How To Study Ethics Cfa Level 1

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How To Study Ethics Cfa Level 1

CFA Ethics Level 1 Tips: 6 Actionable Strategies to Nail Your Exam

CFA ethics is one of the most important topic areas in the CFA program. It represents 15% in Level 1, and 10-15% in Level 2 and Level 3. A good performance in ethics can also earn you a pass in case you score at the borderline.

CFA Level 1 Ethics

The exam content includes the CFAI Professional Code Program and Global Investment Performance standards (GIPS). You are expected to know the codes and standards, as well as the enforcement, application and recommended procedures.

CFA Level 2 Ethics

The coverage is around 80% the same as Level 1. The difference is three extra short sessions: soft dollar standard, research standard, and prudent investment rules.

It represents 10-15% of the Level 2 exam, meaning you can expect to see 2-3 ethics questions.

In terms of format, the multiple choice should look very similar.  They are however presented in item sets and can make for some confusing scenarios. Also, be prepared to differentiate between what is recommended and what is required.

CFA Level 3 Ethics

Again, the exam content is pretty much the same as those in Level 1 and 2, but questions are more complex. You could have the ethics book in front of you for the exam and there would still be some indecision on the correct answers.

Level 3 Ethics tends to focus more on procedures for avoiding breaches of ethics and for handling breaches of ethics.  It also adds the Asset Manager’s Code of Conduct.

CFA Level 1 Ethics Tips

Ethics could be dry and boring, but it is tested in all 3 levels and too important to be ignored.

1. Prepare to Read the Ethics Section Multiple Times

Ethics questions are subtle and ambiguous, and it takes a fair bit of time to get it locked down.  The good news is that once you do, you get payback for it in Level 2 and Level 3. A lot of the ethics material is the same across levels.Repetition will get you thinking about it the right way.  Try doing some questions every day over many weeks instead of cramming it at the end.

2. Know the CFA Ethics Standards

Here are the 7 Standards of Conduct:

  1. Professionalism
  2. Integrity of capital markets
  3. Duties to clients
  4. Duties to employers
  5. Investment analysis, recommendations, and actions
  6. Conflicts of interest
  7. Responsibilities as a CFA Institute member or CFA candidate

You are expected to know what the standards stand for, and be able to differentiate them.

For example, there will likely be questions on “which standard is…” and you should be able to pick the correct one from the possible choices.

3. Differentiate the CFA Code of Ethics from the Standards

In addition to the Standards, we have the following CFA Code of Ethics:

  1. Act with integrity, competence, diligence, respect
  2. Client interest first
  3. Use reasonable care and exercise independent professional judgment
  4. Practice and encourage others
  5. Promote integrity of capital markets
  6. Maintain and improve professional competence

Now, candidates start to get confused — which ones are the standards and which are the codes? Remember this:The Standards tell you what to do, and the Code tells you how to do it.

4. Don’t Blindly Memorize

CFA Level 1 ethics does require a little bit more memorization because there are some industry-specific situations (e.g. the Standards and Codes) that are hard to generalize.

Having said that, you definitely don’t need to remember things like the numbering (e.g. what is II(B) of the Code). You should figure out how the logic works, such as what is permitted and not permitted instead of memorizing a bunch of rules.

5. Read Examples to Develop Your “Ethics Intuition”

The best way to do this is to go through all examples. Each example is a scenario of an underlying standard. It is the best place to learn how to recognize if an action is in compliance or not with a certain standard.

Also, work on all the ethics questions you can find, then read the explanatory answers for both correct and incorrect answers. You will slowly but surely get the hang of it, developing your “ethics intuition” in the process.

6. Think like a Lawyer

I have two readers who find ethics really easy and score >70% in their exams. Both have training in law schools.

Law school students are taught how to understand the law and go through various mental tests to determine if there is a violation and more importantly, what specific action in the whole chain of events caused the line to be crossed.Use the lawyer’s technique, IRAC — issue, rule, application, conclusion. It’s an excellent tool to solve ethics questions.

Bonus CFA Ethics Study Tips for Level 2 and 3

The tips above apply to all levels, but here are additional ones for L2 and L3:

1. Don’t Rush when Reading the Vignette

When you go through the examples and EOCs, read the vignette and questions very, very carefully, and take them slowly.

2. Mark Key Information

You should be able to identify key info, violations or questionable behaviors. Make a note on the side of the page of the violation, underline or put a question mark. This will help you find the paragraph fast when you go back to verify info with each question asked.

3. Pick the More Conservative Answer

When you really can’t figure out, go for the more conservative answer.

Best Materials for CFA Level 1 Ethics

Reading Materials

For CFA level 1 ethics on the standards, there is no substitute for the original material from CFA Institute. The curriculum goes through more ethically ambiguous situation than the Schweser book does.

For GIPS, some readers find Schweser good enough but I might as well study the entire ethics section based on CFAI text. It takes longer but CFAI text is more thorough and uses the same terminologies as in the exam.

Once you are done with your initial reading from CFAI text, revisions using other third-party providers can be productive.

Wiley‘s audio and videos are great to clarify concepts. This is especially useful when you reach Level 2 and Level 3.

Practice Questions

I recommend sticking with the CFAI EOC as your core set of questions. The Schweser Qbank tends to ask about your high level knowledge of the ethics, while CFAI EOC questions go much deeper.

The Ethics Adjustment

One big incentive to do well in this topic area is this rule known as the “Ethics Adjustment”. Quoting from the CFAI website:

The Board of Governors instituted a policy to place particular emphasis on ethics. Starting with the 1996 exams, the performance on the ethics section became a factor in the pass/fail decision for candidates whose total scores bordered the minimum passing score. The ethics adjustment can have a positive or negative impact on these candidates’ final results.”

While the Ethics Adjustment has a net positive effect on candidate scores in most exam sessions, it only applies to borderline candidates. For example, if you score <50% in most topic areas, a >70% in ethics won’t save you. At the same time, you can fail ethics and still pass if you do well in other topic areas.

Three Takeaways

The CFA ethics section does not build on other topics. Because of this, some candidates procrastinate till the very end. Don’t do that.

To make life easier for you, remember this:

  1. Remember the macro – the Standards, the Codes and what they stand for. Don’t bother to memorize the micro concepts.
  2. Once you know the Standards, Ethics is a very logical topic. Simply overlay the Standards over any problem and figure out which Standard is violated or not.
  3. Use the mental checklist: Are they really doing something wrong? if yes, what rule covers it? What does the rule say and how does it apply to this situation? Use the IRAC and develop your ethics intuition.

cfa ethics adjustment

CFA Ethics: Top 10 Tips To Nail This Section [All Levels]

The Ethical and Professional Standards section is challenging for most CFA candidates given the more subjective nature of the topic and questions (vs. the rest of the curriculum), and the sheer amount of readings to go through.

Regardless whether you’re new to CFA exams or a seasoned CFA Level 3 candidate, CFA Ethics section plays an important role in all levels of the CFA program. Most CFA candidates tend to moan about it at some point, although we highly recommend not skipping this section.

In this epic CFA ethics guide, we will delve into why Ethics is important, how it evolves across 3 levels of the CFA program, and our top tips to ace this section.

Let’s do it!Contents

  1. What are the differences in CFA Ethics for Level 1, 2 and 3?
    • CFA Level 1 Ethics (15-20% exam weight)
    • CFA Level 2 Ethics (10-15% exam weight)
    • CFA Level 3 Ethics (10-15% exam weight)
  2. Why is CFA Ethics so important?
    • What is Ethics’ weighting in CFA exams?
    • What is the CFA ethics adjustment?
    • Can I fail ethics but still pass the CFA exams?
  3. How to Study CFA Ethics – Our Top Tips
    • 1) Save Ethics for the end, but please make time for it
    • 2) CFA Curriculum is best for studying Ethics
    • 3) Know the difference between the 7 Standards of Professional Conduct and 6 Code of Ethics
    • 4) Be thorough. Learn from case studies.
    • 5) Do a lot of Ethics practice questions, it’s a must
    • 6) Make summary notes or flashcards, if you have time
    • 7) Reinforce your CFA Ethics learning via CFA Institute’s video series
    • 8) Read the question carefully and highlight key information
    • 9) When in doubt, disclose
    • 10) Don’t skip GIPS, here are some tips (sorry)
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What are the differences in CFA Ethics for Level 1, 2 and 3?

CFA ethics differences across levels

CFA Level 1 Ethics (15-20% exam weight)

CFA Level 1 Ethics represents 15-20% of exam weight, i.e. 27-36 questions out of 180.

It introduces candidates to CFA Institute’s 6 Code of Ethics and 7 Standards of Professional Conduct (Code and Standards). These form a framework for ethical decision-making to help guide behavior and build trust.

Candidates are required to learn each Standard, its application and the recommended procedures.

The Ethics study session ends with a brief introduction to Global Investment Performance Standards (GIPS). Note that some parts of CFA Level 1 Ethics GIPS section are optional – refer to GIPS tips section further below.


CFA Level 2 Ethics (10-15% exam weight)

CFA Level 2 Ethics represents 10-15% exam weight, i.e. 9-13 questions out of 88.

Interestingly, CFA Level 2 Ethics is mostly similar to Level 1’s, with the additional introduction of 3 new concepts: Soft Dollar Standard, Research Objectivity Standard, and the Prudent Investor Rule.

The other change for CFA Level 2 is that the questions are presented in a mini case study format (i.e. vignette), accompanied with multiple-choice questions.

More careful reading required here with the longer vignette text, and a common ‘trick’ here is that candidates need to know their stuff to differentiate what is required vs. recommended by the Standards.


CFA Level 3 Ethics (10-15% exam weight)

CFA Level 3 Ethics represents 10-15% exam weight, mixed across the constructed response (essay) and vignette-based multiple choice questions.

Building off Level 1 and 2’s knowledge, CFA Ethics for Level 3 is all about application. The questions increases in complexity as there is greater emphasis on candidate’s ability to evaluate and explain how a certain conduct does or does not violate the Code and Standards.

More importantly, CFA Level 3 Ethics adds on a new section on Asset Manager Code of Professional Conduct and has a stronger emphasis on Global Investment Performance Standards (GIPS).


Why is CFA Ethics so important?

CFA ethics transferable knowledge

Ethics is an important topic that CFA candidates should master since Level 1 for 3 key reasons:

  • Significant topic weighting and tested across 3 levels (10-20%).
  • Highly transferable knowledge across 3 levels: despite the gradual increase in complexity from Level 1 to Level 3, CFA Ethics works on the same base knowledge of Code and Standards for all levels. Mastering Ethics since Level 1 is a good return on investment and will pay dividends in Level 2 and Level 3 when other topics start to demand more of your study time, as explained in the CFA Level 1 Commandments.
  • Ethics adjustment which matters to your CFA exam pass/fail decision if you are a borderline case.

What is Ethics’ weighting in CFA exams?

LevelCFA Ethics’ Topic Weight (%)
CFA Level 115-20%
CFA Level 210-15%
CFA Level 310-15%

The CFA Ethics topic weight for Level 2 and Level 3 has been stable in the past years at 10-15%. However CFA Level 1 Ethics’ topic weight has increased to 15-20% in 2021 as CFA Institute started to give a range % for Level 1 as well.

Although not the largest section, the topics and LOS statements on Ethics are very similar across all levels. This means that the information you retain in Level 1 will still be exactly applicable in Level 3 questions. Combine that with the relatively little amount of time needed to master Ethics and suddenly you have a very effort-efficient topic in your hands.

Be a master of Ethics in Level 1 and you’ll see benefits throughout the subsequent levels.


What is the CFA ethics adjustment?

How CFA Ethics adjustment may affect Passing Score

Besides its transferable knowledge across levels, Ethics is also unique in a very important way.

The CFA Institute implements a factor called the ‘ethics adjustment’ for candidates that are within the passing score. According to CFA Institute:

The Board of Governors instituted a policy to place particular emphasis on ethics. 

Starting with the 1996 exams, the performance on the ethics section became a factor in the pass/fail decision for candidates whose total scores bordered the minimum passing score.

The ethics adjustment can have a positive or negative impact on these candidates’ final results.

– CFA Institute

This means that:

  • if you’re a borderline fail, you can be pushed into the passing zone by a strong performance in Ethics.
  • similarly, if you were a borderline pass, you could be failed if your Ethics performance was particularly weak. 

However, overall the CFA Institute has stated that you’re more likely to be be ‘passed’ through ethics adjustment than ‘failed’.


Can I fail ethics but still pass the CFA exams?

Failed CFA exam - here's what to do next

Yes, it is possible pass the CFA exams even if you’re rubbish at Ethics.

But, it is a very bad idea to skip CFA Ethics as an exam study topic.

Why? Because if you’re a borderline case, Ethics will be the deciding factor (see ‘Ethics Adjustment’) as CFA Institute thinks it is important to build trust, understandably.


How to Study CFA Ethics – Our Top Tips

1) Save Ethics for the end, but please make time for it

CFA Ethics: Top 10 Tips To Nail This Section [All Levels] 1

In our recommended CFA topic study order for CFA Level 1, Level 2 and Level 3, we do suggest that candidates save Ethics for the end.

The key assumption here is of course that you make sure you stay on track with your CFA study plan, and save sufficient time at the end to address this important topic.

Whatever you do, please don’t skip this topic.


2) CFA Curriculum is best for studying Ethics

CFA Ethics: Top 10 Tips To Nail This Section [All Levels] 2

Nothing beats the CFA curriculum for studying Ethics.

Even if you use third party CFA study materials for the other topics, it’s worth using the curriculum for Ethics alone, but only if you have saved sufficient time for it as the CFA curriculum is extremely thorough.

In an ideal world:

  • Read and scan the curriculum properly, especially the ‘blue box’ examples.
  • Work through all the End of Chapter (EOC) questions.
  • Do lots of practice questions, reread concepts that you got wrong.

If there isn’t enough time:

  • Focus on using summarized third party study notes for Ethics.
  • But go through as many CFA curriculum’s ‘blue box’ examples and EOC questions.
  • Do practice questions. Make sure you prioritize the examples and EOC questions in CFA curriculum before you do this (if you have extra time).

3) Know the difference between the 7 Standards of Professional Conduct and 6 Code of Ethics

CFA Ethics: Top 10 Tips To Nail This Section [All Levels] 3

Here are the 7 main Standards of Professional Conduct (22 subsections in total, which are not listed):

  1. Professionalism (A)-(D)
  2. Integrity of capital markets (A)-(B)
  3. Duties to clients (A)-(E)
  4. Duties to employers (A)-(C)
  5. Investment analysis, recommendations, and actions (A)-(C)
  6. Conflicts of interest (A)-(C)
  7. Responsibilities as a CFA Institute member or CFA candidate (A)-(B)

Here are the 6 Code of Ethics:

  • Act with integrity and in an ethical manner
  • Place the profession and interest of clients over personal interest.
  • Conduct all professional activities (such as investment analysis, recommendations, etc) with reasonable care and independent judgement.
  • Work in a professional manner and encourage others to do so.
  • Promote the integrity of capital markets and support the rules governing the markets
  • Maintain and improve professional competence

In short, the Standards tell you what to do, and the Code tells you how to do it.


4) Be thorough. Learn from case studies.

CFA Ethics: Top 10 Tips To Nail This Section [All Levels] 4

CFA Ethics case studies are chapters in the CFA Institute & study providers material where an extensive fictional scenario is explored and dissected from an Ethics perspective.

In these case studies, a scenario set in a professional / industry-related setting is often depicted, and one or several protagonists’ thoughts, decisions and actions are explained.

Work through the case-study chapters in detail and observe how the various standards are explored through the situations.

Actual exam questions in CFA Level 1 are small and highly simplified versions of these case studies, but in Levels 2 and 3 don’t be surprised if you are hit by 3 pages of Ethics case study vignette before you’re given your first question.


5) Do a lot of Ethics practice questions, it’s a must

CFA ethics practice questions

Answering Ethics questions requires a certain degree of familiarity with the question format as well as the source material – a combination of knowing what keywords to watch out for, anticipating common traps and weeding out irrelevant information. 

Concepts will not be tested individually, instead, as the CFA levels progress, more and more concepts will be blended into the questions, which forms the long item set questions of Level 2 and Level 3.

Practicing loads of questions beforehand will reduce any surprises in the actual exam. For tips on where to find extra Ethics practice questions, see our list of free CFA study materials.

What we recommend for Ethics practice questions (in order of priority):

  1. Read all the CFA curriculum’s Ethics practice questions and answers. Learn how they think about the rules and their applicability.
  2. Do all the ‘blue box’ questions, then End of Chapter (EOC) questions.
  3. Don’t forget that there are extra questions in the CFA Institute’s online Learning Ecosystem and Standards of Practice handbook.
  4. Then if you have time, do them again, before even looking at third party question banks.

You’ll make mistakes, for sure. Just read the solution and reread the question to see which part of the question you misunderstood. Then refer back to the CFA curriculum notes to understand the theory and reread certain sections to further solidify your CFA Ethics knowledge.


6) Make summary notes or flashcards, if you have time

how to create your own cfa flashcards

As discussed earlier, the return on investment of studying Ethics properly will pay dividends in CFA Level 2 and 3.

If you have been organized with your time, it is worthwhile making summary notes for the Ethics section. You don’t have to write it, typing is fine too as writing itself isn’t the most effective way to improve memory.

This helps save time during the phase when you’re doing practice questions as well as revising Ethics concepts quickly. And it saves so much time for Level 2 and Level 3, when all your attention should be on other tougher topics.


7) Reinforce your CFA Ethics learning via CFA Institute’s video series

cfa ethics videos

Each video is on average 10-15 minutes, with 22 videos to cover the 7 Standards and their subsections. It’s perfect for visual learners or those who prefer to listen when commuting.


8) Read the question carefully and highlight key information

CFA Ethics: Top 10 Tips To Nail This Section [All Levels] 5

Perhaps more of a Level 2 and Level 3 CFA Ethics tip, do read the vignette in the question carefully when you go through the examples and EOC questions.

Quite often a mistake is made when a candidate missed out a key word like ‘always’, ‘never’ or ‘didn’t’.

Make sure you underline or circle keywords and phrases, as you need to refer to the vignette again after reading the question. Only a few sentences matter in the long vignette.


9) When in doubt, disclose

CFA Ethics: Top 10 Tips To Nail This Section [All Levels] 6

Finally, there will be times like this in the actual exam when you’re unsure of the answer.

My golden rule here for CFA Ethics questions is that “when in doubt, disclose (the action)”!


10) Don’t skip GIPS, here are some tips (sorry)

CFA Ethics: Top 10 Tips To Nail This Section [All Levels] 7

Global Investment Performance Standards (GIPS) are ethical principles for standardized calculation and presentation of investment performance set for investment companies by CFA Institute and applied voluntarily worldwide.

While only a small portion of CFA Ethics in Level 1, GIPS gets more crucial and heavily tested in CFA Level 3.

A lesser known fact is that CFA Level 1’s Reading 5 on GIPS is mostly optional:

– GIPS’s Standard 0, i.e. Fundamentals of Compliance (page 240-243 of CFA Curriculum) is a required reading;

– However, page 243-262 of the CFA Level 1 curriculum reading on GIPS is optional. This covers the other 8 out of 9 major provisions of the GIPS standards.

– That said, you need to know some basic info of the 9 major provisions of GIPS as covered in the introduction on page 240-243 of CFA curriculum.

While GIPS is admittedly a drier topic than Standards of Conduct, it is easier to ace it in a way as it is more factual and rules based. It is short to read, easy to answer once you know or memorized the facts. It may make a difference between a pass and fail so try not to skip it (especially in Level 3)!

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