Market Integrity, Trading Conduct and Ethics
Prohibited conduct
The FMC Act prohibits insider trading and market manipulation. Manipulation includes false or misleading conduct, wash trades, pre-arranged trading outside market rules, spoofing, layering and marking the close. Front running a client order is a conduct breach even if it is not always called manipulation. Trading on material non-public information about a client's order is prohibited.
Surveillance and controls
NZX monitors trading and receives order and audit-trail data. Participants must keep accurate records, report errors and comply with position limits and large-position reporting. Escalation procedures should cover suspicious orders, error trades and potential breaches. A strong control environment deters misconduct before surveillance finds it.
Ethics in practice
Ethics goes beyond legality. Client priority, confidentiality, personal account dealing rules and conflict management are central. An adviser who trades ahead of a client's large order may profit personally but breaches trust and market integrity. The exam tests whether you can identify the conflict and the correct response: disclose, decline or escalate.
Worked example
An adviser learns that a client will place a large buy order in NZX 50 index futures. The adviser buys for their own account before the client order. This is front running and insider trading on client information. The correct response is not to trade, to escalate the matter and to record the conflict. The reasoning is that the adviser used confidential, material information for personal gain.
Traps
Equating legal with ethical; assuming everyone trades ahead of clients; failing to escalate suspicions; and ignoring personal account dealing rules.