Conduct of Business and Ethics
Conduct rules require firms to act honestly, fairly and professionally in the client's best interest. Key obligations: information to clients (fair, clear, not misleading), conflicts-of-interest management, inducements rules, client agreements, and best execution. Inducements must enhance the service, not impair the firm's duty, and must be disclosed. Candidates must know when a fee is a permissible inducement versus prohibited.
Ethics questions test independence, confidentiality, and integrity. Traps include assuming disclosure cures all conflicts (it does not; management is required), treating marketing as exempt from fair-and-clear rules, and forgetting that client agreements must set out services, remuneration and conflicts policy. Another trap: assuming a gift from a third party is always acceptable if small; it must still meet the inducement test.
Rule of thumb: disclosure plus management, not disclosure alone.
Worked example: a firm receives research from a broker in exchange for directing client orders. This is an inducement that may breach best execution unless it qualifies as minor non-monetary benefit or is properly structured. The firm must assess, document and disclose.