ETHICS & STANDARDS — LEVEL II CHEAT SHEET

SIX PILLARS OF THE CODE OF ETHICS

|--------|-----------|---------------|

Pillar	Core Duty	Key Red Flags
Integrity	Act with honesty, reflect credit on profession	Misrepresentation, credential abuse, false claims
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

---

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

---

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

---

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

---

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

---

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

---

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