Regulation and Ethics
What this domain tests
This domain covers the rules and standards governing markets and the conduct expected of practitioners. You need a grasp of the regulatory architecture (regulators, exchanges, clearing houses), the objectives of regulation (investor protection, market integrity, financial stability, reducing financial crime), and the principles-based conduct expected of individuals.
Concepts to master
- Regulatory aims: protecting consumers, maintaining confidence, promoting transparency, preventing market abuse.
- Market abuse: insider dealing, market manipulation, and unlawful disclosure of inside information.
- Know your customer (KYC) and anti-money-laundering (AML): customer due diligence, identifying beneficial owners, suspicious-activity reporting.
- Conflicts of interest: managing them, best execution, and treating customers fairly.
- Fitness and propriety, training and competence, and the role of senior managers.
- Ethics: integrity, objectivity, confidentiality, competence, and the difference between legal minimums and ethical conduct.
Traps
Questions often blur insider dealing (trading on inside information) with market manipulation (distorting price or volume). Another trap: assuming compliance with the letter of the rules is sufficient - ethical standards can demand more than strict legality. Watch for scenarios testing whether an employee should escalate a suspicion rather than act alone.
Rule of thumb
If information is non-public and could move the price, treat it as inside information: do not trade, do not tip, do not misuse - report it.
Worked example: An analyst overhears an unannounced takeover bid and considers buying shares. Because the information is non-public and price-sensitive, trading would be insider dealing, tipping a friend would be unlawful disclosure, and the correct action is to refrain and escalate to compliance. Even a small personal trade breaches the principle.