Ethics and code of conduct
In this chapter: Conflicts of interest · Fair dealing, allocation between accounts
PMS firms face structural conflicts: same firm may run multiple strategies, have related-party broker arrangements, manage proprietary capital alongside client capital. The Code of Conduct requires fair allocation across accounts, no front-running, no soft-dollar abuse, full conflict disclosure, and segregation of activities.
Allocation rules: orders must be allocated pari passu (proportionally) across accounts that participate; no preferential allocation to large or proprietary accounts. Trade aggregation rules permit aggregation for execution efficiency, but allocation must be fair (typically by initial allocation declared pre-trade). Front-running: trading own account before client orders is criminal. Soft-dollar arrangements with brokers (using client commissions to pay for research) must be disclosed and used only for client benefit. Related-party transactions (e.g., investing in group AMCs' funds) must be disclosed and within agreed mandate.
A nuanced compliance area: SEBI inspections increasingly check the trade-allocation algorithm. PMS firms with AI-driven allocation must be able to demonstrate that the algorithm produces fair outcomes consistently. Manual allocation is increasingly seen as a red flag — too much PM discretion creates allocation-bias risk. The exam tests scenarios like: "PM gets a hot tip; orders for 5 client accounts and own account; how should allocation work?" Answer: pre-declared pari passu allocation, with own-account either excluded or last-in-time after clients have been filled.