RES 2B Chapter 5 is a conduct chapter built on the CFA Institute standards. It tests the definition of ethics, the five-element ethical framework, why people behave unethically, the six steps for the ethical role, the three threats behind ethical dilemmas, the standards of professional conduct (professionalism, integrity of capital markets, duties to clients, duties to employers, investment analysis, conflicts), the seven recommended compliance procedures, the SFEMC Blue Book and FX Global Code in outline, and best execution under SFA 04-N16 and FAA-G04. Scenario questions dominate: read for the missing disclosure, the wrong priority, or the pressure being obeyed.
7 sections·~10 min read
✓Checked against the IBF RES 2B Study Guide v1.0 (6 Jun 2024) ch.5; IBF RES 1B Study Guide v1.1 (Nov 2024) ch.4, 2026-09-12. Unofficial prep, not endorsed by MAS or SCI.
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Must-know for the exam
✓Ethics (CFA definition adopted by the guide): a set of moral principles or rules of conduct that guide behaviour when it affects others. It goes beyond regulation and the law: doing the right thing even when no one is looking.
✓Ethical framework, five elements: Understanding and Comprehension; Analyse Risks; Execute Solutions (smooth, efficient, transparent, fair); Serve Clients (best interest, never self-interest); Safeguarding Reputation. Objective: serve the client's best interests with integrity. The figure says four components; the text lists five.
✓Why people behave unethically: one external factor (client pressure, fear of losing the deal or future business) and three internal factors (inadequate knowledge or supervision; deliberate pursuit of financial or non-financial gain; pressure from colleagues or seniors in a weak culture).
✓Six steps for the ethical role: clients' interests first; integrity, competence, diligence and respect (no conflicts, gifts policy, training, fair and transparent charges); care and independent judgement; build trust and respect market conduct rules (confidentiality, client assets, complaints, whistleblowing); disassociate from the deal when ethical (objectivity, advise the client to reconsider a market-moving strategy); seek guidance from compliance and legal.
✓Threats behind ethical dilemmas: self-interest (personal benefit), self-review (bias towards one's own work), influence (clients, superiors, departments).
✓Misrepresentation: honest opinion plus an undisclosed interest is still misrepresentation (the analyst blog example). Performance presentation: attribute track records to where they were earned.
✓Material non-public information: material if it could affect the price, non-public if not yet disseminated. Acting on it, or causing others to act, is insider trading (SFA Part XII; s.216 defines materiality). Profit is not required; a losing trade on MNPI is still insider trading. Tipper and tippee are both caught.
✓Market manipulation has two types: informational-based (spreading misleading information) and transactional-based (trades that influence price or volume). Splitting a position across accounts and planting rumours to sell into a rising price is both.
✓Duties to clients: loyalty, prudence and care (client before employer and self; carry out client transactions before your own); fair dealing, including a policy on the corporate governance of investee companies (FAA-G11 outcomes); suitability (reasonable inquiries, match written objectives and risk appetite, judge in the context of the total portfolio; FAA s.36, FAA-N16); a written investment management agreement before any advice or trade; confidentiality with three exceptions (client's illegal activity, required by law, client permits).
✓Suitability trap: a high income does not override a risk-averse client's stated objective. The client's needs and risk appetite govern, not the opportunity in a booming market.
✓Duties to employers: loyalty; no misuse of confidential information; no solicitation of the employer's clients or prospects without permission; no misappropriation of client lists, records or reports even without soliciting; self-dealing (own interest before the party you owe a duty to) is a breach. Additional compensation needs written consent of all parties. Supervisors must make reasonable efforts to ensure compliance by those they supervise. Whistleblowing to protect market integrity is allowed; silence may be construed as collusion.
✓Conflicts: avoid, or make full, fair, prominent, plain-language disclosure before the transaction; even after client consent keep seeking alternatives. Priority of transactions: client and employer trades come before any trade in which the representative is beneficial owner (selling your own shares ahead of a client's block sale is self-dealing). Referral fees, gifts and entertainment must be disclosed and recorded.
✓Seven recommended compliance procedures: segregate sales/dealing from research; resist undue influence from sponsoring companies; protect the integrity of opinions (unbiased research, compensation that preserves independence); review procedures; limit gifts (per gift or aggregate annual value); appoint a compliance officer and publicise reporting channels; regular ethics and compliance training. When your research diverges from colleagues', investigate the variance.
✓Blue Book (SFEMC): benchmark for conduct and good market practice in the wholesale markets, to promote efficiency and minimise disputes. Five areas: general dealing principles and market conduct; ethics and behavioural standards; governance, risk management and compliance; back office practices; dealing practices for FX, debt securities, swaps and OTC derivatives. SFEMC also channels communication with MAS and mediates disputes by agreement.
✓FX Global Code: the guide attributes it to the BIS (established 1930, Basel, 63 member central banks; maintained in practice by the Global Foreign Exchange Committee). Aims at a fair, robust, liquid and open wholesale FX market; supplements local rules. Six leading principles: Ethics, Governance, Information Sharing, Execution, Risk Management and Compliance, Confirmation and Settlement Processes.
✓Best execution: reasonable steps to obtain the most advantageous result considering price, costs, speed, likelihood of execution and settlement, size and execution quality. FAA-G04 paras 5.2 and 5.3 (under FAA s.64): execute promptly, per instructions, on best available terms, with prompt written confirmation. SFA 04-N16 and Guidelines SFA 04-G10 (effective 3 March 2022): written policies for best available terms and time-of-receipt priority for comparable orders; no payment for order flow (a conflict of interest); monitor effectiveness and disclose the policy clearly.
✓Best execution elements: speed and likelihood (volatility and large orders create imbalances); price improvement (opportunity, not guarantee, of a better price than quoted); size improvement (seek liquidity and order-size guarantees); overall execution quality; client-specific instructions (DMA parameters chosen by the client are deemed satisfied; departures must be justified). Not achieving the best price at one instant is not automatically a breach; speed and likelihood may be prioritised for large illiquid orders or triggered stop-losses.
✓Best execution principles: be clear whether you act as agent (bound by the mandate) or principal (own behalf, more risk, no obligation until agreement); fairness and transparency (truthful, unambiguous, records before and after); cross trades only between client accounts and only when in both clients' best interest, never with staff personal accounts or a house account controlled by both; make sure clients understand the risks of the trades they request.
✓Applying the framework, six steps: gather facts and identify the problem; consider the ethical issues; identify the affected parties; refer to the firm's internal reporting procedures; evaluate alternatives; implement the best course and monitor it, documenting the reasoning. The commission-pressured dealer's best move is to alert superiors and ask them to monitor his dealings.
What ethics is and why it matters
•The guide adopts the CFA Institute definition: ethics is a set of moral principles or rules of conduct that guide behaviour when it affects others. Unethical behaviour is an act outside what the individual, the profession or the industry considers morally right. Ethics goes beyond regulation and law; the shorthand is doing the right thing even when no one is looking.
•Rule: legality is the floor, not the test. Trap: 'no rule prohibits it, so it is ethical.' Why it matters: individual misconduct (false markets, cornering, Ponzi schemes, mis-selling) erodes investor confidence and public trust and, in interconnected markets, can spread as contagion across borders. Takeaway: ethics protects the integrity of the whole ecosystem, not one relationship.
•Codes of ethics and standards of professional conduct mostly serve as guidance for best practice, but they are embedded in the rules of Chapters 2 to 4; when codes are violated and the laws enforced, individuals and firms face penalties and civil or criminal liability.
The ethical framework and why people breach it
•Five elements (the figure caption says four; the text lists five): Understanding and Comprehension of the product and its suitability; Analyse Risks in detail, highlight them and keep them within the client's tolerance; Execute Solutions smoothly, efficiently and above all transparently and fairly; Serve Clients with integrity and never place self-interest first; Safeguarding Reputation of the employer and the industry. The main objective is to serve the client's best interests with integrity.
•Why people behave unethically. External factor: client pressure to bend the firm's rules, backed by the threat of losing the deal or future business. Internal factors: inadequate knowledge, experience or supervision; deliberate acts for financial gain or non-financial advantage (recognition, position); and pressure from colleagues or seniors to conform, especially for junior staff in a weak ethical culture.
•Six steps to prepare for the ethical role: (i) clients' interests first; (ii) integrity, competence, diligence and respect: abstain when conflicted, follow gifts policies, attend training on new products and rules, keep charges fair and transparent; (iii) care and independent judgement: understand products and clients, give factual information, observe best execution and client priority; (iv) build trust and respect market conduct rules: confidentiality, client funds, communication through the product's life, internal controls, complaints procedures, whistleblowing channels; (v) disassociate from the deal when ethical: stay objective, act professionally, advise the client to reconsider a market-moving strategy; (vi) seek guidance from compliance and legal whenever in doubt.
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