Ethics and Professional Standards
Domain 1 - Ethics and Professional Standards
The ethics domain tests whether you can apply the seven Standards of Professional Conduct to facts, not whether you can recite slogans. Vignettes usually combine a conflict, a disclosure question, and a duty to one or more parties. The exam rewards the answer that protects market integrity and client interests while respecting confidentiality and employer loyalty.
Core rules
- Materiality and nonpublic information: Information is material if its disclosure would likely move price or a reasonable investor would want it. Nonpublic means not broadly disseminated. Trading or causing others to trade on it violates Standard II(A).
- Mosaic theory: Combining public information with nonmaterial nonpublic information is generally permitted; combining public information with material nonpublic information is not.
- Priority of duties: Clients come before employer, and employer before personal interests. Avoid conflicts; if unavoidable, disclose, obtain consent where required, and manage the conflict.
- Performance and communication: Present performance fairly, fully, and comparably; do not misstate credentials or guarantees; distinguish facts from opinions.
Worked example
A portfolio manager learns from a client-director at a dinner that the director's company will miss earnings and is about to announce a restructuring. The manager has not yet traded. Under the Standards, the manager must not trade the stock or tip others, must not cause affiliated accounts to trade, and should encourage the company to make the information public. The manager may continue independent public research, but if the information is material and nonpublic, it cannot be used to trade. If the manager already holds the stock in client accounts, the duty is to act in clients' best interests without exploiting the information; a pre-existing sell discipline based on public factors may be followed, but the decision must not be driven by the tip.
Traps that cost marks
- Treating a rumor as public because it appeared online.
- Assuming disclosure to a supervisor cures a conflict.
- Confusing confidentiality with a duty to conceal illegal activity.
- Applying GIPS to a non-compliant composite without meeting all requirements.
- Letting employer pressure override client loyalty.