Ethical Conduct and Fiduciary Responsibilities
What this domain tests
This domain tests fiduciary duties, conflicts of interest, personal trading, confidentiality, and fair treatment. Questions often ask what a professional should do when personal or firm interests conflict with a client's.
Core rules and concepts
- Fiduciary duties include loyalty, prudence, care, and confidentiality. The client's best interest comes before the firm's revenue or the employee's personal gain.
- Conflicts must be identified, disclosed, managed, or avoided. Personal trading requires pre-clearance and must not disadvantage client accounts.
- Front-running, trading ahead of client orders, misallocating trades, and using material nonpublic information are prohibited.
- Gifts and entertainment must be reasonable and disclosed under policy. Client information may be shared only with proper authorization or legal requirement.
- Fair allocation and best execution apply to client orders. Employees should use whistleblowing channels for suspected misconduct.
Worked example
A fund manager learns that an issuer will be downgraded and sells personal holdings before selling the fund's holdings. This places personal interest ahead of clients and may also misuse confidential information. The manager should have recused, pre-cleared any personal trade, and let the fund's investment process act independently. The firm should review the trade, preserve records, and escalate to compliance.
Traps that cost marks
Accepting lavish gifts from brokers; sharing client data with marketing; favoring a proprietary account in allocation; trading personal accounts ahead of client orders; failing to disclose a conflict because it seems small.