ETHICS & STANDARDS — LEVEL II CHEAT SHEET

SIX PILLARS OF THE CODE OF ETHICS

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Integrity	Act with honesty, reflect credit on profession	Misrepresentation, credential abuse, false claims
Pillar	Core Duty	Key Red Flags
Competence & Diligence	Perform work thoroughly; maintain & improve skills	Stale research, unauthorized trading, inadequate analysis
Respect	Treat others professionally; obey law	Harassment, discrimination, illegal conduct
Client Interest Priority	Place clients above employer & personal interests	Conflicts of interest accepted, self-dealing, favoritism
Market Integrity	Prevent manipulation; oppose MNPI trading	Trading on inside info, market manipulation, collusion
Professional Conduct	Maintain independence; discharge fiduciary duty	Gift acceptance, fee pressure, undisclosed relationships

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STANDARD I: PROFESSIONALISM

I(A) Knowledge of Law

Comply with stricter of: CFA Standards OR applicable law

If law permits but Standards don't → follow Standards

If law prohibits but Standards allow → follow law

I(B) Independence & Objectivity

Threats to independence:

Gifts/entertainment (especially if tied to business flow)

Compensation from investment banking/advisory linked to research

Personal trading conflicts

Gifts from clients/vendors (reasonable hospitality OK; all-expenses gifts problematic)

Test: Would a reasonable observer question your objectivity?

I(C) Misrepresentation

Prohibited:

False credentials (e.g., claiming CFA when not enrolled or lapsed)

Inflated performance claims

Overstating qualifications, experience, or firm capabilities

Using "CFA candidate" when not currently enrolled/progressing

Allowed:

"CFA charterholder" (current membership only)

Accurate composite performance (GIPS-compliant)

Proper use of CFA mark with trademark notation

I(D) Misconduct

Any conduct that reflects discredit on profession

Criminal activity, dishonest conduct, violation of law

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STANDARD II: MARKET INTEGRITY

II(A) Material Non-Public Information (MNPI)

MNPI definition: Not yet public AND would move security price if disclosed

PROHIBITED:

Trading on MNPI

Tipping (sharing MNPI with others for their trading benefit)

Recommending based on MNPI

Mosaic Theory (ALLOWED):

Combining multiple independent public pieces → original conclusion ✓

Each piece must be independently non-material AND public

Conclusion derived from public pieces is actionable

MNPI from insider tips:

Information received from corporate insider → treat as MNPI even if passed through intermediary

No distinction based on chain of transmission

II(B) Market Manipulation

Prohibited:

Spreading false rumors

Engaging in wash trades, pump-and-dump schemes

Coordinating trades to artificially move price

Recommended action: report to compliance immediately

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STANDARD III: DUTIES TO CLIENTS

III(A) Loyalty, Prudence, Care

Client interest = top priority (above employer, personal)

Manage accounts per IPS (Investment Policy Statement)

Rebalance per mandate; don't allow drift without reason

Exercise care: due diligence on all recommendations

III(B) Fair Dealing

Equal treatment requirement:

No client gets preferential access to recommendations

Reasonable dissemination lag acceptable (overnight; not 1 week for some, 1 day for others)

Fair execution: don't execute for personal account before clients can act

Same recommendation → same access window across all clients

Favored vs. disfavored clients violates this Standard

III(C) Suitability

Must verify:

Client objectives (return, income, growth, preservation)

Risk tolerance & constraints

Time horizon & liquidity needs

New information mid-engagement → re-evaluate

Applies to single client AND pooled portfolios (per mandate/prospectus)

III(E) Preservation of Confidentiality

Protect client information; don't disclose without consent

Exception: required by law or to prevent illegal conduct

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STANDARD IV: CONFLICTS OF INTEREST

IV(A) Disclosure of Conflicts

Must disclose:

Compensation from third parties (commissions, soft dollars, referral fees)

Related-party transactions

Investment banking conflicts

Asset allocation conflicts (your products vs. others)

Timing: Before client/employer relationship deepens

IV(B) Priority of Transactions

Order of precedence:

Client transactions first (sufficient size for reasonable execution)

Employer transactions (if firm has proprietary account)

Personal transactions last (only after clients had reasonable opportunity)

Red flag: Manager buys for personal account at 9:15 AM, clients get access at 9:45 AM → VIOLATION

IV(C) Referral Fees

Referral fees to other professionals must be disclosed

If advisor refers client to another firm → must disclose any fee arrangement

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STANDARD V: INVESTMENT ANALYSIS & RECOMMENDATIONS

V(A) Diligence & Reasonable Basis

Conduct thorough due diligence before research/recommendation

Maintain written documented basis (not just verbal)

Understand investment recommendation fully before issuing

Update research as facts change

V(B) Communication with Clients

Disclose investment process & risks clearly

Flag important assumptions

Distinguish fact from opinion

Update clients on material changes to thesis

V(C) Record Retention

Keep research files & communications for required period (per firm policy, typically 7+ years)

Document basis for each recommendation

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STANDARD VI: CONFLICTS WITH EMPLOYERS

VI(A) Loyalty

Act in employer's legitimate interests

Don't engage in activities that would harm employer (moonlighting, soliciting clients/employees)

Duty to employer ≠ duty to harm clients (client interest prevails)

VI(B) Compensation Arrangements

Don't let compensation structure compromise client advice

Ethics & Standards