CFA Level III · Cheat Sheet
| Standard | Key Rule | Level III Focus |
|---|---|---|
| I(A) Professionalism | Act with integrity, competence, diligence, respect | Honesty in portfolio decisions, no misrepresentation |
| I(B) Independence & Objectivity | Free from pressure, gifts, employer influence | Research pressure, broker gifts, IPO allocation bias |
| II(A) Material Nonpublic Information (MNPI) | Cannot trade on MNPI; mosaic theory is OK if info is *not* material | Distinguish: material MNPI = violation; non-material + public data = legal |
| III(A) Loyalty, Prudence, Care | Act as fiduciary—client interests above firm/personal | No commission-chasing strategies; avoid soft-dollar abuse |
| III(B) Fair Dealing | Equitable treatment across all clients | Pro-rata or pre-disclosed allocation; no cherry-picking fills |
| III(C) Suitability | Align every trade with written IPS | Respect risk tolerance, liquidity, time horizon, tax situation, constraints |
| IV(A) Loyalty to Employer | Cannot take firm property (client lists, models, proprietary data) | *Can* retain knowledge and notify clients after departure |
| VI(B) Priority of Transactions | Client trades execute *before* personal trades (same recommendation) | Front-running own recommendations = violation |
| Scenario | Violation? | Reason |
| Non-material nonpublic info + public data → trade | ✗ No | Permissible under mosaic theory |
| Material nonpublic info (from any source) → trade | ✓ Yes | Standard II(A) violation; source irrelevant |
| Public data only → trade | ✗ No | No MNPI involved |
| Insider info about recall (clearly material) | ✓ Yes | Material = violates II(A) regardless of mosaic |
| Can Take? | Action | Result |
| Client relationships | Notify clients after leaving; solicit them | ✓ Legal |
| Knowledge, skills, experience | Retain and use at new firm | ✓ Legal |
| Client lists, account data, proprietary models | Copy/transfer to new employer or personal device | ✗ IV(A) violation |
| General client knowledge (no specific data) | Recall from memory | ✓ Legal |
| Component | Firm Responsibility | Red Flag |
| 1. Loyalty to Clients | Written code; training; discipline enforcement | No ethical code or training |
| 2. Investment Process & Actions | Document process; disclose conflicts | Ad-hoc decisions; hidden conflicts |
| 3. Trading | Fair allocation; soft-dollar benefit verification; pre-clear personal trades | Cherry-picked fills; soft dollars enrich firm |
| 4. Risk, Compliance, Support | Chief Compliance Officer (separate from CIO); internal audits; business continuity | CCO reports to CIO; no independence |
| 5. Performance & Valuation | GIPS-compliant; objective valuations; high-water mark fee structures | Favorable fund performance reporting; self-dealing valuations |
| 6. Disclosures | Quarterly performance; all compensation; regulatory/legal issues | Delayed performance reports; hidden fees |
| Pair | Difference | |
| Mosaic Theory vs. MNPI Trading | Mosaic = legal if info is *non-material*; MNPI = *always* illegal if material | |
| Fair Dealing (III(B)) vs. Suitability (III(C)) | Fair Dealing = *how* to allocate; Suitability = *what* to buy for each client | |
| IV(A) Loyalty vs. III(A) Loyalty | IV(A) = duty to *employer* (don't steal data); III(A) = duty to *clients* (best interest) | |
| Soft Dollars (III(A)) vs. Gifts (I(B)) | Soft dollars = commissions for research (OK if clients benefit); Gifts = broker entertainment (disclose/limit) |
Aligned to the CFA Institute Level III curriculum.
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