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CFA® Level III · Ethical and Professional Standards · free lesson
Application of the Code and Standards: Level III
Level III ethics sets rarely test a single rule. They describe a firm with several professionals, overlapping policies and clients with competing interests, then ask which Standard applies, whether a practice complies and what should happen next. This module turns the Standards you already know into a repeatable method: map the people and their duties, test each fact against the precise elements of a Standard, and recommend corrective actions and procedures that fix both the harm and its cause.
What you will learn
1. Evaluate a complex case involving several professionals, clients and firm policies by mapping each person's role and duties to the relevant Standards.
- Map roles and membership first: the Standards bind members and candidates, not firms or non-members.
- Loyalty runs to clients first, then the employer, then the professional.
- One act can breach several Standards, and several people can breach on the same facts.
- A supervisor is judged on reasonable efforts to prevent and detect violations, not on whether a subordinate erred.
- Knowingly participating in or assisting anyone's violation breaches I(A); escalate and dissociate.
2. Explain precisely why a practice, policy or action does or does not breach a specific Standard, including the conditions that would make it acceptable.
- Name the Standard and the element: material and nonpublic, knowing, written consent, reasonable basis.
- Disclosure cures many conflicts but never front-running, trading on inside information, misuse of client brokerage or unfair allocation.
- Outcomes rarely matter: misleading figures breach III(D) even if nobody relied on them, and diligent advice that loses money is not a breach.
- Loyalty is about whose interests come first; fair dealing is about fairness between clients.
- Suitability tests the fit with the client; diligence tests the quality of the research.
3. Recommend proportionate corrective actions and compliance procedures that address the violations identified in a case.
- Fix the harm, fix the cause, keep the response proportionate.
- A member who finds a violation should stop, escalate, document and, if it continues, dissociate; reporting to regulators may be appropriate or legally required.
- Firms halt the practice, compensate clients, correct misstatements and report where the law requires.
- Pre-set allocation rules, pre-clearance, blackout periods, restricted lists and gift logs address the most common breaches.
- A supervisor who finds the compliance system inadequate should decline supervisory responsibility in writing until it is fixed.
Module at a glance
- Work in order: map people, roles and membership; identify clients and duties; test each fact against a specific Standard.
- Name the right person and the right Standard: one act can breach several Standards and several people can breach on the same facts.
- Supervisors are judged on reasonable procedures and on how they respond to red flags, not on the outcome alone.
- Precision means testing the elements (material and nonpublic, knowing, written consent, reasonable basis) and whether a valid cure is present.
- Disclosure cures many conflicts but never front-running, trading on inside information, misuse of client brokerage or unfair allocation.
- Corrective action repairs the harm and the cause: stop, escalate, compensate, correct, then adopt targeted procedures.
- Prefer proportionate controls such as pre-set allocation, pre-clearance, blackout periods and restricted lists over disclosure-only fixes or blanket bans.
This free module has 3 lessons, 14 practice questions with full explanations.