Ethics and Professional Standards
Ethics and Professional Standards tests judgement more than recall. Items describe a realistic pressure point, such as a gift from a broker, an allocation of a hot issue, or a performance record that is flattering rather than accurate, and ask which standard governs and what the professional must do. The answer is usually the one that protects clients and the integrity of the market, and that discloses conflicts before acting.
Core duties
- Place client interests ahead of employer and personal interests; employers' interests ahead of your own.
- Act with independence and objectivity. Modest gifts and entertainment can be acceptable if disclosed and if they do not compromise judgement; lavish or repeated gifts that create obligation must be declined or the relationship terminated.
- Fair dealing: all clients must have adequate opportunity to act on recommendations. Sequential dissemination to favoured clients is a violation, and so is a selective preview to the press.
- Misrepresentation: never guarantee returns, never plagiarise, attribute sources, and distinguish fact from opinion.
- Priority of transactions: client and employer accounts trade before personal accounts; personal trading requires pre-clearance and a blackout around recommendations.
Worked example
An analyst covers a company in which she holds shares. Her employer has no personal-trading policy. The correct action is not to sell quietly and say nothing. She must disclose the holding to her employer and in the research report, and her firm should impose pre-clearance and a blackout period around her recommendations. If her ownership is large enough to compromise her objectivity, she must transfer the position or have the coverage reassigned. The test is whether a reasonable client, knowing the facts, would trust the recommendation.
Traps that cost marks
- Believing disclosure cures every conflict. It does not cure a gift or relationship that actually impairs independence.
- Confusing fair dealing with equal outcomes; clients may be treated differently under a documented suitability policy, but they must have adequate opportunity.
- Presenting backtested or model performance as actual results.
- Accepting a referral fee without written disclosure to clients and employer.
- Treating a supervisor's instruction as a defence; if you know of a violation, you must escalate or dissociate.