Market Conduct, Ethics and Compliance
Key Concepts
- Prohibited practices: Insider trading, market manipulation (e.g., spoofing, layering), front-running, and misrepresentation.
- Ethical standards: Integrity, objectivity, confidentiality, and professional competence. Codes of ethics from CFA Institute and regulatory bodies.
- Compliance programs: Written policies, training, monitoring, and surveillance. Role of the chief compliance officer.
- Whistleblowing: Protections and incentives (e.g., SEC whistleblower program).
- Insider trading rules: Material nonpublic information (MNPI), tipper/tippee liability, and the misappropriation theory.
Traps
- Confusing insider trading (illegal) with legitimate research using public information.
- Assuming ethics and legality are identical; ethical standards can be higher.
- Overlooking the need to escalate suspected violations.
Worked Example / Rule of Thumb
Rule of thumb: If information is material and nonpublic, trading on it is illegal. Example: An employee learns of an upcoming merger from a colleague and buys stock. This is insider trading because the information is material, nonpublic, and obtained in breach of duty.