Ethics and Professional Standards carries a 15-20% weight on the CFA Level 1 exam, making it the single highest-weighted subject — as outlined in our complete guide to all 10 CFA Level 1 topics. But the weight alone understates its importance. The CFA Institute has publicly stated that Ethics performance can be used as a tiebreaker for candidates near the passing threshold. In other words, if you’re on the borderline, a strong Ethics score can push you to a pass, and a weak one can fail you.
I’ve seen this play out in practice. Candidates with otherwise solid scores have failed because they neglected Ethics. Conversely, I’ve seen candidates who were borderline in technical subjects pass because their Ethics performance tipped the balance. This is not a subject you can afford to treat as secondary.
What Ethics Covers
The Code of Ethics
The CFA Institute’s Code of Ethics is a set of six broad principles that all CFA candidates and charterholders must follow. You need to know these principles and understand how they translate into practical behavior:
- Act with integrity, competence, diligence, respect, and in an ethical manner
- Place the integrity of the investment profession and clients’ interests above your own
- Use reasonable care and independent professional judgment
- Practice and encourage others to practice professionally and ethically
- Promote the integrity and viability of global capital markets
- Maintain and improve professional competence
These principles form the philosophical foundation. The Standards of Professional Conduct are the specific rules that operationalize them.
Standards of Professional Conduct
There are seven Standards, each with sub-standards. This is the core of the Ethics curriculum.
Standard I: Professionalism
- Knowledge of the Law — comply with the strictest applicable law, rule, or regulation
- Independence and Objectivity — don’t let external pressures compromise your judgment
- Misrepresentation — don’t distort facts, analysis, or recommendations
- Misconduct — don’t engage in dishonest, fraudulent, or deceitful behavior
Standard II: Integrity of Capital Markets
- Material Nonpublic Information — don’t trade on insider information
- Market Manipulation — don’t distort prices or trading volume artificially
Standard III: Duties to Clients
- Loyalty, Prudence, and Care — act in your clients’ best interests
- Fair Dealing — treat all clients fairly (but not necessarily equally)
- Suitability — ensure recommendations are appropriate for each client
- Performance Presentation — present investment performance fairly and accurately
- Preservation of Confidentiality — protect client information
Standard IV: Duties to Employers
- Loyalty — don’t harm your employer’s interests
- Additional Compensation Arrangements — disclose outside compensation
- Responsibilities of Supervisors — supervise subordinates adequately
Standard V: Investment Analysis, Recommendations, and Actions
- Diligence and Reasonable Basis — have a sound basis for every recommendation
- Communication with Clients — distinguish fact from opinion, disclose risks
- Record Retention — maintain records supporting your recommendations
Standard VI: Conflicts of Interest
- Disclosure of Conflicts — disclose all conflicts to clients and employers
- Priority of Transactions — client trades come before employer trades, which come before your personal trades
- Referral Fees — disclose any referral compensation
Standard VII: Responsibilities as a CFA Institute Member or Candidate
- Conduct as Participants in CFA Institute Programs — don’t cheat or share exam content
- Reference to CFA Institute, Designation, and Program — use the CFA designation correctly
Global Investment Performance Standards (GIPS)
GIPS is a set of standardized, industry-wide principles for how investment firms should calculate and present their performance results. At Level 1, you need to know:
- The purpose of GIPS (fair representation and full disclosure)
- Key requirements (composite construction, required disclosures, calculation methodology)
- The difference between compliance and verification
- That GIPS compliance is voluntary but “claims of compliance” must meet all requirements
GIPS typically accounts for a few questions on the exam. It’s a lighter topic but one where you can pick up relatively easy marks.
Why Ethics Is Different from Every Other Subject
It tests judgment, not knowledge
Every other CFA subject primarily tests whether you know something — a formula, a concept, a definition. Ethics primarily tests whether you can apply ethical principles to ambiguous situations. The questions describe a scenario and ask you to determine which Standard was violated, what the appropriate action is, or whether a violation occurred at all.
This means that memorizing the Standards is necessary but not sufficient. You need to develop ethical reasoning skills through practice with scenario-based questions.
The “most likely” trap
Ethics questions often include answer choices that are all partially correct. The question asks which answer is “most likely” correct or which Standard is “most likely” violated. This phrasing requires you to identify the primary issue, not just any issue. Many candidates lose marks because they choose a correct but secondary answer.
Real-world ambiguity
Unlike a math problem with one right answer, Ethics scenarios often involve nuance. A financial analyst might have multiple obligations that partially conflict — duties to clients, duties to employers, and duties to the profession. The exam tests your ability to prioritize these obligations correctly.
Study Strategy for Ethics
Read the Standards of Practice Handbook cover to cover
This is the one section of the CFA curriculum where I recommend reading the primary source material thoroughly. The Standards of Practice Handbook contains the Standards, their guidance, and — critically — the application examples. These examples are scenarios that illustrate how the Standards apply in practice.
Many exam questions are closely modeled on these application examples. Reading them carefully is one of the highest-value activities in your entire CFA preparation.
Study Ethics twice — at the beginning and the end
Start your CFA prep with Ethics. This gets you into the CFA Institute’s mindset early and gives you a framework for thinking about professionalism that colors everything else you study — including heavy technical subjects like Financial Reporting and Analysis.
Then, in the final 2-3 weeks before the exam, do a complete Ethics review. Re-read the Standards, re-do the practice problems, and take Ethics-focused mock questions. This second pass reinforces the material when it matters most.
Practice with scenario-based questions extensively
The more scenarios you work through, the better your ethical judgment becomes. Aim to complete at least 100-150 Ethics practice questions from your prep provider. After each question, read the explanation carefully, even for questions you got right. Understanding the reasoning is more important than getting the answer correct.
Create a Standards summary sheet
Condense each Standard into its core principle in your own words. For example:
- Standard III(B) Fair Dealing: Treat all clients fairly when disseminating recommendations and taking investment action. “Fairly” means at the same time, not necessarily equally.
- Standard V(A) Diligence: Don’t recommend anything without doing your homework first.
This personalized summary helps you recall Standards quickly during the exam.
Pay attention to the “recommended procedures”
The curriculum distinguishes between required actions (violations of Standards) and recommended procedures (best practices that help prevent violations). The exam can test both. Know which actions are required and which are merely recommended.
Common Mistakes in Ethics
Mistake 1: Choosing the most extreme answer. Ethics answers tend to be moderate and practical. “Report to the SEC immediately” is usually less correct than “report to your compliance department first.” The CFA Institute favors measured, professional responses.
Mistake 2: Confusing “fair dealing” with “equal dealing.” Fair dealing means treating all clients fairly and not disadvantaging anyone. It does NOT mean giving every client the same allocation or the same information at the exact same time — it means having a systematic process that’s fair.
Mistake 3: Not recognizing the “mosaic theory.” Analysts can use non-material nonpublic information combined with public information to form investment conclusions. This is the mosaic theory, and it’s an important exception to the prohibition on using nonpublic information.
Mistake 4: Misunderstanding “reasonable basis.” Having a reasonable basis for a recommendation doesn’t mean the recommendation has to be correct. It means the analyst did adequate research and analysis before making it. The Standard is about the process, not the outcome.
Mistake 5: Getting GIPS details wrong. GIPS compliance is firm-wide (not just for specific composites), compliance is voluntary (but if you claim compliance, you must meet all requirements), and verification is not required but is recommended. These distinctions are frequently tested.
Mistake 6: Assuming the answer is always to “dissociate.” While dissociation from unethical behavior is sometimes necessary, the CFA Standards generally expect you to first try to remedy the situation through internal channels (compliance department, supervisor) before escalating.
Practical Exam Tips
Tip 1: When a question describes a violation, identify the most specific Standard that was violated. “Standard I(C) Misrepresentation” is a better answer than “Standard I Professionalism” if the scenario involves distorting facts.
Tip 2: The CFA Institute’s answer is usually the one that prioritizes client interests. When in doubt, ask yourself: “What action best serves the client?” That’s almost always the right direction.
Tip 3: For questions about material nonpublic information, determine two things: Is the information material? Is it nonpublic? If both answers are yes, the person cannot trade. If either answer is no, the mosaic theory may apply.
Tip 4: GIPS questions at Level 1 are typically about high-level principles, not detailed calculations. Know the purpose, the key requirements, and the distinction between compliance and verification.
Tip 5: Time management in Ethics is important. Because the questions require careful reading of scenarios, they can be time-consuming. Read the question stem first to know what you’re looking for, then read the scenario. This focused reading approach saves time.
Time Allocation
Plan for 40-50 hours on Ethics:
- Code of Ethics and Standards overview: 3-4 hours
- Standards of Professional Conduct (detailed study): 15-20 hours
- Application examples from the Handbook: 8-10 hours
- GIPS: 4-5 hours
- Practice questions (100-150 minimum): 10-15 hours
Ethics deserves this investment. No other section combines high weight, tiebreaker status, and learnable content in the same way.
Final Thoughts
Ethics is not a section you can cram. The judgment skills it tests are built through repeated exposure to scenarios over weeks and months, not through a last-minute review session. Start early, practice consistently, and develop a genuine understanding of the Standards — not just an ability to recite them.
The CFA designation means something precisely because of Ethics. The investment industry operates on trust, and the Standards of Professional Conduct are what distinguish CFA charterholders as professionals who take that trust seriously. Studying Ethics isn’t just exam preparation — it’s professional development. For broader strategies on how to ace the CFA Level 1 exam, Ethics mastery is the single best starting point.
If you want help developing a study approach for Ethics, or if you’re struggling with the scenario-based questions, reach out for a free mentorship session. Ethics is the subject where personalized coaching makes the most difference, because developing ethical judgment benefits from discussion and debate — not just reading.