likely:

How sure are you?

Correct: A. The correct answer is Disassociate from any activities that require the license and seek legal counsel to clarify her personal obligations. Maria cannot knowingly assist in activities that violate the law, even if the violation is the firm's rather than her own. She should seek guidance on her personal exposure and escalate internally..
B. The supervisor's assurance seems to transfer the responsibility. You might don't want the 'quit your job' answer. A supervisor's assurance does not eliminate a member's personal obligation under Standard I(A). 'I was told it was fine' is explicitly not a defense in the Standards.
C. If operating without a license is illegal, resignation seems like the 'safe' choice. Resignation is a last resort, not the first step. Maria should disassociate from the specific violations and escalate internally first.

Unit: guidance-for-standards-i-vii

Question 5Exam level

Under Standard I(A), which of the following best describes the term 'disassociation'?

How sure are you?

Correct: A. The correct answer is Removing oneself from participating in or assisting with any activity that violates laws, regulations, or the Standards. Disassociation is an active step. Ceasing involvement. It does not automatically require resignation, reporting to regulators, or any other external action..
B. The most dramatic way to 'disassociate' from a firm seems to be leaving it. Resignation may ultimately be necessary if disassociation is impossible, but it is not what disassociation means. You can disassociate from a specific activity while remaining employed.
C. Seems like the transparent, ethical approach. Standard I(A) does not require informing clients of employer violations. This could itself create legal and contractual problems.

Unit: guidance-for-standards-i-vii

Question 6Exam level

Tom, a CFA candidate still in the exam process, discovers his portfolio management firm is front-running client orders. Tom is not personally involved in the execution side of the business. Which statement is MOST accurate regarding Tom's obligations under Standard I(A)?

How sure are you?

Correct: A. The correct answer is Tom has the same obligations as a CFA member. Standard I(A) applies equally to CFA candidates and CFA charterholders. Tom must disassociate from the violating activity and escalate internally..
B. You might assume their obligations begin upon receiving the charter. The CFA Institute Standards explicitly apply to all candidates enrolled in the CFA Program, not only those who have earned the designation.
C. Tom is not personally front-running, so it seems his personal conduct is clean. Standard I(A) requires more than personal non-participation. Knowledge of an ongoing violation requires disassociation and internal reporting.

Unit: guidance-for-standards-i-vii

Question 7Harder

A CFA member is working in a country where local law explicitly prohibits reporting employer violations to any external authority. The firm is violating CFA Standards but not local law. The member has escalated internally with no result. Under Standard I(A), the member's most likely course of action is:

How sure are you?

Correct: A. The correct answer is Disassociate from the violating activities and consider resignation if continued employment requires participation in violations. Where local law prohibits external reporting, the member cannot be required by Standard I(A) to break local law. Disassociation and, if necessary, departure remain available options..
B. CFA Institute seems like the right body to report to when regulators are blocked. Standard I(A) does not prescribe reporting firm violations to CFA Institute as a required step. CFA Institute enforcement actions are complaint-driven but are not required by the standard.
C. Ethics seems to demand transparency regardless of local law. Standard I(A) never requires members to break applicable law. The standard says to comply with the MOST STRICT of applicable laws and Standards. But breaking a law to comply with Standards is never required.

Unit: guidance-for-standards-i-vii

Question 8Harder

Under CFA Institute Standards, which of the following is most likely a RECOMMENDED PROCEDURE (not a requirement) under Standard I(A)?

How sure are you?

Correct: A. The correct answer is Maintaining written records documenting that the member attempted to comply with or correct violations. The Standards distinguish between what members MUST do (requirements) and recommended procedures that support compliance. Documentation is a recommended best practice, not a mandatory requirement..
B. This sounds like a best practice rather than a hard rule. This is a REQUIREMENT under Standard I(A), not merely a recommendation. Members must follow the strictest applicable standard.
C. Disassociation sounds like a best practice one would choose, not a rule one must follow. Disassociation from known violations is a requirement, not merely a recommended procedure.

Unit: guidance-for-standards-i-vii

Question 9Above the exam

An analyst, in the same week, (1) accepts a small gift from a client that is customary in the client's culture and immediately discloses it to her employer, and (2) fails to keep records supporting a buy recommendation she issued from memory. Which of her two actions is most likely a genuine Standards violation?

How sure are you?

Correct: B. A modest gift that is customary in the client's culture, promptly disclosed to the employer, does not by itself violate Standard I(B) (Independence and Objectivity); disclosure and reasonableness are exactly what the guidance for that Standard looks for. Issuing a recommendation without retaining the records that support it, however, is a direct violation of Standard V(C), Record Retention, regardless of whether the recommendation itself turned out to be sound.
A. The guidance for Standard I(B) does not treat every client gift as an automatic violation; a modest, culturally customary gift that is disclosed to the employer is specifically the kind of fact pattern the guidance treats as acceptable, not presumptively wrong.
C. Treating both as equal violations misses that the gift scenario, as described (modest, customary, disclosed), is compliant under the Standard I(B) guidance; only the recordkeeping lapse is an actual violation here.

Unit: guidance-for-standards-i-vii

Question 10Above the exam

A member discovers that her firm's written compliance procedures adequately address insider trading (Standard II(A)) but say nothing at all about how employees should handle material nonpublic information received accidentally from a corporate insider. Under the guidance for Standard IV(C), Responsibilities of Supervisors, and Standard II(A) together, the member's most likely best course of action is to:

How sure are you?

Correct: B. Standard IV(C) guidance calls for members with supervisory or compliance responsibility to recommend that adequate compliance procedures be adopted and to escalate known gaps rather than ignore them. A general prohibition on trading on material nonpublic information (Standard II(A)) is not the same as having a written PROCEDURE addressing a specific accidental-receipt scenario; combining the two LOS, the correct response is to flag and push for the procedural gap to be closed through the firm's own compliance channel.
A. A general prohibition on trading on inside information is not a substitute for a written PROCEDURE telling employees what to do in a specific accidental-receipt scenario; the gap identified here is a compliance-procedure gap, which Standard IV(C) guidance says should be raised, not ignored just because a related Standard exists.
C. An individual member is not authorized to unilaterally implement firm-wide policy without escalating through her firm's own compliance and supervisory structure; doing so bypasses the very process the guidance for Standard IV(C) describes.

Unit: guidance-for-standards-i-vii

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