Business conduct, ethics and conflicts of interest
What this domain tests
This domain tests the general principles in the SFC Code of Conduct and how a firm manages the conflicts that inevitably arise between client, firm and employee interests.
Core rules
- The Code rests on nine general principles: honesty and fairness; diligence; capabilities; information about clients; information for clients; conflicts of interest; compliance; client assets; and client accounts.
- Inducements that are likely to impair the firm's duty to act in the client's best interest are prohibited. Soft dollar arrangements must be disclosed, must benefit the client and must not be a disguise for firm expenses.
- Client assets must be held in trust or segregated accounts, not commingled with firm money, and reconciled regularly.
- Conflicts must be identified, avoided where possible and otherwise managed and disclosed: Chinese walls between corporate finance and research, restrictions on analysts joining pitches, personal account dealing policies, and controls on gifts and entertainment.
- Disclosure is a control, not a cure: disclosure does not permit a firm to act against a client's interest.
Worked example
An analyst covering a stock holds shares in it and is asked to help pitch for that company's IPO. The personal holding must be declared and cleared under the personal account dealing policy; the analyst should not join the pitch; and the research report must not be shared with the corporate finance team before publication.
Traps that cost marks
Treating disclosure as sufficient to neutralise any conflict; assuming a Chinese wall is valid without documented information barriers and access controls; and accepting lavish entertainment without applying the firm's gifts policy.