NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Regulatory, Governance and Ethical Aspects of Portfolio Managers

Code of Conduct, Ethics and Conflict of Interest for Portfolio Managers

Updated 11 October 2026 · Fact-checked

The code of conduct sets the ethical standards a portfolio manager must follow: act in the client's interest, in good faith, with due diligence, and keep client information confidential. You solve questions by finding the duty at stake, spotting any conflict, and picking the option that puts the client first and discloses openly.

Understand Code of Conduct, Ethics and Conflict of Interest

A portfolio manager handles other people's money, often with discretion to trade without asking each time. That creates trust. The law therefore treats the manager as a fiduciary: a person who must put the client's interest ahead of their own.

SEBI's Portfolio Managers Regulations contain a code of conduct that every portfolio manager must follow. In plain words it asks for honesty and fairness, high standards of integrity, due skill, care and diligence, fair dealing with clients, and compliance with all laws and regulations. Exact clause wording is in your NISM workbook, so read it once and learn the themes.

A conflict of interest arises when the manager's own interest, or that of a group company, an associate or another client, could clash with the client's interest. Examples: investing client money in securities of a group company, favouring one client's trades over another's, or choosing products because they pay higher commission. Conflicts cannot always be avoided. The ethical response is to avoid them where possible, disclose them, and manage them so the client is not harmed.

Suitability means advice and portfolio decisions must fit the client's objectives, risk appetite and financial situation. A high-risk strategy for a client who needs safety is unsuitable, even if the client would earn more commission for you.

Insider trading means dealing in securities while holding unpublished price sensitive information (UPSI), or passing it on. It is prohibited under SEBI's insider trading regulations. A portfolio manager must not trade on it, for the firm, for clients or personally. Confidentiality means client information is not shared with anyone except where the client agrees or the law requires disclosure.

Key formulas to remember

Fiduciary rule: Client's interest > manager's own interest; If an option shows the manager benefiting at the client's cost, it is almost always wrong.
Conflict handling order: Avoid → Disclose → Manage; Where a conflict cannot be avoided, it must be disclosed to the client and managed fairly.
Insider trading test: UPSI + dealing or communicating = prohibited; Applies to trading for self, firm or clients, and to tipping others. Information already public is not UPSI.
Suitability test: Recommendation must match objectives + risk profile + circumstances; Based on client profiling done before investing.
Confidentiality rule: Client information shared only with client consent or legal requirement; Disclosure to regulators when required by law is allowed.

How to solve Code of Conduct, Ethics and Conflict of Interest questions

Use this method for any scenario or definition question on ethics and conduct.

1Read the scenario and identify who benefits: client, manager, group company or another client.
2Name the duty involved: fiduciary duty, suitability, confidentiality, fair treatment or insider trading.
3Check whether a conflict of interest exists. If yes, ask whether it was disclosed.
4Check whether the information used is public or unpublished and price sensitive.
5Eliminate options where the manager gains at the client's expense or hides facts.
6Eliminate extreme options that ignore the client's consent or the law.
7Choose the option that puts the client first, discloses openly and follows regulations.

Quickest way: Client-first elimination

When to use it: Scenario MCQs where two options look reasonable and time is short.

Ask: who gains in each option?
Drop any option where the manager or an associate gains without disclosure.
Drop any option that uses or shares UPSI or client data without consent.
Of what remains, pick the one that discloses and treats clients fairly.

Common mistakes in Code of Conduct, Ethics and Conflict of Interest

Thinking a conflict of interest is always illegal.
The word 'conflict' sounds like a violation.
Fix: A conflict is a situation. It becomes a breach when it is hidden or the client is harmed. Remember avoid, disclose, manage.
Treating disclosure as enough to justify any action.
Students overlearn 'disclose'.
Fix: Disclosure does not excuse unsuitable advice or unfair treatment. The client's interest still comes first.
Calling any non-public information insider information.
Confusing confidential with price sensitive.
Fix: Insider trading needs unpublished information that is price sensitive. Check both parts.
Believing confidentiality has no exceptions.
Rule is learnt as absolute.
Fix: Information may be shared with client consent or when the law requires, such as to regulators.
Confusing suitability with maximising returns.
Returns feel like the goal of portfolio management.
Fix: Suitability means fit with the client's objectives and risk profile, not the highest expected return.

Worked examples

Example 1

A portfolio manager's discretionary client has a conservative risk profile. The manager invests a large part of the portfolio in a newly launched, high-risk security of a group company, without telling the client. Which principle is most clearly violated? (a) Only confidentiality (b) Suitability and disclosure of conflict of interest (c) Only insider trading prohibition (d) None, as the manager has discretion

Show the solution

Identify the beneficiary: the group company gains, so there is a conflict of interest.
The client is conservative, but the security is high-risk, so suitability is breached.
The manager did not tell the client, so the conflict was not disclosed.
Discretion lets the manager choose investments, but only within the client's objectives and with fiduciary duty.
Option (a) and (c) address unrelated duties. Option (d) ignores the fiduciary duty.

Answer: (b) Suitability and disclosure of conflict of interest

Example 2

A portfolio manager learns, from a company insider, of an unannounced major contract win that will likely lift the share price. The manager buys the shares for client portfolios before the announcement. What is the position? (a) Permitted, as it benefits clients (b) Permitted if the manager's own account does not trade (c) Prohibited, as it is dealing on unpublished price sensitive information (d) Permitted if the amount is small

Show the solution

Is the information public? No, it is unannounced.
Is it price sensitive? Yes, a major contract likely moves the price.
So it is UPSI, and dealing on it is prohibited.
Benefit to clients does not remove the prohibition, and trading only for clients is still dealing.
Size of the trade is irrelevant to the prohibition.

Answer: (c) Prohibited, as it is dealing on unpublished price sensitive information

Exam tips

Scenario questions usually have one option where the manager benefits at the client's cost. Spot and reject it first.
Learn the difference between confidential information and UPSI. Examiners test it.
Words like 'always', 'never' and 'only' in options often signal a trap, especially for confidentiality and conflicts.
Read the workbook's code of conduct list once for exact wording, then practise applying it to scenarios.
Check the negative marking of 10% per wrong answer before guessing, since wrong answers cost marks.

Practice questions from Regulatory, Governance and Ethical Aspects of Portfolio Managers

Code of Conduct, Ethics and Conflict of Interest in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Code of Conduct, Ethics and Conflict of Interest: frequently asked questions

What is the fiduciary duty of a portfolio manager?

It is the duty to act in the client's best interest, in good faith, and ahead of the manager's own interest. The manager holds the client's trust and discretion, so loyalty and care are required.

Is a conflict of interest allowed in portfolio management?

It can exist, but it must be avoided where possible, disclosed and managed so the client is not harmed. Hiding it or acting against the client's interest is a breach.

What is insider trading for a portfolio manager?

It is dealing in securities, or sharing information, based on unpublished price sensitive information. It is prohibited for the manager's own account, the firm and client portfolios.

Can client information ever be disclosed?

Yes, with the client's consent or when required by law, such as a request from a regulator. Otherwise it must stay confidential.