Ethical decision-making - Case analysis and best practice re...

Learning Outcomes

This article explains ethical decision-making and case analysis for the CFA Level 3 exam, including:

• systematically breaking down ethics vignettes into facts, issues, applicable standards, alternative actions, and conclusions;
• applying the CFA Institute Code of Ethics and Standards of Professional Conduct precisely, citing specific standards in your reasoning;
• distinguishing clearly between minimum regulatory or standards compliance and higher “best practice” conduct expected in the exam;
• evaluating stakeholder interests, conflicts, and potential market impacts when comparing alternative courses of action;
• selecting the most ethically robust recommendation and articulating why it better preserves client interests and market integrity;
• structuring written answers that show logical, step‑by‑step justification rather than unsupported conclusions;
• recognising common exam traps, such as focusing solely on client benefit, legality, or firm policy while ignoring broader professional duties;
• integrating ethical case analysis techniques with time‑pressured exam strategy so you can prioritise key facts, avoid over-complication, and deliver concise, high-scoring responses.

CFA Level 3 Syllabus

For the CFA Level 3 exam, you are expected to systematically evaluate ethical situations, apply case analysis frameworks, and justify your decision-making process according to professional standards, with a focus on the following syllabus points:

• Identify and analyse key facts and ethical issues in exam-based scenarios
• Apply relevant provisions of the CFA Institute Code of Ethics and Standards of Professional Conduct
• Develop best practice approaches for reasoning and decision-making in ambiguous or conflicting cases
• Evaluate competing stakeholder interests and explain your final recommendation clearly

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What steps should you take to analyse an ethical dilemma presented in a CFA case scenario?
2. When multiple stakeholders have conflicting interests, how should your reasoning be structured to ensure best practice in decision-making?
3. How do you distinguish between minimum compliance and best practice in professional ethical reasoning?
4. Briefly explain the 'facts–issues–analysis–conclusion' framework.

Introduction

Ethical decision-making sits at the centre of professional conduct for CFA charterholders. The exam frequently tests your ability to assess unfamiliar, ambiguous scenarios, identify and resolve ethical conflicts, and support your choice of action with clear, logical reasoning. A structured approach using case analysis and best practice reasoning is essential. This article outlines a repeatable process for analysing cases, applying the CFA Code and Standards, and justifying your actions at the highest ethical level.

A STRUCTURED CASE ANALYSIS FRAMEWORK

A disciplined framework is required to analyse complex ethics questions. The CFA exam expects you to apply such a process when evaluating professional dilemmas.

Key Term: Ethical case analysis
A systematic process for evaluating facts, identifying issues, applying standards, and forming a justified recommendation in ethical scenarios.

Key Term: Best practice reasoning
An approach for decision-making that not only ensures compliance with rules, but achieves the highest ethical and professional standards, as articulated in the CFA Institute Code and Standards.

Step 1: Identify the Facts

Carefully distinguish between what is known and what is assumed or inferred. Gather all relevant facts before identifying the ethical issues.

Key Term: Stakeholder
Any party affected by the actions or decisions in a professional scenario, including clients, employers, colleagues, regulators, and the public.

Step 2: Determine the Ethical Issues

Highlight explicit and implicit ethical issues, including any conflicts of interest, duties to clients or employers, and questions of honesty, integrity, or professional reputation.

Step 3: Identify and Apply Relevant Standards

Reference the precise provisions from the CFA Institute Code of Ethics and Standards of Professional Conduct that apply. Consider both the letter and spirit of the rules.

Step 4: Analyze Alternatives and Stakeholder Impacts

For each alternative action, evaluate the consequences and implications for all stakeholders. Identify which option best serves your duties and maintains public trust.

Step 5: Recommend and Justify the Best Practice Solution

Select the most ethically robust course of action, not just what is legally permissible or minimum compliance. Justify your chosen recommendation by explaining how it satisfies the highest duty to all stakeholders and upholds professional integrity.

BEST PRACTICE REASONING IN DECISION-MAKING

The CFA exam is explicit: you must explain, not just state, your reasoning. Use these best practice guidelines:

• Prioritise the integrity of capital markets and the welfare of clients at all times.
• Avoid not only actual breaches, but also actions that might give the appearance of impropriety.
• Disclose all relevant conflicts—even potential ones—and obtain informed consent as required.
• When in doubt, choose the option that requires greater transparency or a higher level of fairness, rather than merely avoiding violation.
• Document your decision-making process where appropriate.

Worked Example 1.1

Scenario:
A portfolio manager receives material nonpublic information about a client company from a close friend working in the client’s finance department. If the manager sells the client’s shares immediately, losses will be avoided.

Answer:

• Facts: The manager has received material nonpublic information and faces a conflict between acting for the client’s immediate benefit and maintaining market integrity.
• Issues: Using material nonpublic information would breach CFA Standard II(A) and potentially violate securities laws.
• Analysis: While avoiding the loss may seem to benefit the client in the short run, trading on inside information undermines confidence in the markets and puts all clients at risk long-term.
• Conclusion (Best Practice): The manager must not act on the information. The most ethical course is to neither buy nor sell the securities and to inform compliance officers about the contact.

Worked Example 1.2

Scenario:
You identify that the investment report you are reviewing contains research sourced verbatim from a third-party analyst without explicit attribution.

Answer:
Failing to attribute the research is plagiarism, breaching CFA Standard I(C). Best practice is to fully attribute all research used, seek permission where necessary, and update policies to ensure clear, consistent citation in the future.

Exam Warning

A common exam pitfall is to jump directly to a recommended action without explaining how you arrived there. The CFA expects a stepwise analysis—do not skip the logical justification for each step, including the identification of all stakeholders and the application of the specific CFA Code and Standards.

Summary

Applying a clear stepwise case analysis is essential for ethical decision-making under exam conditions. Start with the facts, specify issues, apply the relevant Codes and Standards, weigh stakeholder impacts, and arrive at a solution that reflects both compliance and the highest level of professional integrity. Always justify your conclusions—not just with rules, but with reasoning and reference to best practices.

Key Point Checklist

This article has covered the following key knowledge points:

• Ethical case analysis means systematically evaluating facts, issues, alternatives, and recommendations using the CFA Code and Standards.
• Best practice reasoning goes beyond mere compliance and demands maximum transparency, fairness, and duty to clients and markets.
• A disciplined five-step framework improves clarity, consistency, and justification in all ethical decision-making.
• CFA exam questions require both clear recommendations and a stepwise justification focusing on best practice, not just minimum compliance.
• Stakeholder analysis and the weighing of all interests are essential to robust ethical decision-making.

Key Terms and Concepts

• Ethical case analysis
• Best practice reasoning
• Stakeholder