Codes of Conduct
Codes of Conduct
The Codes of Conduct domain assesses the ethical and professional standards expected of registered persons. It goes beyond legal minimums to test whether you can identify conflicts of interest, apply fiduciary principles, and handle material non-public information correctly.
Core concepts
- Fiduciary duty: advisers and representatives must act in the client's best interest, placing the client's interests ahead of their own.
- Conflicts of interest: must be identified, disclosed, and managed-or avoided if disclosure is insufficient. Gifts, entertainment, and personal trading are common conflict sources.
- Material non-public information (MNPI): trading or tipping on MNPI is prohibited. Firms need information barriers and restricted lists.
- Confidentiality: client information may only be used for legitimate business purposes.
- Market conduct: codes prohibit manipulative trading, false statements, and unfair dealing.
Worked example
An analyst learns from a company insider that a merger will be announced next week. The analyst buys shares for a client's discretionary account. Reasoning: the information is material and non-public; trading on it is insider dealing, a serious breach of the code and likely a legal violation. The analyst should have escalated the information to compliance and placed the security on the restricted list. The client's account does not shield the analyst from liability.
Traps
- Thinking disclosure alone cures every conflict; some conflicts require avoidance.
- Confusing ethical obligations with legal ones; codes can be stricter.
- Ignoring the "appearance" of a conflict; regulators care about perception.
- Assuming personal trading rules apply only to proprietary accounts.