Ethical and Professional Standards
Apply, don't recite
Level II tests the Code and Standards through vignettes: a fact pattern, four choices, a decision. Learn the seven standards by function - I Professionalism; II Integrity of Capital Markets; III Duties to Clients; IV Duties to Employers; V Investment Analysis, Recommendations, and Actions; VI Conflicts of Interest; VII Responsibilities as a CFA Institute Member or Candidate - then ask which duty the conduct touches.
Traps that recur
- Knowing versus should have known. Standard I(A) requires escalation or dissociation when you have reason to believe a violation is occurring; supervisors must act under IV(C).
- Mosaic theory. Combining material public information with nonmaterial nonpublic information is permitted; trading on material nonpublic information is not, even when it arrives casually from a client.
- Gifts and referral fees. Anything that could compromise independence must be disclosed to the employer under I(B) and VI(C); soft dollars must benefit the client, not the manager.
- Performance presentation (III(D)) must be fair, not merely accurate.
Worked example
A research analyst learns at a trade show, from a supplier's engineer, that the supplier will miss delivery targets. The information is nonpublic and would move the stock, so trading and tipping are barred by II(A) even though the analyst discovered it independently; the correct step is to refrain and escalate to compliance until the information becomes public. If instead the analyst reaches the same conclusion from public shipping data and industry reports, that is legitimate mosaic-theory research.
Rule of thumb: before acting, ask whether the decision could be defended on the front page of a newspaper and to the compliance officer. If not, take the more conservative path - refuse, disclose, or escalate.