Required reading
Standards of Practice · tested at both levels
Ethics & Professional Standards
The most reliably scored marks on the exam, because the answers are rule-based rather than judgement calls. Ethics questions are vignette-driven: identify the standard, apply it, prescribe the remedy.
How to answer an ethics question
Every ethics item, multiple-choice or essay, yields to the same three-step method. Practise it until it is automatic, because it converts an ambiguous story into a rule application.
1. Identify the actor and the duty
Who is the member or candidate, and to whom is the duty owed — client, prospective client, employer, the market, or the profession? Many wrong answers come from applying a client duty where the duty is actually to the employer, or vice versa.
2. Name the standard
State the specific standard, not "ethics generally". In an essay, naming the standard and its sub-heading earns the mark; describing a vague concern does not.
3. Prescribe the remedy
Say what the person should have done and what they must do now: disclose, obtain written consent, refuse, refrain from acting, escalate, document, or dissociate. Ethics answers that stop at "this is a violation" leave half the marks on the table.
The two rules that decide most questions
Disclosure does not cure everything, and consent must be informed. Some conflicts can be managed by full, prior, plain-language disclosure and written client consent; others — misrepresentation, misuse of material non-public information, misappropriation — cannot be disclosed away. And where law and the Code conflict, follow the
stricter of the two.
Professionalism
Knowledge of the law
Understand and comply with all applicable laws, rules and regulations, including the Code and Standards. Where they differ, comply with the stricter. Do not knowingly participate in a violation, and dissociate from any violation you discover — which in practice means stopping participation, documenting your objection, and escalating to compliance or supervisors.
Independence and objectivity
Use reasonable care to maintain independence. Gifts, sponsored travel, allocations in oversubscribed offerings, pressure from issuers or from an employer's investment banking relationships, and pressure from a manager being diligenced all fall here. Modest, customary gifts from clients may be acceptable with disclosure; anything that could reasonably be seen to compromise judgement must be refused.
Misrepresentation
No untrue statements about qualifications, services, performance, or the characteristics of an investment — including implying guaranteed returns, presenting model or backtested results as actual, or omitting fees. Plagiarism is a misrepresentation: cite third-party research, and do not present another firm's work as your own.
Misconduct
No dishonesty, fraud or deceit, and no conduct that reflects adversely on professional reputation, integrity or competence — including conduct outside professional life where it bears on trustworthiness.
Alternative-investment specifics. Independence questions in this curriculum most often involve a manager under diligence offering hospitality, conference sponsorship, or a co-investment allocation; performance-presentation questions involve pro-forma or simulated track records, and cherry-picked composites. Both are recurring vignette shapes.
Integrity of capital markets
Material non-public information. Information is material if it would affect an investment decision or a security's price, and non-public until broadly disseminated. Possessing it prohibits both acting and causing others to act. Remedies: refuse the information if possible, notify compliance immediately, place the security on a restricted list, and observe firewalls between departments. The mosaic theory is the legitimate counterpart — conclusions assembled from public and non-material non-public information are permissible, and this is exactly how alternative-data and expert-network questions are framed. Note that a signal derived from alternative data can become MNPI when the vendor's source is an insider or a party under a confidentiality obligation.
Market manipulation. Two forms: information-based (spreading false or misleading information to move a price) and transaction-based (trades intended to create a misleading impression of price or volume, cornering, or marking the close). The distinguishing test is intent to mislead — legitimate trading strategies that move prices are not manipulation.
A private-markets variant worth knowing: influencing a valuation input, timing a transaction to affect a reported NAV, or arranging a trade to establish a favourable mark are all manipulation questions in disguise, and they connect directly to the valuation red flags in operational due diligence.
Duties to clients
Loyalty, prudence and care
Place the client's interest above the employer's and your own, act with the care of a prudent professional, and be clear about who the client is — for a pooled fund the client is the fund and its investors collectively, not the largest investor. Proxy voting is part of the duty and requires a cost-benefit-informed policy.
Fair dealing
Deal fairly with all clients in recommendations and investment actions. Fair does not mean equal: differential service levels are permissible if disclosed and available, but allocation of limited opportunities — a scarce co-investment, an oversubscribed allocation, an IPO — must follow a pre-established, written, non-preferential policy. Distribute research and changes of recommendation to all eligible clients simultaneously.
Suitability
For advisory relationships, know the client's objectives, constraints, experience and risk tolerance, keep an IPS updated, and judge suitability in the context of the total portfolio. Where the mandate is to follow a stated strategy, judge suitability against that strategy — the standard shifts from client-specific to mandate-consistent.
Performance presentation
Fair, accurate and complete. Distinguish actual from model or backtested returns, disclose whether returns are gross or net, state the time period, and avoid selective composites. Provide the detail behind any summary on request.
Confidentiality
Preserve client information, including after the relationship ends, unless disclosure is legally required, the information concerns illegal activity, or the client permits it.
Alternative-investment applications the exam favours: allocating a scarce co-investment across accounts; side letters granting preferential liquidity or transparency (a fair-dealing question, and the reason MFN clauses exist); recommending an illiquid fund to an investor with near-term liquidity needs; and presenting a fund's performance without disclosing the effect of a subscription credit line on IRR.
Duties to employers
Loyalty
Act for the employer's benefit; do not deprive it of your skills, divulge confidential information, or cause harm. Preparing to leave is permitted; using employer resources, soliciting clients, or taking records and models before departure is not. Independent practice requires prior consent from the employer.
Additional compensation arrangements
No benefits that compete with or could create a conflict with the employer's interest without written consent from all parties involved. Performance-linked payments from a client are the classic case.
Responsibilities of supervisors
Make reasonable efforts to prevent and detect violations by those under your supervision — which means an adequate compliance system, not merely good intentions. If the firm's system is inadequate, decline supervisory responsibility in writing until it is fixed. A supervisor who reasonably relies on a sound system is not liable for a subordinate's concealed violation.
Investment analysis, recommendations & actions
Diligence and reasonable basis
Exercise diligence, independence and thoroughness, and have a reasonable and adequate basis supported by research. When relying on third-party research or a subadviser, make reasonable efforts to verify its soundness — the standard that turns operational due diligence from good practice into an ethical requirement. Relying on a manager's marketing material as the basis for a recommendation is a violation.
Communication with clients
Disclose the basic format and general principles of the investment process, and any material change to it. Identify the significant limitations and risks — for alternatives that means illiquidity, lock-ups and gates, valuation uncertainty on Level 3 holdings, leverage, and the fee structure. Distinguish fact from opinion.
Record retention
Maintain records supporting analyses, recommendations and actions. Records belong to the employer; you cannot take them with you.
The alternatives twist is that the diligence standard scales with complexity: a recommendation of an illiquid, leveraged, model-valued strategy demands a deeper documented basis than a recommendation of an index fund — and where the process is quantitative or AI-driven, the explainability requirement is an ethical obligation, not just a governance preference.
Conflicts of interest & the Asset Manager Code
Conflicts. Make full and fair disclosure of anything that could reasonably impair independence or interfere with duties — ownership of the securities or funds recommended, referral or placement arrangements, cross-holdings, board seats, and personal relationships. Disclosure must be prominent, plain and prior. Priority of transactions requires client transactions to precede those of the firm and its employees, with pre-clearance, blackout windows and reporting for personal accounts. Referral fees must be disclosed to clients and employers so the recipient's recommendation can be judged accordingly — including placement agent economics in fund distribution.
The Asset Manager Code applies the same ideas at the firm level, and its six components are worth being able to list: loyalty to clients; investment process and actions; trading; risk management, compliance and support; performance and valuation; and disclosures. It also sets out general principles of conduct — act with skill, competence and diligence; act in a professional and ethical manner; comply with applicable law; and uphold market integrity — and requires firm-level infrastructure: a designated compliance officer, an independent third-party confirmation of client assets, a documented business-continuity plan, and fair, accurate valuation and performance reporting.
Firm-level requirements that recur in vignettes: a written soft-dollar and best-execution policy, a documented trade-allocation policy, an independent valuation process for hard-to-price assets, and disclosure of fees including performance-fee mechanics and any expenses charged to the fund rather than the manager.
Responsibilities as a member or candidate
Conduct in the programme. Do not compromise the integrity of the designation or the examination process — no disclosure of exam content, no cheating, and no conduct that damages the reputation of the CAIA Association or the CFA Institute. Do not misrepresent or exaggerate the meaning of membership, the designation, or candidacy.
Reference to the designation. State it factually and without implying superior performance. "Charter holder" and "candidate in the programme" are statements of fact; claims that the designation predicts investment results are not. There is no partial designation — passing one level does not confer a title.
Why this section is worth revision time: these items are pure recall, cost almost nothing to learn, and appear reliably. They are the cheapest marks in the entire curriculum.
Confusion pairs
Fair dealing vs equal dealing
All clients treated fairly, with differentiated service permitted if disclosed vs identical treatment, which the Standards do not require.
MNPI vs mosaic theory
Material and non-public — cannot act or cause others to act vs conclusions assembled from public and non-material information, which is legitimate research.
Disclosure vs consent
Telling the client vs obtaining informed, written permission. Additional compensation and independent practice need consent, not just disclosure.
Duty to client vs duty to employer
The client's interest comes first in investment matters; the employer's interest governs use of its resources, records and time.
Dissociation vs whistleblowing
Stop participating, document, and escalate internally — required vs reporting externally, which the Standards do not mandate.
Code & Standards vs Asset Manager Code
Obligations of individuals vs voluntary firm-level code with six components and firm infrastructure requirements.
Model vs actual performance
Backtested or simulated, must be labelled as such vs realised client returns. Presenting the first as the second is misrepresentation.
Practice
Six multiple-choice questions in exam style, with the reasoning — not just the letter.
1. During on-site due diligence, a hedge fund manager offers an analyst use of its corporate box at a sporting event. The best course of action is:
A. Accept and disclose it afterwards to the client
B. Accept, since diligence findings are documented independently
C. Decline, because it could reasonably be seen to compromise independence and objectivity
D. Accept only if the analyst pays the face value of the tickets
C. Independence and objectivity turns on reasonable appearance, not on whether judgement was actually affected. A benefit from an entity under evaluation should be declined; the safest answer in this vignette family is always to refuse and note the offer to compliance.
2. An analyst buys satellite parking-lot data from a vendor whose contract permits resale, and infers a retailer's quarterly sales. Acting on the inference is:
A. A violation, because the information is non-public
B. Permissible under the mosaic theory, provided no source is an insider or under a confidentiality duty
C. Permissible only if the analyst publishes the inference first
D. A violation of confidentiality
B. Conclusions built from lawfully obtained, non-material and public inputs are legitimate research. The caveat that matters in the alternative-data era: if the vendor's data originates with an insider or breaches a confidentiality obligation, the analysis becomes MNPI-tainted.
3. A GP offers a scarce co-investment to the manager's three largest accounts only, with no written allocation policy. This most likely violates:
A. Suitability
B. Fair dealing
C. Confidentiality
D. Record retention
B. Limited opportunities must be allocated under a pre-established, written, non-preferential policy. Differentiated service is acceptable when disclosed and available to all; ad hoc preference for the largest accounts is not.
4. An adviser recommends a fund of funds relying solely on the manager's marketing deck and a peer-group quartile ranking. The primary violation is:
A. Misconduct
B. Diligence and reasonable basis
C. Priority of transactions
D. Independence and objectivity
B. A recommendation requires a reasonable and adequate basis, and reliance on third-party material requires reasonable verification. The standard scales with complexity — an opaque, illiquid, fee-layered product demands more, not less, documented work.
5. A firm reports fund IRRs boosted by a subscription credit facility without mentioning the facility. This is best described as a violation of:
A. Performance presentation and communication with clients
B. Loyalty to employer
C. Market manipulation
D. No violation, since IRR is calculated correctly
A. A technically correct number presented without the material factor driving it is not fair, accurate and complete. Disclose the facility's use and present multiples alongside IRR.
6. A newly promoted head of research finds the firm has no compliance procedures for personal account dealing. She should:
A. Supervise informally until procedures are written
B. Decline supervisory responsibility in writing until an adequate system is in place
C. Report the firm to the regulator immediately
D. Rely on employees' professional judgement
B. Responsibilities of supervisors requires an adequate system; accepting the role without one exposes her to liability for violations she cannot detect. The Standards require internal escalation and, if necessary, declining the role — not external reporting.
Constructed-response practice
Ethics essays are the most formulaic on the paper: violation, standard, remedy — one line each, per issue.
Prompt A (12 minutes). An analyst diligencing a private credit fund accepts a paid trip to the manager's investor conference, is shown unpublished portfolio-company financials under NDA, and afterwards recommends the fund to the three clients who can meet the minimum. Identify each issue, the standard involved, and the required action.
Outline:
- Paid travel → independence and objectivity: decline, or pay own costs; disclose the offer to compliance.
- NDA financials → integrity of capital markets / MNPI: information cannot be used to trade in the affected public securities; notify compliance and restrict if applicable.
- Recommendation to three clients only → fair dealing: allocate under a written policy and offer to all eligible clients, distinguishing minimum-size constraints (legitimate) from preference (not).
- Basis for the recommendation → diligence and reasonable basis: document independent verification beyond the manager's materials.
- Close with the remedy set: written policies, compliance escalation, and record retention.
Prompt B (10 minutes). A manager markets a new fund using the backtested results of its systematic model, net of a fee schedule it no longer charges, and grants one large investor a side letter with monthly liquidity while other investors have quarterly gates. Advise the manager.
Outline:
- Backtested results → performance presentation and misrepresentation: label clearly as simulated, state the methodology and period, and use the current fee schedule.
- Side letter liquidity → fair dealing and disclosure: preferential redemption rights disadvantage remaining investors in a stress; disclose the existence and terms, and consider an MFN election.
- Firm-level lens → Asset Manager Code: disclosures, performance and valuation, and loyalty to clients components.
- Prescribe: revise marketing materials, disclose all side letters, adopt a written policy on preferential terms, and document the valuation and redemption policy.