CFA® Exam Ethics Summary: Standard II

CFA Exam: Level 1 / Ethics / Standard II

Quick Ethics Review for CFA Candidates

Level 1 CFA Exam Ethics Summarized: Each ethical standard is devoted to a separate area of expertise. Standard II is about the Integrity of Capital Markets. It has 2 sub-sections.

This blog post was created as a part of the CFA exam review series to help you in your level 1 exam revision, whether done regularly or shortly before your CFA exam.

Level 1 Ethics Cheat Sheet, Standard II

Here's a level 1 CFA exam cheat sheet for Ethics, Standard II on the integrity of capital markets:

• (A) Material Nonpublic Information,
• (B) Market Manipulation.

CFA Exam, Standard II: INTEGRITY OF CAPITAL MARKETS

Standard II (A) – Material Nonpublic Information

Standard II (A) makes it clear that using material non-public information is prohibited. But how do we know that we’re dealing with material non-public information?

The key issue here is the influence of the information on the price of a security. Notice that not every piece of information will affect the price and not every piece of information will affect the price to the same extent. To identify material non-public information, you should take into account the impact of the information on the price of a security, as well as the source and reliability of the information.

Material non-public information – examples:

• bankruptcies,
• mergers and acquisitions,
• annual reports and auditor reports,
• innovation-oriented initiatives,
• tender offers,
• contracts with customers, etc.

Using public information as well as nonmaterial non-public information for investment actions is beyond any violation. On the basis of these types of information, analyst are allowed to form their own opinions. This kind of approach is called mosaic theory. From different bits and pieces of information available to analysts, they draw their own conclusions and, thus, are able to provide valuable service to their clients.

You can learn more about CFA Institute Code of Ethics & Standards of Professional Conduct by visiting our CFA exam lesson on Ethics, Standard II .

Standard II (B) – Market Manipulation

The aim of Standard II (B) is to secure the market and its participants against the adverse effect of manipulation.

There are two major issues that you need to associate with this Standard. The first one is information-based manipulation and the other is manipulation based on transactions.

Information-based manipulation is when you spread false information in order to obtain some unfair gain at somebody else’s expense. Transaction-based manipulation, on the other hand, is when you aim at obtaining this unfair gain through artificially conducted transactions. In both cases what decides whether an action is a manipulation or not is the intent that lies behind the action.

NEXT: Ethics, Standard III

LAST UPDATE: 7 Nov 2023