Market Conduct, Ethics and Compliance
This domain tests the SFC Code of Conduct, inside information, market misconduct, disclosure of interests, short selling and anti-money-laundering controls.
Conduct and market abuse
The SFC Code of Conduct sets general principles including honesty and fairness, diligence, capability, knowing the client, information for clients, conflicts of interest, compliance, client assets, client information and competition. Firms must manage conflicts, control personal-account dealing, maintain Chinese walls and keep proper records, generally for seven years.
Inside information is precise, non-public and likely to materially affect the price of the listed securities. A listed issuer must disclose it as soon as reasonably practicable, subject to safe harbours. Insider dealing can be pursued before the Market Misconduct Tribunal (MMT) or criminally. Market misconduct includes false trading, price rigging, wash trades, matched orders and disclosure of false or misleading information. The MMT can impose civil sanctions such as cold-shoulder orders, disqualification, cease-and-desist orders and costs. Disclosure of interests requires notification at the 5% substantial-shareholder threshold, and directors and chief executives must also report. Short selling is permitted only in designated securities and must be covered; naked short selling is prohibited. AML/CFT rules require customer due diligence, ongoing monitoring and suspicious transaction reports to the Joint Financial Intelligence Unit.
Worked example
An analyst learns from an investment banker that a client will be taken over and buys shares before the announcement. This is insider dealing: the information is precise, non-public and price-sensitive, and the analyst is connected to the information through the firm. The tip-off is also a breach. The firm should have watch and restricted lists, pre-clearance for personal deals, Chinese walls and escalation procedures. The MMT may impose civil sanctions; serious cases may be prosecuted criminally.
Traps that cost marks
Inside information must be precise, not merely a rumour. The disclosure-of-interests threshold is 5%, while the connected-person substantial-shareholder threshold under the Listing Rules is 10%. The MMT is not a criminal court. Ethics questions require conflicts to be avoided or managed and disclosed, not simply resolved in the client’s favour. Short selling requires both a designated security and a covering arrangement.