Ethics and Professional Standards
What the domain tests
Ethics and professional standards tests whether you can identify conflicts, protect material nonpublic information, and apply a code of ethics under pressure.
Core rules
- Client interests come before employer and personal interests; employer interests come before personal interests.
- Material nonpublic information must not be traded on or selectively disclosed. Mosaic theory permits assembling public information with nonmaterial nonpublic information.
- Independence and objectivity require avoiding gifts or compensation that could influence judgment; disclose conflicts.
- Fiduciary duty includes loyalty, prudence, and care for clients.
- Performance presentation must be fair, accurate, and not misleading; model or backtested results must not be presented as actual.
- Referral fees must be disclosed to clients and employer.
Worked example
An analyst learns from a board member that a merger will be announced next week. Trading on the information violates the standard on material nonpublic information. The analyst should not trade, should not tip others, and should encourage the company to make public disclosure. If the same fact came from a public regulatory filing, trading is permitted after the information is broadly disseminated. The key test is materiality plus whether the information is nonpublic.
Traps
Accepting lavish gifts; using material nonpublic information indirectly; presenting hypothetical performance as actual; failing to disclose conflicts; placing employer interests above clients.