Regulation, Ethics, and Professional Standards
Regulation, Ethics, and Professional Standards tests whether you can apply conduct rules to real conflicts, information flows, and client interactions. Expect fiduciary or suitability duties, conflicts of interest, material non-public information (MNPI), market abuse, best execution, AML/KYC, client asset protection, confidentiality, recordkeeping, and fair dealing.
Core rules and concepts
- Client duty: act in the client's best interest or according to the applicable suitability standard; disclose conflicts; obtain informed consent where required; put client interests ahead of personal or firm interests.
- MNPI: do not trade or tip others on material non-public information. Information is material if a reasonable investor would consider it important; non-public means not broadly disseminated.
- Mosaic theory: combining public information with non-material non-public information can be permissible, but using material non-public information is not.
- Market conduct: prohibit manipulation, spoofing, layering, false rumors, and abusive squeezes. Best execution considers price, cost, speed, likelihood of execution, and venue, not merely the lowest explicit commission.
- Conflicts: personal trading, gifts and entertainment, soft-dollar arrangements, IPO allocations, and outside business activities require policies, pre-clearance, disclosure, or avoidance.
- AML/KYC: identify clients, verify beneficial ownership, monitor transactions, and escalate suspicious activity. Keep accurate records and protect confidential data.
Worked example
An analyst learns from a company insider at a private dinner that an unannounced takeover bid will be launched next week. The analyst does not trade but mentions it to a friend who buys shares. The information is material because it would move the price, and it is non-public because it has not been disclosed. The analyst has violated the duty not to tip MNPI, even without personal trading. The correct action is to stop the conversation, avoid further dissemination, and report the matter to compliance. The friend's trade may also be insider dealing. If the analyst had instead pieced together public supply-chain data and a public executive comment to estimate demand, that could be permissible mosaic analysis only if no material non-public information was used.
Traps that cost marks
Do not assume a gift is acceptable because it is customary; test intent, value, and influence. Do not confuse legal compliance with ethical conduct; policy may require more. Do not trade before checking whether information is MNPI. Do not allocate favorable IPO shares to personal or favored accounts without disclosure and allocation rules. Do not present misleading performance or omit conflicts.