Lesson 1 of 6 · All lessons in this module
- How to work through an ethics caseVideo lesson
- Professionalism: law, independence, honesty and competence
- Markets and conflicts: inside information, manipulation, front-running and fees
- Duties to clients: loyalty, fair dealing, suitability, performance and confidentiality
- Duties to employers: loyalty, outside pay and supervision
- Research, communication, records and the CFA designation
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Lesson 1 of 6 · 12 min
How to work through an ethics case
Every ethics vignette is solved the same way: identify the person's role and duty, find the facts that trigger a standard, then test each tempting excuse against what the standard actually requires.
In short
- Start with role: adviser or execution-only broker, analyst, supervisor, compliance officer, issuer executive or candidate. The role decides which duties apply and how far they reach.
- Then ask whose interest is at stake: the law, the market, clients, the employer, or the CFA Program. That points you to the right standard.
- Most wrong answers are excuses: 'nobody was harmed', 'it turned out well', 'the client agreed', 'it was disclosed', 'the employer allowed it', 'I didn't profit personally'. Learn which ones never work.
- Disclosure cures conflicts and referral arrangements; it never cures fraud, unsuitable advice, misleading statements or a waiver of core duties.
- Count every actor. Silence, continued participation, weak supervision and blind reliance on someone else's work can each be a violation.
Four questions for every vignette
Ethics questions on the exam are short stories that end with 'Are the actions appropriate?', 'Who violated the Code and Standards?' or 'What should the member do?'. Reading them well is a skill you can practise, and the same four questions work every time.
1. What is the person's role? An adviser with discretion owes far more than a broker who only executes a client's own orders. A supervisor owes duties for other people's conduct. A compliance officer is a supervisor for compliance matters across the firm.
2. To whom is the duty owed? Breaking a law points to Knowledge of the Law; distorting prices or trading on inside information points to the market standards; harming clients points to Duties to Clients; harming the firm points to Duties to Employers.
3. Which facts trigger the standard? Look for the red flag the writer planted: a payment nobody was told about, a trade placed just before a big client order, a figure that is technically correct but missing context, a promise of a return. 4. What would compliant conduct look like? If you can describe the fix, you can usually spot the right answer.
Ethics answers often feel 'harsh'. That is deliberate: the standards protect trust in the whole profession, so the test is the conduct itself, not whether things happened to turn out fine.
Excuses that do not save the conduct
Exam writers build distractors from the reasons people give for questionable conduct. Most of them fail for the same few reasons, so learning them once saves a lot of time.
The core idea: a standard is breached by the conduct, not by the outcome. A deceptive act that happens to make clients money is still deceptive. A front-run trade that does not move the price is still front-running.
| Excuse in the answer option | Why it fails |
|---|---|
| 'No client or investor was harmed.' | Violations are judged on conduct. Harm is not a required element. |
| 'The investment performed well later.' | Hindsight cannot cure misleading or manipulative conduct at the time. |
| 'The client gave permission.' | A client cannot waive a legal requirement (such as a genuine signature) or the adviser's core duties. |
| 'It was fully disclosed.' | Disclosure does not make an unsuitable or deceptive action acceptable. |
| 'Firm policy allowed it' or 'my boss told me to'. | The stricter of law, firm policy and the Code applies, and misusing a policy is still misconduct. |
| 'I did not benefit personally.' | Tipping friends or helping others breach a rule is still a violation. |
| 'I'll make it up to clients later.' | Ethics is not a ledger; each act must comply when it is done. |
| 'The amount was small' or 'it was my own money'. | What matters is whether the act could reasonably compromise independence or mislead. |
When disclosure is the cure, and when it is not
Disclosure is the right fix when the problem is that someone lacks information to judge your objectivity: a conflict of interest, a referral payment, outside compensation, different levels of service. There, full, plain-language disclosure (and, for outside pay, the employer's written consent) makes the arrangement acceptable.
Disclosure is not enough when the problem is the action itself. Explaining the risks of an unsuitable product does not make it suitable. Telling clients that an agreement limits their rights does not make it acceptable to strip away the duty of loyalty. Disclosing how trades are allocated does not make cherry-picking fair.
| Disclosure (plus consent where required) is enough | Disclosure is not enough |
|---|---|
| Payments from sub-advisers or product providers | Recommending an unsuitable investment |
| Referral fees paid or received | Promising or guaranteeing returns |
| Outside compensation (with written employer consent) | Contract terms that waive loyalty, prudence and care |
| Premium service tiers available to all clients | Allocating winning trades to your own accounts |
Counting violators and choosing the remedy
Many questions ask 'which individual(s) violated?'. Check each person separately. A colleague who stays silent while a client is misled, and keeps taking part, is assisting. A supervisor whose oversight is minimal fails even if they never knew of the wrongdoing. An analyst who copies another analyst's flawed report fails the reasonable-basis test alongside the original author.
When a member discovers wrongdoing, the remedy follows a ladder. First raise it with a supervisor or compliance. If the proposed fix is inadequate, the member must not continue to take part: dissociate by refusing to perform the tainted work. If that still fails, escalate further (senior management, the board, a regulator) or leave the firm.
A partial fix is the classic trap. Correcting a problem only for future clients, or 'at the next renewal', leaves current clients exposed, so continuing to work under the old arrangement is still participation.
- Silence in front of a client who is being misled = assisting.
- Inadequate corrective plan from management = keep refusing to participate.
- Resigning much later, after failing to act, does not cure the period of non-compliance.
Worked examples
Example 1 Counting the violators
At a pitch to a university endowment, Varga, CFA, head of sales at an asset manager, tells the trustees that the firm's flagship fund 'has never had a negative calendar year'. Oduya, a CFA candidate on the team, knows the fund lost 4% two years ago. He says nothing and later sends the trustees a follow-up pack repeating the claim. Who violated the Code and Standards?
Example 2 Does disclosure fix it?
An adviser, Lindqvist, CFA, considers three situations. (1) Fund houses pay her firm an annual fee based on client assets she places with them. (2) She plans to put a cautious, retired client 70% into one leveraged property fund and to give him a detailed written risk warning. (3) Her new client agreement states that clients waive any claim if her advice is not in their best interest. In which situation(s) can disclosure make the conduct acceptable?
Example 3 Choosing the remedy
Petrov, CFA, works in fund administration and finds that the firm has for years charged funds a 'data cost recovery fee' that exceeds the actual data costs, while describing it to investors as a pass-through. His manager agrees to cap the fee at cost for funds launched from next year. What should Petrov do?
On the exam
Vignettes end with 'are the actions appropriate', 'who violated' or 'what should the member do'. Wrong options are usually plausible excuses: no harm, good outcome, client consent, disclosure, or employer instruction.
- Choosing an option because the outcome was good or nobody lost money. Standards judge conduct, not outcomes.
- Assuming disclosure always cures. It cures conflicts and referral arrangements, not unsuitable or deceptive actions.
- Forgetting a second actor: the silent colleague, the supervisor or the analyst who relied on someone else's work.
- Treating a partial corrective plan as adequate and letting the member carry on as before.
Check yourself
Q1A portfolio manager's misleading conduct ended up increasing client returns. When evaluating whether he violated the Code and Standards, the improved returns are best described as:
Q2In which situation is full disclosure to clients, on its own, most likely sufficient to comply with the Code and Standards?
Q3Novak, CFA, learns her firm overstates a fee to clients. Management will correct it for new clients only. Novak's best course of action is to:
Q4During a client meeting, a senior colleague misstates the firm's credentials. A CFA charterholder present knows the statement is false and says nothing. The charterholder has most likely:
Q5A trader tells a friend which stocks a large fund will buy later that day, but takes no profit himself, and the fund's prices are unaffected. Which statement is most accurate?
Answer the 5 questions: +10 XP for each one you get right first time.
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