CFA Level 1: The Code and Standards, Simplified

By the end, you will know the 7 Standards of Professional Conduct, the exam pattern that uses them, the mosaic-theory nuance that catches many candidates, and the study technique that moves Ethics from 40% to 70% scorer.

Seven Standards

1. I. PROFESSIONALISM (knowledge of law, independence, misrepresentation, misconduct).
2. II. INTEGRITY OF CAPITAL MARKETS (material non-public info, market manipulation).
3. III. DUTIES TO CLIENTS (loyalty, fair dealing, suitability, performance presentation, preservation of confidentiality).
4. IV. DUTIES TO EMPLOYERS (loyalty, additional compensation arrangements, responsibilities of supervisors).
5. V. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS (diligence and reasonable basis, communication with clients, record retention).
6. VI. CONFLICTS OF INTEREST (disclosure of conflicts, priority of transactions, referral fees).
7. VII. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CANDIDATE (conduct as members and candidates, reference to CFA Institute).

Each Standard has 2-5 sub-standards (I(A) through I(D); II(A) through II(B); etc.). Learn the sub-standards, not just the headings. Exam questions often test specific sub-standards in isolation, and the case details matter.

The exam pattern

Questions are CASE-BASED: a scenario describes an action (analyst receives insider tip, buys stock); you identify the violated Standard OR confirm no violation. Most wrong answers come from confusing "what is RECOMMENDED" (polite but not required) with "what is REQUIRED" (mandatory under the Standards). The Code provides both. Mandatory requirements (violations are violations) and recommended practices (not violations, but best practice). Case questions about "did they violate?" hinge on the mandatory side.

Second common pattern: multi-violation cases. A scenario contains actions violating multiple Standards simultaneously. The question asks which Standard is MOST violated OR asks for all violations. Candidates often identify one violation and miss others. Train by re-reading each case assuming any Standard could be violated; the act of asking the question forces completeness.

Mosaic theory. The nuanced trap

Standard II(A) MATERIAL NON-PUBLIC INFORMATION (MNPI) prohibits trading on MNPI or communicating it to others. But "Mosaic Theory" is an exception: an analyst can combine PUBLIC information with NON-MATERIAL NON-PUBLIC information (information that is non-public but not individually significant) to reach an investment conclusion. The combination, if it produces a new insight, does NOT violate Standard II(A). This is a consistent exam trap. Many candidates incorrectly flag mosaic-theory analysis as a violation.

Test: non-material non-public info = information that would not, by itself, move market prices. Material non-public info = information that would, by itself, move prices. Combining multiple pieces of the former to draw a valuable conclusion is permissible; using any single piece of the latter is a violation.