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ACI Diploma practice questions

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Question 1Ethical Conduct

Under the ACI Code of Conduct, a member who becomes aware of a suspected market manipulation by a colleague should first:

  1. Confront the colleague publicly in the trading room
  2. Post the details anonymously on a market forum
  3. Report the suspicion through the firm's internal escalation or compliance channels Correct answer.
  4. Wait until the conduct causes a confirmed client loss

Explanation

The Code expects members to escalate suspected misconduct promptly through internal compliance or escalation channels so the firm can investigate and, where required, notify regulators. Public confrontation or anonymous posting risks tipping off wrongdoers and breaching confidentiality. Waiting for proven client harm defeats the purpose of early detection.

Question 2Ethical Conduct

The core principle that members must place client interests above their own when a conflict arises is best described as:

  1. Suitability
  2. Know-your-customer
  3. Fiduciary duty Correct answer.
  4. Best execution

Explanation

Fiduciary duty is the obligation to act in the client's best interest and to subordinate personal or firm advantage to that interest where a conflict exists. Best execution, suitability and KYC are specific obligations that flow from, but do not define, that overriding duty of loyalty.

Question 3Ethical Conduct

A dealer quotes a two-way price to a client but, when the client trades, fills at a worse level than quoted without the client's agreement. This conduct most directly breaches which ethical standard?

  1. Confidentiality of client information
  2. Timely trade allocation
  3. Personal account dealing pre-clearance
  4. Fair and honest dealing Correct answer.

Explanation

Deliberately filling outside a quoted price without agreement is dishonest dealing because the client relied on the quote given. Fair and honest dealing requires members to honour the terms on which they represent they will trade. The other standards concern information handling, allocation and employee trading, not the integrity of the quote itself.

Question 4Ethical Conduct

Which situation is the clearest example of a conflict of interest requiring disclosure or management?

  1. A member declining to trade for a personal account
  2. A member attending a regulatory briefing
  3. A member recommending a product issued by an affiliate that pays the member's firm a higher distribution fee Correct answer.
  4. A member refusing a gift from a client

Explanation

A conflict arises where the member's or firm's interest (higher distribution revenue) may influence the advice given to the client. Such conflicts must be disclosed or managed so the client can judge the advice. Refusing gifts, declining personal trading and attending briefings are all conduct that reduces rather than creates conflicts.

Question 5Ethical Conduct

A member receives a material non-public tip about a pending takeover from a client and trades on it in a personal account. The primary ethical violation is:

  1. Insider dealing Correct answer.
  2. Front running
  3. Market timing
  4. Churning

Explanation

Trading on material non-public information obtained in confidence is insider dealing, which is both an ethical breach and typically a criminal offence. Front running concerns trading ahead of a known client order, churning concerns excessive trading to generate commissions, and market timing concerns exploiting stale pricing in funds.

Question 6Ethical Conduct

Under the ACI model code, a firm's gifts and entertainment policy should primarily ensure that:

  1. Entertainment spending is maximised to build client relationships
  2. All gifts above a token value are recorded and approved so they cannot improperly influence behaviour Correct answer.
  3. Gifts are never disclosed to avoid embarrassing clients
  4. Employees accept entertainment only from the highest-paying clients

Explanation

Gifts and entertainment policies exist to prevent inducements from improperly influencing decisions, so items above a token threshold must be disclosed, recorded and approved. The purpose is transparency and independence, not maximising spend or protecting clients from embarrassment.

Question 7Ethical Conduct

A trader executes a large client order, then immediately buys the same instrument for the firm's proprietary book before the client's remaining quantity is worked. This is best characterised as:

  1. Wash trading
  2. Best execution
  3. Front running Correct answer.
  4. Pre-hedging permitted by the client

Explanation

Trading ahead of an unexecuted client order to profit from the expected price impact is front running and breaches duties of loyalty and fair dealing. Best execution concerns the quality of the client's fill, pre-hedging requires client consent and disclosure, and wash trading involves offsetting trades with no change in beneficial ownership.

Question 8Ethical Conduct

When a member changes firms, the ethical handling of client information generally requires that the member:

  1. Deletes all records to avoid any allegation of misuse
  2. Refrains from using or disclosing confidential information belonging to the former employer Correct answer.
  3. Contacts former clients using confidential details remembered from the previous firm
  4. Takes the client list to the new employer to maintain continuity of service

Explanation

Confidentiality obligations survive the end of employment, so a member must not use or disclose the former employer's confidential information, including client lists and contact details. Soliciting former clients is permissible only through lawful, non-confidential means and subject to any contractual restrictions. Deleting records is unnecessary and may breach record-keeping rules.

Question 9Ethical Conduct

A junior dealer is instructed by a senior colleague to record a trade at a price different from the executed price to improve the desk's reported profit. The appropriate response is to:

  1. Comply because the senior colleague has authority over trade records
  2. Record the altered price but note it privately
  3. Ask the client to confirm the altered price
  4. Refuse and escalate the instruction through compliance Correct answer.

Explanation

Recording a false price is a misrepresentation that can mislead clients, the firm and regulators, so the dealer must refuse and escalate. Seniority does not authorise falsification, and a private note does not cure the false record. Involving the client in the alteration would compound the misconduct.

Question 10Ethical Conduct

The ethical purpose of a personal account dealing policy is chiefly to:

  1. Prevent employees from profiting from information or orders they handle for clients Correct answer.
  2. Allow employees to trade freely without disclosure
  3. Maximise employees' investment returns
  4. Restrict employees from holding any securities

Explanation

Personal account dealing rules, including pre-clearance and holding periods, exist to stop employees exploiting client orders or confidential information for their own benefit. They are not designed to boost returns, permit undisclosed trading, or impose a blanket ban on holding securities.

Question 11Ethical Conduct

A client asks a member to execute an order that the member believes is unsuitable given the client's stated objectives. The most appropriate ethical course is to:

  1. Execute the order and silently adjust the client's objectives record
  2. Raise the suitability concern, document it, and proceed only as permitted after the client's informed decision Correct answer.
  3. Execute immediately without comment to preserve the relationship
  4. Refuse all future business with the client

Explanation

The member should explain the concern so the client can make an informed decision, document the discussion, and follow the firm's suitability procedures. Executing silently ignores the duty of care, refusing all future business is disproportionate, and altering the client's record would falsify information.

Question 12Ethical Conduct

Which behaviour best illustrates market manipulation through false information?

  1. Quoting a wider spread during volatile conditions
  2. Publishing a research report with a disclosed 'sell' recommendation
  3. Spreading a rumour about a company's solvency to profit from a short position Correct answer.
  4. Executing a large order in line with a client's instructions

Explanation

Spreading false information to move a price and profit from it is manipulation because it deceives other market participants. Genuine disclosed research, client-driven orders and wider spreads in volatility are legitimate market activities, even if they move prices or inconvenience counterparties.

Question 13Ethical Conduct

A member is asked to provide a reference for a former client to a new bank. Ethics require the member to:

  1. Provide only information the client has authorised, or decline Correct answer.
  2. Share confidential details because the new bank is also regulated
  3. Disclose the client's full transaction history to support the reference
  4. Exaggerate the client's standing to help them obtain credit

Explanation

Confidentiality means a member may share client information only with the client's authorisation or where legally required, so a reference must be limited to what the client consents to. The recipient being regulated does not remove the need for consent, and exaggeration would be misrepresentation.

Question 14Ethical Conduct

The ACI Code's stance on accepting inducements from a third party in return for directing client order flow is that such arrangements:

  1. Are unacceptable unless properly disclosed and managed in the client's interest Correct answer.
  2. Are acceptable if disclosed only to the compliance function
  3. Are acceptable if the client benefits indirectly
  4. Are acceptable if the inducement is paid in a foreign currency

Explanation

Inducements create conflicts and are permissible only where they are disclosed and managed so that the client's interest is served, consistent with conduct rules on inducements. Indirect client benefit or internal disclosure alone does not cure the conflict, and the currency of payment is irrelevant.

Question 15Ethical Conduct

Which action best demonstrates the ethical principle of 'know your client' beyond simple identification?

  1. Collecting a passport copy and closing the file
  2. Relying solely on the client's stated net worth without verification
  3. Assessing the client's investment objectives, risk tolerance and source of funds on an ongoing basis Correct answer.
  4. Updating records only when the client requests it

Explanation

Know-your-client is an ongoing duty to understand the client's objectives, risk appetite and source of funds so that advice and monitoring remain appropriate. Mere identification documents or unverified self-reported wealth fall short, and records must be refreshed as circumstances change.

Question 16Ethical Conduct

A member discovers that a colleague has been sharing confidential client order information with an external friend who trades on it. The member should:

  1. Warn the colleague privately and take no further action
  2. Join the arrangement to share in the profits
  3. Report the matter to compliance or the appropriate authority Correct answer.
  4. Ignore it because no client has complained

Explanation

Sharing confidential order information that is then traded on is a serious market abuse matter, and the member has a duty to report it through proper channels. Private warnings leave the abuse ongoing, and joining the arrangement would make the member complicit.

Question 17Ethical Conduct

In the context of the ACI model code, 'market conduct' obligations apply to:

  1. All staff whose actions can affect clients, markets or the firm's integrity Correct answer.
  2. Only front-office traders
  3. Only members of senior management
  4. Only staff holding a regulatory licence

Explanation

Market conduct obligations are broad and reach everyone whose work can affect clients, markets or the firm's reputation, including operations, sales, research and support staff. Limiting them to traders, licence holders or senior management would leave significant conduct risk unaddressed.

Question 18Ethical Conduct

A member is offered a lavish weekend trip by a broker seeking an increased share of the member's order flow. The most appropriate response is to:

  1. Accept and keep the trip confidential from the firm
  2. Decline or seek approval under the gifts and entertainment policy, recognising the conflict Correct answer.
  3. Accept but route only a token amount of business to the broker
  4. Accept, since hospitality is normal in financial markets

Explanation

Lavish hospitality tied to order flow is an inducement that creates a conflict, so it should be declined or approved under the firm's policy with the conflict recognised. Routine hospitality may be acceptable, but this scale and its link to business allocation make it improper, and confidentiality would conceal it.

Question 19Ethical Conduct

Which statement best reflects the ethical requirement for fair allocation of an oversubscribed new issue?

  1. Allocate to employees' personal accounts first
  2. Allocate according to a pre-disclosed, non-discriminatory policy applied consistently Correct answer.
  3. Allocate randomly without any records
  4. Allocate primarily to clients who generate the most revenue

Explanation

Fair allocation requires a documented, consistently applied policy that does not favour clients arbitrarily or employees improperly. Revenue-based favouritism is discriminatory, employee priority is a conflict, and undocumented randomness undermines accountability.

Question 20Ethical Conduct

A member's duty of confidentiality to clients is best described as:

  1. Waived whenever a regulator makes an informal request
  2. Continuing after the relationship ends and surviving the member's change of employer Correct answer.
  3. Applying only while the account remains open
  4. Limited to information the client marks as confidential

Explanation

Confidentiality is a continuing obligation that survives the closure of accounts and changes of employer, so client information remains protected. It is not waived by informal regulatory contact, which must follow proper legal channels, and it covers client information generally, not only items labelled confidential.

Question 21Ethical Conduct

A dealer notices that a client's repeated small orders appear designed to move the price before a larger trade by an affiliated entity. The dealer should:

  1. Treat the pattern as potential manipulation and escalate it while following firm procedures Correct answer.
  2. Execute the orders without question because they are client instructions
  3. Match the pattern with proprietary trades to profit from it
  4. Confront the client and threaten to report them

Explanation

A pattern suggesting deliberate price influence is potential market manipulation and should be escalated so compliance can assess it, while the dealer continues to follow documented procedures. Blind execution ignores the red flag, confrontation risks tipping off the client, and mimicking the pattern would make the dealer complicit.

Question 22Ethical Conduct

The ethical handling of a client complaint about an execution error requires the member to:

  1. Log, investigate and resolve the complaint fairly, with accurate records and appropriate remediation Correct answer.
  2. Offer a small credit on condition the client withdraws the complaint
  3. Deny the error regardless of the facts
  4. Delay the response until the client stops pursuing it

Explanation

Complaints must be handled fairly and transparently, with investigation, accurate records and remediation where an error occurred. Conditioning a remedy on withdrawal, delaying deliberately or denying a genuine error all breach fair treatment of clients and record-keeping duties.

Question 23Ethical Conduct

Which practice most clearly conflicts with the ethical requirement to avoid misleading marketing of a structured product?

  1. Presenting historical performance with a clear statement that past results do not guarantee future returns
  2. Highlighting the maximum possible return while omitting the conditions under which capital is at risk Correct answer.
  3. Providing a risk disclosure document alongside the marketing material
  4. Explaining fees in a summary table

Explanation

Marketing that emphasises upside while omitting the downside conditions is misleading because it gives clients a distorted view of risk. Balanced performance presentation, accompanying risk disclosures and transparent fee summaries all support informed decision-making.

Question 24Ethical Conduct

A member is asked to sign off on a trade confirmation that omits a fee charged to the client. The ethical response is to:

  1. Sign it and note the omission in a personal diary
  2. Refuse to sign until the confirmation accurately discloses all charges Correct answer.
  3. Sign it and verbally mention the fee to the client
  4. Sign it because the fee appears in a separate master agreement

Explanation

Confirmations must accurately reflect the terms of the transaction, including charges, so the member should refuse to approve an incomplete document. Relying on a separate agreement or a verbal remark does not give the client a complete record, and a personal note does not correct the document.

Question 25Ethical Conduct

Which situation represents a conflict that is generally manageable through information barriers rather than outright prohibition?

  1. A member accepting a secret payment from a broker
  2. An investment banking team working on a deal while the sales desk serves clients in the same sector Correct answer.
  3. A research analyst owning shares in a company they cover
  4. A trader executing personal trades ahead of client orders

Explanation

Information barriers, or Chinese walls, are the standard control where banking and sales activities coexist and confidential deal information could otherwise leak. Personal ownership by an analyst, trading ahead of clients and secret payments are conflicts that require restriction or prohibition, not merely a barrier.

Question 26Ethical Conduct

Under the ACI model code, the primary purpose of a firm's conflicts of interest register is to:

  1. record every trade executed by staff on personal accounts for tax reporting
  2. identify and manage situations where member or firm interests could harm client or market integrity Correct answer.
  3. list clients who have complained about execution quality during the year
  4. document the training completed by each member in the current cycle

Explanation

A conflicts register is a governance tool that identifies actual and potential conflicts and records the controls applied to manage or disclose them. It is not a transaction log, a complaints list, or a training record, though those may be separate registers.

Question 27Ethical Conduct

A member is invited to join a WhatsApp group in which dealers from several banks discuss their clients' pending orders. The most appropriate response is to:

  1. join but only read messages without contributing any information
  2. join and use an alias so individual contributions cannot be traced
  3. decline and report the invitation through the firm's escalation channels Correct answer.
  4. join and share only information that is already publicly available

Explanation

Sharing client order information outside authorised channels breaches confidentiality and can facilitate market abuse, so the invitation should be declined and escalated. Reading without posting still exposes the member to receiving confidential information improperly.

Question 28Ethical Conduct

Which statement best describes the ACI model code's expectation regarding a member's personal dealings in instruments the member's clients also trade?

  1. Personal dealings must not take precedence over client interests and are subject to pre-clearance and monitoring Correct answer.
  2. Personal dealings are permitted without restriction provided the member uses a different broker
  3. Personal dealings are prohibited entirely for any member who has client contact
  4. Personal dealings require only annual disclosure to the compliance function

Explanation

The code expects personal account dealing to be controlled so that client interests come first, typically through pre-clearance, holding periods and monitoring. Absolute prohibition is not the standard, and annual disclosure alone would not prevent front-running.

Question 29Ethical Conduct

A member is asked to provide a market colour commentary to a journalist. Which approach is most consistent with ethical market conduct?

  1. Provide forecasts without disclosing that they reflect the firm's own book
  2. Provide views that are honestly held and clearly distinguish opinion from fact Correct answer.
  3. Provide unattributed price-sensitive information to build the journalist's trust
  4. Provide only views that support the firm's current trading position

Explanation

Commentary given to the market must be honest and must not mislead, and opinion should be distinguishable from factual statements. Promoting a firm's position or passing price-sensitive information covertly is inconsistent with market integrity.

Question 30Ethical Conduct

A member's obligation of professional secrecy in respect of client information generally continues:

  1. only for the duration of the current regulatory reporting year
  2. after the client relationship has ended and after the member leaves the firm Correct answer.
  3. only until the client gives verbal permission to disclose
  4. only while the client relationship remains active

Explanation

Confidentiality attaches to the information itself and survives the end of the relationship and the member's departure from the firm. It is not extinguished by time, by a change of employer, or by informal permission.

Question 31Ethical Conduct

A member is completing the firm's annual attestation and is unsure whether a small gift received from a counterparty required disclosure. The most appropriate action is to:

  1. omit it because small gifts fall outside any reasonable threshold
  2. wait until the next annual cycle to see whether it becomes relevant
  3. disclose it and seek guidance rather than deciding unilaterally that it is immaterial Correct answer.
  4. record it only if a colleague received a similar gift

Explanation

Where the application of a gifts and entertainment threshold is uncertain, the member should disclose and seek guidance rather than self-determine immateriality. Attestations are personal confirmations that must be accurate.

Question 32Ethical Conduct

Which behaviour is most consistent with the ACI model code's expectation of integrity in fixing and benchmark processes?

  1. Sharing intended submissions with counterparties to improve market consistency
  2. Submitting rates that reflect genuine market conditions and never coordinating submissions with other contributors Correct answer.
  3. Adjusting submissions to smooth volatility in the published benchmark
  4. Submitting rates that favour the firm's own trading position where the rules permit

Explanation

Benchmark submissions must be genuine, independent and free of coordination, because the published rate affects the wider market. Deliberately favouring a position or smoothing the benchmark corrupts the price formation process.

Question 33Ethical Conduct

A member receives an instruction from a client that appears to be based on a misunderstanding of a product's downside risk. The most ethical course is to:

  1. execute promptly because the client is responsible for their own decisions
  2. clarify the risk with the client before executing the instruction Correct answer.
  3. decline to deal with the client in future without explanation
  4. execute and note the concern only in the member's private records

Explanation

Ethical dealing requires the member to ensure the client understands what they are buying, particularly where a misunderstanding is apparent. Executing silently exploits the client's error, and refusing future business is a disproportionate response.

Question 34Ethical Conduct

A dealer learns from a client that the client will shortly announce a large acquisition. The dealer's most appropriate action is to:

  1. recommend the target to other clients as a general market view
  2. buy the target's shares personally before the announcement is public
  3. keep the information confidential and refrain from dealing or tipping others Correct answer.
  4. pass the information to a colleague who does not cover the client

Explanation

Information about an upcoming announcement is confidential and potentially inside information, so the member must neither deal nor disclose it. Acting on it, directly or indirectly, would amount to insider dealing.

Question 35Ethical Conduct

A member is responsible for allocating a heavily oversubscribed bond issue. Which allocation approach best meets the ethical standard?

  1. Allocate at the member's discretion without recording the basis for each decision
  2. Allocate primarily to clients who generate the most revenue for the desk
  3. Allocate first to clients who have provided the member with valuable gifts
  4. Apply a pre-disclosed allocation policy consistently and document any permitted exceptions Correct answer.

Explanation

Fair allocation requires a policy disclosed in advance and applied consistently, with any exceptions justified and recorded. Revenue weighting, personal benefit, and undocumented discretion all create unfairness or conflicts.

Question 36Ethical Conduct

A colleague asks a member to countersign a deal ticket for a transaction the member did not witness. The most appropriate response is to:

  1. decline to sign and refer the request to a supervisor Correct answer.
  2. sign provided the amount falls below the desk's reporting threshold
  3. sign because a countersignature is only a formality
  4. sign and note privately that the transaction was not witnessed

Explanation

A countersignature attests that the signatory has verified the transaction, so signing without verification is a false attestation. The request should be declined and escalated so the control failure can be corrected.

Question 37Ethical Conduct

A member is offered a paid speaking engagement by a fund manager whose order flow the member influences. Which factor is most relevant to whether acceptance is ethical?

  1. Whether other members of the desk have received similar invitations
  2. Whether the event takes place outside the member's normal working hours
  3. Whether the payment is proportionate, disclosed and approved under the firm's outside business interests policy Correct answer.
  4. Whether the speaking fee is paid in a single instalment rather than several

Explanation

Payments from parties whose business the member can influence are potential inducements, so proportionality, disclosure and formal approval are the decisive considerations. Timing, payment structure, and peer practice do not neutralise the conflict.

Question 38Ethical Conduct

A member is asked to write a research note on an issuer for which the firm is acting as lead manager of an upcoming offering. The most appropriate control is to:

  1. delay the note until after the offering and then publish only positive conclusions
  2. publish the note without restriction because research independence is absolute
  3. allow the corporate finance team to draft the note and publish it under the analyst's name
  4. apply information barriers and review the note for balanced, non-misleading content before publication Correct answer.

Explanation

Research must remain independent and not misleading, which in an offering context requires information barriers and independent review. Suppressing negative views or letting the deal team write the note corrupts its independence.

Question 39Ethical Conduct

A client asks a member to backdate a trade confirmation so that it falls within the previous reporting period. The member should:

  1. refer the request to the client's own auditors for approval
  2. refuse the request and report it in line with the firm's escalation procedures Correct answer.
  3. comply but record the true date in a separate internal log
  4. comply because the client is entitled to administrative flexibility

Explanation

Backdating a confirmation falsifies the firm's records and misrepresents the transaction to third parties, so it must be refused and escalated. Internal side-logs or external approvals do not make a false record acceptable.

Question 40Ethical Conduct

A member is asked by a client to execute a series of trades designed to create the appearance of active trading in a thinly traded instrument. The member should:

  1. execute the trades and disclose the pattern only in the monthly report
  2. execute the trades because the instruction comes from a paying client
  3. execute at a slower pace to reduce the visible market impact
  4. decline to participate and escalate the concern about potential market manipulation Correct answer.

Explanation

Executing orders intended to create a false impression of activity is market manipulation, and a client instruction does not authorise it. Pacing the trades or reporting later still leaves the member participating in abusive conduct.

Question 41Ethical Conduct

A member has a close personal relationship with the finance director of a client company. The member should:

  1. keep the relationship private because it is a personal matter unrelated to work
  2. disclose the relationship only if a transaction with the company is later questioned
  3. transfer all dealings with the company to a junior colleague without telling anyone
  4. declare the relationship so that the firm can assess and manage the resulting conflict Correct answer.

Explanation

Personal relationships that could influence business judgement are conflicts that must be declared so the firm can apply appropriate controls. Concealment or informal workarounds leave the conflict unmanaged and unrecorded.

Question 42Ethical Conduct

A member notices that a colleague routinely executes client orders ahead of recording them in the order management system. The most appropriate first step is to:

  1. wait to see whether any client suffers a loss before acting
  2. raise the concern through the firm's escalation or whistleblowing channel Correct answer.
  3. confront the colleague publicly in front of the desk
  4. adjust the member's own records to align with the colleague's practice

Explanation

Control failures of this kind should be raised promptly through the designated escalation or whistleblowing channel so they can be investigated. Public confrontation or waiting for harm to occur delays remediation.

Question 43Ethical Conduct

A member is asked to provide a client with a summary of a complex derivative. Which approach best reflects the ethical standard for client communications?

  1. Omit the cost breakdown because the client did not specifically request it
  2. Provide the full legal documentation without any summary or explanation
  3. Present the material risks, costs and scenarios in a balanced way that a non-specialist can understand Correct answer.
  4. Emphasise the potential returns and describe the risks as unlikely to materialise

Explanation

Communications must be fair, clear and not misleading, which means explaining risks, costs and scenarios in balanced terms. Downplaying risk or omitting costs distorts the client's understanding, while handing over documentation alone does not ensure comprehension.

Question 44Ethical Conduct

A member is offered a seat on a client's internal investment committee. Which consideration is most important from a conduct perspective?

  1. Whether the role could compromise independent judgement and whether it is approved and monitored under firm policy Correct answer.
  2. Whether the client is listed on a recognised exchange
  3. Whether the role carries any remuneration at all
  4. Whether other banks have representatives on the same committee

Explanation

Sitting on a client committee can impair independent judgement and create conflicts, so approval and ongoing monitoring under firm policy are essential. Remuneration, listing status, and competitor practice are not the decisive tests.

Question 45Ethical Conduct

A member receives an email that appears to have been sent to the wrong client and contains another client's portfolio details. The member should:

  1. forward it to the intended client to correct the error quickly
  2. delete the email and take no further action
  3. avoid further use or forwarding of the information and notify the appropriate control function promptly Correct answer.
  4. use the portfolio details to benchmark the member's own client recommendations

Explanation

A mistaken disclosure must be contained by not further circulating the information and by prompt notification so the firm can assess and remediate. Forwarding or silently deleting does not manage the breach.

Question 46Ethical Conduct

A firm discovers that a member has been executing personal trades in the same instruments as a client's orders, shortly before the client's orders. Which characterisation best fits this conduct?

  1. A minor policy breach that warrants only refresher training
  2. Front-running that abuses client order information and breaches the duty of priority to the client Correct answer.
  3. Acceptable personal dealing because the member used no confidential information
  4. A record-keeping deficiency that can be corrected by amending the trade blotter

Explanation

Trading ahead of known client orders exploits confidential order information and puts the member's interests before the client's. It is a serious conduct breach, not a clerical or training issue.

Question 47Ethical Conduct

A member managing a fund is allocated shares in an oversubscribed offering partly because the member directed brokerage to the lead bank. This arrangement is best described as:

  1. a reciprocal practice that conflicts with fair allocation and should be prohibited or strictly controlled Correct answer.
  2. an acceptable reward provided the shares are held for the long term
  3. a normal commercial courtesy that requires no disclosure
  4. a legitimate marketing expense of the lead bank

Explanation

Tying an allocation to directed brokerage is a reciprocal arrangement that undermines fair allocation and prioritises the intermediary's interests over other clients. It must be prohibited or tightly controlled and disclosed.

Question 48Ethical Conduct

A senior manager asks a member to delay recording a client complaint until after an upcoming regulatory inspection. The most appropriate response is to:

  1. hold the complaint informally until the inspection is concluded
  2. record the complaint in the normal way and escalate the instruction to delay it Correct answer.
  3. record the complaint but backdate it to the date it was received
  4. comply because the senior manager has authority over reporting timelines

Explanation

Suppressing or delaying a complaint to influence a regulatory inspection is a serious integrity breach, and the instruction itself should be escalated. Backdating or informal handling still conceals the complaint from supervisors.

Question 49Ethical Conduct

A member is designing a new incentive scheme for a sales desk. Which design feature best supports ethical conduct?

  1. Setting thresholds that reward volume regardless of suitability assessments
  2. Weighting the scheme entirely towards short-term revenue generation
  3. Balancing revenue measures with conduct, complaint and client-outcome indicators Correct answer.
  4. Removing supervisory review so that staff feel trusted and empowered

Explanation

Incentives drive behaviour, so schemes should balance commercial targets with conduct and client-outcome measures. Pure revenue or volume weighting encourages unsuitable sales and misconduct, and removing oversight weakens controls.

Question 50Ethical Conduct

A member learns that a colleague has been falsifying the timestamps on client orders to appear to have executed them within agreed limits. Which response best meets the member's obligations?

  1. Report the matter only if a client raises a complaint about execution timing
  2. Report the conduct through the whistleblowing channel and preserve any relevant records Correct answer.
  3. Ask the colleague to correct future timestamps and take no further action
  4. Discuss the matter with other colleagues to gather support before reporting

Explanation

Falsifying timestamps is a deliberate record integrity breach that may also harm clients, so it must be reported promptly and relevant records preserved. Private warnings or informal soundings risk concealment and loss of evidence.