Ethics and Professional Standards
The Architecture of the Code and Standards
The Code of Ethics states six principles in broad aspirational language; the Standards of Professional Conduct translate them into enforceable rules. Candidates must know the seven Standards by name and be able to place a fact pattern under the correct one: professionalism (misrepresentation, misconduct, independence), integrity of capital markets (material nonpublic information, market manipulation), duties to clients (loyalty, fair dealing, suitability, performance presentation, confidentiality), duties to employers (loyalty, additional compensation, supervisory responsibilities), investment analysis (diligence, communication, record retention), conflicts of interest (disclosure, priority of transactions, referral fees), and responsibilities as a CFA member or candidate.
Traps That Recur
Questions rarely test the text directly; they test judgment. Common traps: assuming the Standards are subordinate to local law (the stricter of law and Standards governs); treating the mosaic theory as a license to trade on inside information (it permits acting on nonmaterial assembled public pieces, not on a material nonpublic tip); forgetting that fair dealing means no client is disadvantaged in time, not that all clients receive identical service simultaneously; and overlooking that written consent is required before accepting gifts or bonuses that compete with the employer. Another frequent trap is the supervisor who "did not know" - the Standard requires reasonable efforts to detect and prevent violations, so a failure to establish a compliance system is itself a violation.
Worked Example
An analyst learns from a company insider that earnings will beat guidance, and separately builds a model from public channel checks. The tip is material and nonpublic: no trading, and no "catalyst" discussion with clients. The model output alone is legitimate under the mosaic theory. Rule of thumb: ask three questions - is it material, is it nonpublic, and did I misappropriate it? If any answer is unclear, escalate to compliance and do not trade.