NISM CFA Level 1, Ethical and Professional Standards. Updated Jun 2026, 14-minute read.

CFA Level 1 Ethics — Code, Standards, and GIPS Explained

Ethics is the highest-weighted topic in CFA Level 1 (15–20% of the exam, ~27 questions). Unlike other topics, Ethics is also explicitly carried forward to Level 2 and Level 3. Most candidates underestimate it — then lose 3–5 marks on borderline cases. This guide focuses on the application of Standards, not just memorisation.

Key takeaways

Standard I — Professionalism: Know that misrepresentation includes plagiarism; must distinguish personal opinions from facts
Standard II — Integrity of Capital Markets: Material Non-Public Information (MNPI) — if you have it, don't trade; mosaic theory is legal
Standard III — Duties to Clients: Suitability and fair dealing — basis for suitability: client's profile, not your view of what's best for them
Standard IV — Duties to Employers: Loyalty — can take general skills to next employer but not confidential client lists or proprietary models
Standard V — Investment Analysis: Reasonable basis — your recommendation must have a reasonable, independent basis even if you disagree with the conclusion
Standard VI — Conflicts of Interest: Disclosure is the default answer — disclose priority of transactions, compensation arrangements, and referral fees
Standard VII — Responsibilities as CFA Member/Candidate: Exam misconduct rules — even discussing exam questions after a session is a violation
GIPS: Composite construction and compliant presentations — firms present asset-class composites, not cherry-picked accounts

The CFA Code of Ethics (6 Principles)

Before the 7 Standards, memorise the Code itself — exam questions sometimes ask which Code principle applies:

Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues and other participants in the global capital markets
Place the integrity of the investment profession and the interests of clients above your own personal interests
Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities
Practice and encourage others to practice in a professional and ethical manner
Promote the integrity and viability of the global capital markets
Maintain and improve your professional competence and strive to maintain and improve the competence of other investment professionals

The 7 Standards — Exam Focus

Standard I — Professionalism

I(A) Knowledge of the Law: Must follow the stricter of: CFA Code/Standards, local law, employer rules. If laws conflict, follow the stricter.
I(B) Independence and Objectivity: Must not accept gifts that compromise objectivity. Small gifts (coffee, modest meals) = OK. Significant gifts = must disclose or decline. Research trips paid by company being covered = potential conflict — disclose.
I(C) Misrepresentation: No plagiarism. Citing consensus model = OK without attribution. Citing a specific analyst's model = must attribute. Claiming CFA candidate if you've registered = OK. Claiming CFA charterholder if not chartered = violation.
I(D) Misconduct: Personal behaviour outside work can violate this if it reflects poorly on professional integrity (e.g., DUI, fraud).

Standard II — Integrity of Capital Markets

II(A) Material Nonpublic Information: MNPI = information that (i) is not public AND (ii) would significantly affect the price if public. If you have MNPI, you cannot trade or cause others to trade. Mosaic theory: aggregating public information to reach a non-public conclusion = legal. Overheard conversation at a restaurant about a merger = MNPI — don't trade.
II(B) Market Manipulation: No disseminating false information. No artificial trading volume (painting the tape). No transaction-based manipulation.

Standard III — Duties to Clients

III(A) Loyalty, Prudence and Care: Client interests first. Soft dollar arrangements must benefit clients. Voting proxies must be in client interest.
III(B) Fair Dealing: All clients must receive investment recommendations simultaneously. No preferential treatment to large accounts. If full allocation isn't possible, allocate pro-rata.
III(C) Suitability: Know the client's IPS (Investment Policy Statement). Never recommend a product without understanding client's risk tolerance, time horizon, liquidity needs, legal constraints, tax situation, unique circumstances.
III(D) Performance Presentation: Must not misrepresent performance. Must not cherry-pick time periods. Must include terminated accounts in composites.
III(E) Preservation of Confidentiality: Client information is confidential unless: client permits, legal requirement, necessary to prevent illegal acts.

Standard IV — Duties to Employers

IV(A) Loyalty: Can use general skills at new employer. Cannot take client lists, confidential models, or proprietary data. Can work for a competitor after leaving — just can't poach clients using confidential info.
IV(B) Additional Compensation Arrangements: Must get written employer consent before accepting compensation that creates conflict (e.g., being paid by a company whose stock you recommend).
IV(C) Responsibilities of Supervisors: Must have adequate compliance procedures. If a subordinate violates the Standards, a supervisor without adequate oversight is also in violation.

Standard V — Investment Analysis

V(A) Diligence and Reasonable Basis: Must have a reasonable, independent basis for each recommendation. Relying solely on a quantitative model without understanding its assumptions = inadequate due diligence.
V(B) Communication with Clients: Distinguish fact from opinion. Disclose limitations of analysis. Must communicate significant changes to recommendations promptly.
V(C) Record Retention: Maintain records supporting investment analysis for 7 years minimum (or longer per local law).

Standard VI — Conflicts of Interest

VI(A) Disclosure of Conflicts: Disclose all actual and potential conflicts — ownership in recommended stock, compensation arrangements, board memberships. "When in doubt, disclose" is almost always the right answer in Ethics questions.
VI(B) Priority of Transactions: Client transactions before employer's. Employee's personal transactions last. Cannot front-run client orders.
VI(C) Referral Fees: Must disclose referral arrangements to clients before or when engagement begins.

Standard VII — Responsibilities as CFA Member/Candidate

VII(A) Conduct as Members and Candidates: Exam misconduct — sharing questions after exam, tampering with scores = violation. Cheating on any professional exam = violation.
VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program: "I am a CFA charterholder" = OK if you are one. "I am a Level 2 CFA candidate" = OK. "I am a CFA" (implying a standalone credential abbreviated to a noun) = violation per new guidance. Do not imply the CFA designation confers superior ability to generate returns.

Ethics Application Framework (for Exam Questions)

When given an Ethics vignette, use this 4-step approach:

Identify the relevant Standard(s) — most questions test 1–2 specific Standards
Identify what action was taken vs. what the Standards require
Check for conflicts — often the question involves a conflict between two Standards or between standards and employer policies
Apply the hierarchy: CFA Code/Standards > Local Law (when law is stricter, follow law; when Code is stricter, follow Code)

GIPS (Global Investment Performance Standards) — Exam Essentials

GIPS are voluntary performance presentation standards. Key points for Level 1:

Composites = all accounts with similar investment mandate — you cannot cherry-pick accounts
GIPS compliance is firm-wide, not strategy-specific
Terminated accounts must be included in composites for the period they were active
Verification is not required but adds credibility
5 years of GIPS-compliant history required initially; then build to 10 years
Leverage use must be disclosed

Frequently asked questions

How many Ethics questions are in CFA Level 1?

Ethics (Ethical and Professional Standards) makes up 15–20% of CFA Level 1, which translates to approximately 27 questions out of 180. It is the single highest-weighted topic. Additionally, Ethics performance matters for borderline pass decisions — CFA Institute has historically given slight advantage to candidates near the pass threshold who scored well in Ethics.

What is the most commonly tested Standard in CFA Level 1?

Standard III (Duties to Clients) and Standard VI (Conflicts of Interest) are consistently the most heavily tested standards. Standard II(A) — Material Nonpublic Information — generates many tricky application questions. Standard I(C) — Misrepresentation (including plagiarism) — is frequently tested in context of research reports and social media posts.

Can I use the CFA Institute Ethics text alone or do I need Schweser?

The CFA Institute's curriculum is authoritative, but its Ethics volume is extensive. Schweser Notes condenses it well. Most Level 1 candidates use Schweser Notes for efficiency, then refer to the official curriculum for specific Standards they find unclear. The key is doing large numbers of Ethics practice questions — understanding application matters more than memorising the Standards verbatim.

Written by Arpan Das.

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