Outline the duty every GARP Member carries on conflicts of interest, ethical conduct, professional integrity, information confidentiality, and following generally accepted risk management practice.
The idea
The GARP Code of Conduct sets out the standards every GARP Member agrees to uphold, and it can be organised around a few duties. Professional integrity and ethical conduct: act honestly and competently, exercise reasonable care and independent judgment, and never knowingly misrepresent facts or take part in deceit or fraud. Conflicts of interest: fully disclose actual or potential conflicts to those affected, and where a conflict cannot be avoided, disclose it and manage it. Gifts are a separate matter. A member must not offer, solicit or accept a gift, benefit, compensation or consideration that could reasonably be expected to compromise independence or objectivity, and disclosure does not cure one that does. Confidentiality: protect information gained through professional activities and never use it for personal advantage. Generally accepted practice: follow applicable laws and regulations and accepted risk management practice. The usual mistake is to treat disclosure as a cure for every problem, or to think confidentiality only forbids passing information on. For the exam, match each scenario to the duty it breaches.
A practice question
Which description best captures the Code of Conduct's expectation on risk management practice?
- Always adopt the most advanced quantitative model available, regardless of its cost to the firmWhy not: Confuses generally accepted practice with the cutting edge; the Code does not demand the most sophisticated technique.
- Follow only the practices that the member's own employer has written down in its manualsWhy not: Makes the employer the sole standard; the Code points to applicable laws, regulations and generally accepted practice.
- Use only the methods that appear in the GARP FRM syllabusWhy not: Confuses an exam syllabus with the professional standard; the Code does not tie members to syllabus content.
- Follow applicable laws, regulations and generally accepted risk management practice - correct
Members are expected to comply with applicable laws and regulations and to follow generally accepted risk management practices. This is a standard of accepted practice, not of maximum sophistication or of employer policy.
A harder one
During a consulting engagement a GARP Member learns non-public details of a client's hedging programme. The member does not tell anyone but uses them to time personal trades. Which statement is most accurate?
- Breach: confidential information may not be used for personal advantage even if undisclosed - correct
- There is no breach, because the confidentiality duty only covers passing information on to third partiesWhy not: Reads confidentiality as a disclosure-only rule; the Code also bars personal use of confidential information.
- There is a breach only if the client suffers a measurable loss as a result of the tradesWhy not: Makes client loss a condition; the breach lies in the misuse of the information itself.
- There is a breach only if the member's employer has a written policy covering personal trading by staffWhy not: Makes the Code depend on employer policy; the Code applies to members independently of any firm rule.
Confidentiality covers not only withholding information from others but also not using it for personal advantage. The member's silence does not cure the misuse, and neither client loss nor an employer policy is required.
The hardest tier
A GARP Member recommends a data vendor and tells the client in writing that the member's employer holds a stake in the vendor. The member then shares details of the client's portfolio positions with the vendor's sales team without the client's consent. Which statement is most accurate?
- There is no breach, because the written disclosure of the stake resolves all of the member's dutiesWhy not: Assumes disclosure of a conflict cures everything; it does not authorise a separate breach of confidentiality.
- The member breached the conflicts duty by recommending a vendor related to the employer, even with disclosureWhy not: Treats any conflict as forbidden; the Code requires avoidance where possible and full and fair disclosure, so the disclosed stake was handled correctly.
- Conflict properly disclosed, but sharing positions breached confidentiality, so not compliant - correct
- The member breached nothing, because the vendor is a related party and so not a third partyWhy not: Treats a related party as inside the confidentiality circle; client information is protected unless the client permits its use.
Two separate duties are in play. Disclosing the employer's stake satisfies the conflicts duty, but passing client positions to the vendor without permission breaches confidentiality. Meeting one duty does not excuse breaching another.
In the app: 6 practice questions on this outcome, spaced review that brings it back before you forget it.
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