Ethics, Professional Standards, and Compliance
What to know
Ethics questions test the CFA Institute Code and Standards and the Asset Manager Code as applied to alternatives: fiduciary duty, reasonable basis and diligence, conflicts of interest (GP/LP economics, co-investment allocation, fee offset), soft dollars and directed brokerage, allocation of limited opportunities such as oversubscribed IPOs, performance presentation, misrepresentation (including by omission), independence and objectivity (gifts, referral fees), confidentiality, market manipulation, material nonpublic information, and whistleblowing. GIPS compliance requires firm-wide claim, defined composites, documented discretion, and a valuation policy appropriate to illiquid assets. Know the mandatory language: the Standards say "must" and "shall," not "should."
Traps
- Softening mandatory requirements to best practice.
- Overlooking misrepresentation by omission or by implication.
- Favoring a large fee-paying client in an oversubscribed allocation.
- Failing to disclose referral fees or compensation arrangements to employer and clients.
- Trading, or causing others to trade, while in possession of material nonpublic information - possession, not use, triggers the prohibition.
Worked example
An oversubscribed IPO is available. The firm has a written allocation policy: pro rata by order size across eligible clients, with documented deviations. Steering shares to the largest fee payer breaches fair dealing even if it seems commercially sensible. Rule: written policy, consistently applied, contemporaneously documented - if you cannot defend the allocation on paper, do not make it.