Regulation, Compliance and Ethical Conduct
What this domain tests
This domain tests whether you can recognise market abuse, handle inside information correctly, and resolve conflicts of interest in the way a compliance officer would expect. Scenario questions dominate: you are given a situation and asked what you should do next, not merely what rule applies.
Core rules and concepts
- Inside information is information of a precise nature, not generally available, which if made public would likely significantly affect the price. Trading, tipping or recommending on it is insider dealing; improper disclosure to anyone outside the permitted chain is a separate offence.
- Market manipulation covers false or misleading transactions and orders, benchmark manipulation, and misuse of information.
- Controls: insider lists, restricted lists, wall-crossing procedures, personal account dealing pre-clearance, gifts and hospitality registers, and suspicious transaction and order reports (STORs).
- Conduct duties: best execution, fair treatment of clients, managing conflicts, client money segregation, and clear, fair and not misleading communications.
Worked example
An analyst learns from a colleague in the deal team that an acquisition will be announced next week. He mentions it to a fund manager 'in confidence'. Both the tip and the trade that follows are insider dealing: the information is precise, non-public and price-sensitive, and the disclosure is improper. The correct steps are to refuse the information, notify compliance immediately, place the security on the restricted list, and make no trade. Relaying the tip is itself an offence, whatever the motive.
Traps that cost marks
Information circulating as rumour is not automatically public; the test is whether it has been properly disclosed. A 'mosaic' of public information is acceptable, but adding a material non-public piece is not. Chinese walls reduce risk but do not license trading on information that has crossed them. Personal account dealing without pre-clearance breaches most firms' policies even where no profit arises.