Guidance for Professional Standards on the CFA Exams

We started our 21-week study plan with Monday’s blog and the CFA Code of Ethics. Today, we’ll continue study session one with guidance on the Standards which we’ll finish in the next post.
Standard I- Professionalism
**Strict law rule– the standards say to follow the most strict interpretation between either local laws or the code/standards. This applies to all jurisdictions to which you are responsible. A classic example is doing business in one country but living in another. You are probably under both jurisdictions so must follow ‘most strict’ laws in either of the two (or the code/standards).
Know or should have Known- must not knowingly violate or assist someone else in violating laws or code. A big part here (and with supervisor duties) is if you should have known, given your responsibilities.
*NOT required to inform police unless explicitly required by law. Procedure is to inform supervisor, compliance and to disassociate from activities.
Independence & Objectivity
* Firms/analysts should pay their own expenses whenever possible and disclose when they have accepted any form of compensation. This includes when there is not a violation but may be a perception of a violation. Token gifts are acceptable but the Institute does not explicitly define or give a dollar amount on ‘Token’ so questions
* Issuer Paid research should be on a fee-only basis and not tied to rating. Issuer paid research must be disclosed.
* You need to understand and tell the difference between informational firewalls, quiet (blackout) periods, and restricted lists.
You can NEVER guarantee a return unless the investment is explicitly guaranteed by an institution (and the institution has the means to back up losses, i.e. U.S. Government).
All informational sources must be directly credited (not just- “leading analysts” or “experts”).
* Even if something is legal (drinking) members/candidates must not engage in the activity if it could lead to a loss of confidence in the employee, employer, profession or the Institute. Having a ‘high tolerance’ for alcohol does not cover the fact that the perception of misconduct may occur.
* Bankruptcy or civil disobedience is ok as long as it is not from fraudulent conduct.
Standard II- Integrity of Capital Markets
Material non-public Information- This is a big one for the industry and the Institute
* know the Mosaic theory and how it is interpreted. Combination of material PUBLIC information with non-material non-public information is ok to trade on.
* members/candidates must not use or cause others to use material non-public information. “Material” is anything that an investor would want to know or could affect the asset price.
* Company conference calls or meetings are NOT public release and any material information divulged should be immediately made public (and cannot be traded on until made public)
Market Manipulation-
Any actions with INTENT to distort price or volume is against standards. Understand the “pump and dump” and “liquidity priming” scenarios
Standard III- Duties to Clients
Benefit of clients always comes before employer (whose benefit is before employee)
Understand responsibilities for ‘best execution’ and that ultimate beneficiary (i.e. pension holder) is your client, not necessarily the institution hiring your firm
Fair Dealing
* All clients must be treated fairly and equally
Different service levels are ok, but must be available to everyone and disclosed
Allocations should be on a pro-rated policy (but only to those portfolios where suitable)
The method of client communication seems to be important. Example: you can’t send snail mail to some while directly calling others because this gives the called clients an unfair advantage. You can however use the same initial distribution method (email everyone) then start calling clients without violating standards.
You must understand client’s risk/return objectives and constraints to determine suitability. Investments may be risky in isolation, but suitable given total portfolio.
Performance Presentation
Just remember FACT: Fair, Accurate, Complete (and timely)
Only release client information if: required by law, illegal activities, or explicit client permission
We’ll wrap up the guidance on the Standards in the next post and cover additional material in the last post of the week.
‘til next time, happy studyin’
Joseph Hogue, CFA

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