Overview
Ethical and Professional Standards is 10-15% of the CFA Level 3 exam and has ten learning modules in the 2027 curriculum. The first covers the Code of Ethics, the Standards of Professional Conduct and the Professional Conduct Program. Seven modules give guidance on each Standard in turn: Professionalism; Integrity of Capital Markets; Duties to Clients; Duties to Employers; Investment Analysis, Recommendations, and Actions; Conflicts of Interest; and Responsibilities as a CFA Institute Member or CFA Candidate. Application of the Code and Standards: Level III tests them in portfolio management cases, and the Asset Manager Code of Professional Conduct extends the framework from individuals to firms.
The Standards are the same ones studied at Levels 1 and 2, but Level 3 frames them around portfolio managers, trading desks, investment committees and firm policies, so the questions ask what a firm or manager should do, not just which Standard applies.
How it's tested
Ethics cases describe a manager, analyst or firm and several actions. Questions ask whether a specific action violates the Code and Standards, which Standard applies, or what policy would prevent a violation. The reasoning pattern is to isolate each action, identify the duty owed and to whom, and check whether disclosure, consent or a procedure would cure the problem.
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Violation or not
A single action is described and you decide whether it violates the Standards and, if so, which one, often among several plausible options.
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Best firm policy
A firm practice such as trade allocation, personal trading or proxy voting is described, and you choose the procedure that best complies with the Standards or Asset Manager Code.
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Cure by disclosure or consent
A conflict is described and you decide whether disclosure, written consent or avoidance is the required remedy.
A portfolio manager allocates an oversubscribed IPO only to large accounts because they generate the most fees. The question asks which Standard is violated. The duty at stake is treating clients fairly when distributing investment actions, so the violation is Fair Dealing; an allocation pro rata across all eligible accounts, under a written policy, would comply. Loyalty to employer is not the issue because the harm falls on clients.
Learning modules 10
Official learning modules from the CFA Institute outline, in outline order.
5.1 Code of Ethics and Standards of Professional ConductThe Code, the seven Standards and the Professional Conduct Program.
- What it means
- This module presents the six components of the Code of Ethics, the structure of the seven Standards and their subsections, and how CFA Institute's Professional Conduct Program investigates complaints and imposes sanctions through its disciplinary review process.
- What to understand
- Members and candidates must follow the stricter of applicable law and the Code and Standards. Investigations can start from self-disclosure on the annual Professional Conduct Statement, written complaints, public information or exam proctor reports, and sanctions range from private censure to public censure, suspension and revocation of membership or the right to use the designation.
- How it shows up
- A question asks what happens procedurally after a complaint, or which component of the Code an action breaches.
- Common confusion
- Assuming local law is always the governing standard; when the Code is stricter, the Code governs.
5.2 Guidance for Standard I: ProfessionalismKnowledge of the law, independence, misrepresentation, misconduct and competence.
- What it means
- Standard I covers I(A) Knowledge of the Law, I(B) Independence and Objectivity, I(C) Misrepresentation, I(D) Misconduct and I(E) Competence, and this module explains how each applies with examples and recommended procedures.
- What to understand
- Under I(A), members must not knowingly participate in violations and should dissociate from them, for example by refusing to continue and raising the issue with supervisors or compliance. Under I(B), modest gifts are acceptable but gifts that could compromise objectivity are not, and issuer-paid research must be disclosed and paid at a flat rate. Under I(C), presenting another's work or model as one's own is misrepresentation, and guaranteeing returns on risky investments is prohibited.
- How it shows up
- A manager is offered travel, gifts or pressure from an issuer, or uses third-party research without attribution, and you judge compliance.
- Common confusion
- Thinking the Standards require reporting a violation to regulators; dissociation is required, while reporting outside the firm may be advisable but is generally not mandated.
5.3 Guidance for Standard II: Integrity of Capital MarketsMaterial nonpublic information and market manipulation.
- What it means
- Standard II covers II(A) Material Nonpublic Information and II(B) Market Manipulation, with guidance on the mosaic theory, information barriers, restricted lists and practices that distort prices or volume.
- What to understand
- Information is material if it would likely affect price or a reasonable investor's decision, and nonpublic until it has been disseminated to the market; members must not act or cause others to act on it. The mosaic theory allows conclusions from public information combined with non-material nonpublic information. Manipulation includes trading to create false volume and spreading false information to move prices.
- How it shows up
- A manager learns of a pending deal or index change from a nonpublic source and you decide whether trading is permitted and what the firm should do.
- Common confusion
- Believing a firewall alone cures all problems; firms also need restricted or watch lists and monitoring when information barriers may be breached.
5.4 Guidance for Standard III: Duties to ClientsLoyalty, prudence and care; fair dealing; suitability; performance; confidentiality.
- What it means
- Standard III covers III(A) Loyalty, Prudence, and Care, III(B) Fair Dealing, III(C) Suitability, III(D) Performance Presentation and III(E) Preservation of Confidentiality, which define what a manager owes clients.
- What to understand
- Client brokerage belongs to the client, so soft dollars may only buy research that benefits the client, and proxies should be voted in clients' interests. Fair dealing means fairly, not necessarily equally: new issues and block trades are allocated pro rata or by a written, consistent method. Suitability requires an IPS updated at least annually and judging each investment in the context of the whole portfolio.
- How it shows up
- Trade allocation, soft-dollar use, a performance claim or an unsuitable investment is described and you identify the violation or the fix.
- Common confusion
- Equating fair dealing with identical treatment; different service levels are allowed if disclosed and available to all clients who pay for them.
5.5 Guidance for Standard IV: Duties to EmployersLoyalty, additional compensation and supervisor responsibilities.
- What it means
- Standard IV covers IV(A) Loyalty, IV(B) Additional Compensation Arrangements and IV(C) Responsibilities of Supervisors, governing departures to competitors, outside compensation and the duty to supervise.
- What to understand
- Before leaving, an employee may prepare to compete but must not take client lists or confidential records or solicit clients on the employer's time. Compensation that could conflict with the employer's interest, including client-paid bonuses, requires written consent from the employer. Supervisors must make reasonable efforts to prevent and detect violations, which requires adequate compliance procedures.
- How it shows up
- A manager accepts a client bonus, starts a side business or leaves with client information, and you decide which duty is breached.
- Common confusion
- Thinking disclosure to the client alone satisfies IV(B); the employer's written consent is what the Standard requires.
5.6 Guidance for Standard V: Investment Analysis, Recommendations, and ActionsDiligence and reasonable basis, client communication and record retention.
- What it means
- Standard V covers V(A) Diligence and Reasonable Basis, V(B) Communication with Clients and Prospective Clients and V(C) Record Retention, which govern how recommendations are formed, explained and documented.
- What to understand
- Recommendations need adequate research, including due diligence on third-party research and quantitative models. Communication must describe the investment process, significant limitations and risks, distinguish fact from opinion, and promptly report material changes. Records supporting recommendations should be kept; absent regulatory guidance, CFA Institute recommends at least seven years.
- How it shows up
- A manager relies on an untested model or another firm's research, or fails to tell clients of a process change, and you identify the breach.
- Common confusion
- Assuming group research must be withheld when a member disagrees with it; a member may sign off on group research if it has a reasonable basis.
5.7 Guidance for Standard VI: Conflicts of InterestAvoid or disclose conflicts, priority of transactions and referral fees.
- What it means
- Standard VI covers VI(A) Avoid or Disclose Conflicts, VI(B) Priority of Transactions and VI(C) Referral Fees, addressing conflicts that could impair independence and objectivity.
- What to understand
- Conflicts should be avoided where possible and otherwise disclosed fully, prominently and in plain language to clients and employers. Client transactions take priority over the employer's and the member's own; firms commonly use blackout periods, preclearance and reporting of holdings to enforce this. Referral fees must be disclosed to the employer, clients and prospects before entering a formal agreement.
- How it shows up
- A manager trades personally ahead of clients, holds shares in a recommended company or receives a referral fee, and you choose the required action.
- Common confusion
- Treating participation in an IPO by a manager as acceptable if disclosed; it generally needs preclearance and must not disadvantage clients.
5.8 Guidance for Standard VII: Responsibilities as a CFA Institute Member or CFA CandidateConduct in CFA Institute programs and references to the designation.
- What it means
- Standard VII covers VII(A) Conduct as Participants in CFA Institute Programs and VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program, protecting the integrity of the exam and the designation.
- What to understand
- Candidates may discuss broad topic areas but must not disclose specific exam questions or content, and must not cheat or misrepresent information on program forms. The designation is an adjective, never a noun, and members may not claim that holding it guarantees superior results; candidates may say they passed a level but must not imply a partial designation.
- How it shows up
- A candidate's social media post or a firm's marketing copy references the exam or designation, and you decide whether it complies.
- Common confusion
- Thinking a candidate can describe the exam's specific question topics once it is over; specific content remains confidential.
5.9 Application of the Code and Standards: Level IIIEvaluating practices and conduct in portfolio management cases.
- What it means
- This module applies the whole Code and Standards to Level III-style cases set in investment firms, asking you to evaluate practices, policies and conduct and explain why they do or do not violate the Standards.
- What to understand
- Cases often combine several issues: a soft-dollar arrangement, a trade allocation, a personal trade and a performance claim in one firm. You must address each action separately and name the specific Standard and duty involved, then recommend the procedure that would bring the firm into compliance.
- How it shows up
- A multi-paragraph case describes a firm's operations and asks which practice violates the Standards or which policy change is most appropriate.
- Common confusion
- Stopping after finding one violation; Level III cases frequently contain more than one, and other questions in the set may target the others.
5.10 Asset Manager Code of Professional ConductFirm-level code: six General Principles and provisions in six areas.
- What it means
- The Asset Manager Code (AMC) applies to firms rather than individuals and sets six General Principles of Conduct with detailed provisions on Loyalty to Clients; Investment Process and Actions; Trading; Risk Management, Compliance, and Support; Performance and Valuation; and Disclosures.
- What to understand
- A firm claims compliance with the AMC firm-wide and only if it meets all provisions, and it should notify CFA Institute of the claim. Notable requirements include designating a compliance officer, maintaining a business continuity plan, using fair and independent valuation, giving clients regular, accurate reports and disclosing fees, conflicts and proxy voting policies.
- How it shows up
- A firm's practice (for example, valuing illiquid holdings using the portfolio manager's own marks) is described and you decide whether it complies with the AMC and what change is needed.
- Common confusion
- Treating the AMC as applying to individual members; the Standards apply to individuals and the AMC to firms.
High-yield concepts
The terms, rules and formulas this domain turns into questions most often.
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Stricter rule governs
Members follow whichever is stricter, applicable law or the Code and Standards.
- Remember
- If law requires less than the Standards, the Standards govern; if law requires more, the law governs.
- Tested as
- Cross-border and regulatory conflict questions.
- Trap
- Choosing the answer that complies with local law but falls short of the Standards.
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Dissociation
Removing oneself from activity that violates law or the Standards.
- Remember
- Steps include raising the issue with supervisors or compliance, refusing to participate and, if needed, resigning.
- Tested as
- What a member must do on discovering a violation.
- Trap
- Assuming silent continued work is acceptable because the member did not start the violation.
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Mosaic theory
An analyst may reach conclusions by combining public information with non-material nonpublic information.
- Remember
- The conclusion may itself be material without violating II(A), provided no input was material nonpublic information.
- Tested as
- Distinguishing legitimate research from insider trading.
- Trap
- Labeling any conclusion that moves price as material nonpublic information.
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Soft dollars
Use of client brokerage commissions to obtain research or services.
- Remember
- Client brokerage belongs to the client and may pay only for research that benefits that client; firm expenses such as rent or salaries cannot be paid with it.
- Tested as
- Loyalty, prudence and care questions.
- Trap
- Accepting a research service that benefits only the firm's marketing.
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Fair dealing in allocations
Clients must be treated fairly when recommendations are disseminated and trades are allocated.
- Remember
- Allocate block trades and IPOs pro rata or by a written, consistent method, and do not favor large or fee-heavy accounts.
- Tested as
- Trade allocation questions.
- Trap
- Allocating hot issues to family or employee accounts before clients.
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Suitability
Investments must fit the client's written objectives and constraints, judged in the context of the total portfolio.
- Remember
- Update the IPS at least annually and after major changes; for a fund manager, suitability is judged against the mandate.
- Tested as
- Unsuitable investment questions.
- Trap
- Judging a single risky holding in isolation rather than within the portfolio.
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Additional compensation
Compensation or benefits that could conflict with the employer's interest.
- Remember
- Requires written consent from all parties involved, which always includes the employer.
- Tested as
- Client bonuses and outside work questions.
- Trap
- Thinking oral approval or client disclosure is enough.
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Priority of transactions
Clients and employers come before the member's own trades.
- Remember
- Firms enforce it through blackout periods, preclearance and holdings reporting; family accounts that are clients must be treated like other clients.
- Tested as
- Personal trading policy questions.
- Trap
- Excluding a beneficial-interest family account from client allocations entirely.
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Record retention
Records supporting research and recommendations belong to the firm and must be kept.
- Remember
- Absent regulatory guidance, CFA Institute recommends at least seven years.
- Tested as
- Departing employees and documentation questions.
- Trap
- Taking research files to a new employer because the member created them.
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Asset Manager Code General Principles
Six principles: act professionally and ethically, act for the benefit of clients, act with independence and objectivity, act with skill and diligence, communicate with clients accurately and timely, and uphold capital market rules.
- Remember
- Firms claim compliance firm-wide, with no partial claims, and should notify CFA Institute.
- Tested as
- Firm-level compliance questions.
- Trap
- Allowing a firm to claim compliance for one division.
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Independent valuation under the AMC
Firms should use fair market prices from independent third parties where possible.
- Remember
- For illiquid holdings, use a fair and documented valuation process separate from the portfolio manager's influence.
- Tested as
- Valuation and performance practices at firms.
- Trap
- Letting the manager whose fee depends on the valuation set the price.
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Referral fees
Compensation for recommending a service provider or receiving client referrals.
- Remember
- Disclose the nature and amount to employers, clients and prospects before the formal engagement.
- Tested as
- Conflicts of interest questions.
- Trap
- Disclosing only after the client signs.
Side by side
Concepts candidates mix up, compared on the point that decides the answer.
Code and Standards vs. Asset Manager Code
| Concept | Meaning | Key difference | Common trap |
|---|---|---|---|
| Code and Standards | Ethical obligations of individual members and candidates | Applies to people; violations lead to individual sanctions | Applying the AMC's firm-wide claim rules to individuals |
| Asset Manager Code | Voluntary code for investment management firms | Applies to firms; compliance claimed firm-wide with all provisions met | Thinking a firm can adopt only some provisions and still claim compliance |
Duty to clients vs. duty to employer
| Concept | Meaning | Key difference | Common trap |
|---|---|---|---|
| Standard III (Duties to Clients) | Loyalty, fair dealing, suitability, performance and confidentiality owed to clients | Client interests come first, ahead of the employer's | Favoring the employer's revenue over client interests |
| Standard IV (Duties to Employers) | Loyalty to employer, consent for additional compensation and supervisory duties | Applies only where it does not require breaching duties to clients | Citing loyalty to employer to justify hiding a client harm |
Disclosure vs. written consent vs. avoidance
| Concept | Meaning | Key difference | Common trap |
|---|---|---|---|
| Disclosure | Clear, prominent explanation of a conflict to clients and employer | Required for conflicts that cannot reasonably be avoided | Burying it in fine print |
| Written consent | Documented approval from all parties involved | Required for additional compensation arrangements under IV(B) | Relying on oral approval |
| Avoidance | Declining the activity or relationship | Required when the conflict cannot be managed, for example material nonpublic information | Thinking disclosure can cure trading on inside information |
Exam traps
Each trap is an answer that looks right. Learn the clue that should change your mind.
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Disclosure cures everything
- What candidates pick
- Approve a conflicted action because it was disclosed to clients.
- Why it looks right
- Disclosure is the remedy for many conflicts.
- Why it's wrong
- Some issues cannot be cured by disclosure, such as acting on material nonpublic information or using client brokerage for firm expenses; others require written employer consent.
Clue to watch for The action involves inside information, client assets used for the firm, or outside compensation.
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Equal means fair
- What candidates pick
- Reject a firm's tiered service model as a fair dealing violation.
- Why it looks right
- Different treatment looks unfair.
- Why it's wrong
- Fair dealing allows different service levels if they are disclosed and available to all clients willing to pay; what it prohibits is disadvantaging clients in dissemination and allocation.
Clue to watch for The premium service is disclosed and open to every client.
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Ownership of work product
- What candidates pick
- Allow a departing analyst to take models and research files they created.
- Why it looks right
- The analyst built the work.
- Why it's wrong
- Records and work product created on the job belong to the employer; taking them without permission breaches loyalty and record retention duties.
Clue to watch for The analyst copies files or client lists before resigning.
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Mosaic conclusion as inside information
- What candidates pick
- Conclude an analyst violated II(A) because their conclusion moved the stock.
- Why it looks right
- The conclusion was material and not widely known.
- Why it's wrong
- Under the mosaic theory, combining public and non-material nonpublic information is legitimate even if the conclusion is material.
Clue to watch for Each input is public or immaterial, such as a factory parking-lot count or industry survey.
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Supervisor relies on trust
- What candidates pick
- Accept that a supervisor met IV(C) because no violation was reported.
- Why it looks right
- Nothing went wrong that the supervisor knew of.
- Why it's wrong
- Supervisors must make reasonable efforts to prevent and detect violations, including adequate written compliance procedures; lack of a system is itself a failure.
Clue to watch for The firm has no written procedures or monitoring for the activity in question.
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Model use without diligence
- What candidates pick
- Approve a manager's use of a third-party quantitative model because it is widely used.
- Why it looks right
- Popularity looks like validation.
- Why it's wrong
- V(A) requires understanding the model's assumptions, testing and limits; reliance without reasonable diligence violates the Standard.
Clue to watch for The manager cannot explain the model's inputs or has not tested it in stressed conditions.
Answer framework
For an ethics case, work action by action from the duty owed to the remedy required.
- List each separate action in the case, because a Level III case often contains more than one potential violation across different Standards.
- For each action, identify who is owed a duty: markets, clients, employer or the profession, and the Standard that defines that duty.
- Check the facts that change the answer: materiality, public status of information, written consent, disclosure, client instructions and firm policy.
- Decide whether the remedy is disclosure, written consent, a procedural control or avoidance, remembering that some conflicts cannot be cured by disclosure.
- For firm-level practices, test them against the Asset Manager Code and recommend the specific policy that would bring the firm into compliance.
Practice question
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Study strategy
Start by re-reading the Code and the seven Standards as a compact list, then work through the seven guidance modules one Standard at a time. For each subsection, note the facts that flip the answer, such as materiality, written consent or whether information is public, rather than memorizing paragraphs. The 2027 curriculum splits the guidance into separate modules for each Standard, which makes it easy to pace this work across several sessions.
The high-priority areas for portfolio managers are Duties to Clients (soft dollars, proxy voting, fair dealing and suitability), Conflicts of Interest (personal trading and IPO participation) and Duties to Employers (additional compensation and departures). Candidates commonly underestimate the Asset Manager Code, which is the one module unique to the firm perspective; learn its six principles and the specific requirements on valuation, compliance officers and disclosures.
Afterwards, practice the Level III application module and full ethics item sets, and review every miss by writing the specific Standard and the fact that decided it. Revisit ethics again in the final weeks, because the details fade faster than calculation skills. Then connect the material to GIPS in Performance Measurement and to the case studies in Portfolio Construction and the pathways.
FAQ
How much of CFA Level 3 is ethics?
CFA Institute lists Ethical and Professional Standards at 10-15% of the Level 3 exam. In the 2027 curriculum the topic has ten learning modules, including separate guidance modules for each of the seven Standards.
Is Level 3 ethics different from Levels 1 and 2?
The Code and Standards are the same, but Level 3 adds the Asset Manager Code and frames cases around portfolio managers and investment firms. Expect questions about firm policies, trade allocation and manager conduct rather than only individual analysts.
What changed in the ethics outline for 2027?
The 2026 Level III outline grouped all Standards guidance into a single module, while the 2027 outline gives each Standard its own guidance module. The module titles suggest a reorganization rather than new Standards, but check the 2027 learning outcome statements for detail.
What is the Asset Manager Code?
It is a voluntary CFA Institute code for investment management firms, with six General Principles and provisions covering loyalty to clients, the investment process, trading, risk management and compliance, performance and valuation, and disclosures. Firms claim compliance firm-wide.
When is disclosure not enough to resolve a conflict?
Disclosure cannot permit acting on material nonpublic information, using client brokerage for firm expenses or manipulating markets. Additional compensation arrangements also need written consent from all parties involved, not just disclosure.
How should I approach a long ethics case?
List every action separately, identify who is owed a duty for each, and check the facts that decide compliance. Cases often contain several issues, so do not stop after finding the first violation.
How does ethics connect to the rest of Level 3?
GIPS in Performance Measurement builds on the duty of fair performance presentation, and the endowment case in the Portfolio Management pathway includes applying the Code and Standards to manager selection. Ethical judgment also underpins private-client advice in the Private Wealth pathway.
Other Finance certifications
Where the same subject shows up in other exams. Cards marked "Same subject" open the matching domain.
Test your Domain 5 knowledge
You have covered the Code, guidance for all seven Standards, Level III case application and the Asset Manager Code. Test whether you can spot each violation in a firm-level case under exam timing.
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