Ethics and Professional Standards
Ethics and Professional Standards tests the code of ethics and standards of practice: integrity, objectivity, competence, confidentiality, and professional behavior. Questions are situational, asking what a member must do when conflicts, material nonpublic information, or performance reporting pressures appear.
Core rules
- The code requires members to act with integrity, objectivity, and competence, to keep client information confidential, and to avoid conduct that discredits the profession.
- Material nonpublic information must not be traded on or communicated. If information is received in a breach of duty, the member must not act on it and should seek compliance guidance.
- Conflicts of interest must be disclosed and managed; referral fees and soft-dollar arrangements require disclosure and client consent where applicable.
- Performance presentations must be fair, accurate, and complete; do not cherry-pick successful accounts or imply guaranteed returns.
- Supervisors must take reasonable steps to prevent and detect violations, including written procedures and escalation paths.
Worked example
An analyst overhears a merger discussion in an elevator and recognizes the target. The information is material and nonpublic. Trading on it would violate the standard, even if the analyst did not solicit it. The correct action is to refrain from trading, avoid sharing the information, and report the incident to compliance. If the analyst already holds the stock in a personal account, they should not add to it or alert others. The duty runs to the market and to clients, not just to the source of the information.
Traps
- Receiving a gift that could influence judgment creates a conflict even if no favor is explicitly requested.
- Misrepresenting credentials or performance is a violation even when no client is harmed.
- Using a client's information for personal benefit violates confidentiality and loyalty.
- Overstating backtested results or omitting fees misleads investors.
- Remaining silent about a known violation can breach supervisory responsibility.