Cracking Ethics and Professional Standards in CFA L1


So one fine morning you gently kissed your girlfriend’s forehead and are headed straight to the office. While in the elevator, you overheard the CFO of Birla Technologies who sounded exuberant about the upcoming Q4 results. You got out of the elevator, rushed to your cubicle and booked half a million shares of Birla Technologies for your clients. Q4 results are declared, Net Profit of Birla Technologies has almost doubled and your clients make a killing 🙂 You take away a hefty commission and book a vacation with your girlfriend in New Zealand. Now were you ethically correct in the entire process?

Lets have a small twist in the above example.

Lets assume that your elder brother is also your client. Instead of booking the shares for all your clients, you first book the shares for your other clients and then go on to allot the shares of Birla Technologies in your brothers’ account. Were you ethically correct?

The module on ethics and professional standards in CFA primarily deals with these cheeky little things. CFA Institute, USA is very particular about this module and ensures that each one of its Level 1 candidate is tested thoroughly on this module. With ~15% weightage one can expect close to 36 odd questions in Level 1. Both the morning and the afternoon session has an equal split (18 questions) in each of these sessions. Most of my friends and batch-mates who could not get through CFA L1 exam was primarily because of this module. Anything less than 50% in this section (<18 correct answers) is surely to get you on the wrong side on the day of the results.

So how does one go about preparing for this section? Let me give you my thoughts and summarize it around 5 key broad heads:

1) Practice only in the end: Even if you practice this section in the beginning you are sure to have it all messed up one month before the exam. Hence it is better to start preparing this section only in the end – say may be 30-45 days before the exam

2) Get photocopies of ‘CFA Curriculum Books’ only for this section: There are three sources from where you can practice – Schweser Books, Problem Books (The 2 model papers you get with your CFA Books) and CFA Curriculum Books. Even though I had advised you earlier not to buy the CFA Curriculum books it is indeed a great practice to just get the photocopies of this section from the CFA Curriculum books and practice it thoroughly.

3) Analyse the answers: In the first round of practice chances are very high that you will get quite a few questions incorrect. Do not panic but instead analyse the answers and see why your answer is not ‘ethically correct’. Remember this section is pretty subjective and what seems right to you might not be right as per the CFA Standards. The trick is to start thinking like the examiner and get into his thinking of what he subjectively feels is correct 🙂

4) Just figuring what is wrong ethically is not sufficient: You can’t just figure out an ethical discrepancy and be content of cracking the questions in your exam. You also need to be aware of the type of ethical breach. The type could either be Conflict of interest, Lack of due diligence, Fair Dealing etc. As a CFA L1 candidate you need to be thorough with the types and understand what each type stands for.

5) Track your scores: When you are practicing this section, do keep a track of your scores. As I mentioned earlier, on the exam day we need to be in the 50-70% range. To be on the safer side we need to hit >60% on the exam day. Do keep a note of your scores while practicing and see to it that you get closer to the desired range with every practice 🙂

All the very best 🙂 In my next blog I will deep-dive into Quantitative Methods for CFA L1 and see how to tackle this 12% 🙂