1215

Which one of the following least accurately describes the CFA Institute Standard about using material nonpublic information?

A) An analyst may use nonmaterial nonpublic information as long as it has been developed under the Mosaic Theory.

B) An analyst may violate this Standard by passing information to others even when it has been obtained from outside the company.

C) An analyst using material nonpublic information may be fined by CFA Institute.

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There is no provision for CFA Institute to issue fines to members. Members may not use material nonpublic information for trading purposes. Nonmaterial, nonpublic information may be used together with analysis of public information under the Mosaic Theory.

1215

A CFA Institute member is a U.S. citizen living and working in a foreign country. That country has no laws against insider trading. Based on this information, the CFA Institute member may:

A) not trade using insider information based upon the CFA Institute Standards.

B) trade using insider information.

C) not trade using insider information based upon the rules of the SEC.

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CFA Institute Standard II(A) prohibits trading using insider information. A member may not trade using such information regardless of the rules of the country where he/she lives.

1215

An analyst provides services for a charitable organization and in return gets free membership in the organization. Part of her job is to manage the liquid assets of the organization, and those assets include stocks. Her supervisor in the organization calls her and tells her to buy a certain stock for the portfolio based upon insider information from a board member in the organization. The analyst objects, but the supervisor says this is what they have always done and sees no reason for changing now. The analyst complies with the request. With respect to Standards IV(A), Loyalty to Employer, and II(A), Material Nonpublic Information, the analyst violated:

A) both Standards IV(A) and II(A).

B) only Standard IV(A) requiring duty of loyalty.

C) only Standard II(A) that prohibits insider trading.

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An employee/employer relationship does not necessarily mean monetary compensation for services. Complying with the request is a violation of II(A) which prohibits trading on insider information.  Standard IV(A) Loyalty deals with going into business for yourself, leaving an employer and continuing to act in the employer's best interest until their resignation becomes effective, and whistleblowing which means that the member's interests and their firm's interests are secondary to protecting the integrity of capital markets and the interests of the clients.

1215

Which one of the following constitutes the illegal use of material nonpublic information?

A) Trading on information your sister, the firm's attorney, told you over dinner.

B) Trading based on your analytical review of the firm's future prospects.

C) Trading immediately after attending the firm's annual shareholders’ meeting.

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Members may not trade on material nonpublic information; therefore, the information conveyed by the firm’s attorney may not be used by a member for trading purposes.

1215

Marion Klatt, CFA, is a representative for Thiel Financial Network. Klatt received a phone call at home from William Kind, a junior executive at Westtown Development Company, asking whether Klatt had heard that Westtown had just reached an agreement to acquire a major shopping mall chain at a very favorable price. (Klatt had not heard this news, and Klatt was able to confirm that the information had not yet been made public.) Kind requested that Klatt acquire 10,000 shares of Westtown for Kind’s personal account.

Klatt should:

A) not acquire the shares until he has contacted Westtown's management and encouraged them to publicly announce the merger discussion.

B) not acquire the shares.

C) not acquire the shares until the information is made public.

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Standard II(A) prohibits members from taking investment action if they possess material nonpublic information. Kind has a duty to keep information confidential that he acquired in the course of his duties at Westtown. The information is clearly material, so Klatt is not permitted to trade on it. Klatt should make reasonable efforts to achieve public dissemination of the information by contacting management and encouraging them to make the information public. Klatt may not trade on the information until it is made public.

1215

Regarding non-public information, which one of the following statements is NOT correct?

A) An analyst may use some types of non-public information.

B) Disclosing material non-public information would have an impact on the price of a security or be of interest to a reasonable investor.

C) A member can be summarily suspended for having received material non-public information.

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All of these are true except that a member can be suspended for having received material non-public information. The member can receive such information as part of their regular duties or by accident. Neither is punishable in and of itself, and penalties only apply if the member trades or causes others to trade on the information. The member may have certain duties, such as trying to disseminate the information after receiving it. An analyst may use nonmaterial non-public information.

1215

The investment-banking department of the XYZ Brokerage House often has information that would be of significant use to the firm's brokerage clients. In order to conform to CFA Institute Standards of Professional Conduct, which of the following policies should XYZ adopt?

According to Standard:

A) III(B), Fair Dealing, all clients should be informed of the information at the same time.

B) II(A), Material Nonpublic Information, XYZ should encourage their investment banking clients to publicly disseminate this information.

C) II(A), Material Nonpublic Information, XYZ should establish physical and informational barriers within the firm to prevent the exchange of information between the investment banking and the brokerage operations.

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The physical and information barrier erected between departments to prevent communication of material nonpublic information from one department to another is called a "firewall." Departments should be separated. For example, the investment banking and corporate finance departments of a brokerage firm should be segregated from the sales and research departments. Family member accounts who are also clients should be treated like any other client accounts and should not be given special treatment or disadvantaged.

1215

A stockbroker who is a member of CFA Institute has a part-time housekeeper who also works for the CEO of Festival, Inc. One day the housekeeper mentions to the broker that she saw the CEO of Festival having a conversation at his home with John Tater, who is a nationally known corporate lawyer and consultant. The stockbroker is restricted from trading on this information:

A) for both of the reasons listed here.

B) only if the broker knows that the meeting is non-public information.

C) if the housekeeper says the meeting concerned a tender offer and the broker knows that it is non-public information.

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Standard II(A), Material Nonpublic Information, states “a member cannot trade or cause others to trade in a security while the member possesses material nonpublic information” A tender offer would certainly be material nonpublic information. Knowing that the meeting took place, and nothing else, does not restrict the broker. A reasonable investor would need to know more to determine if the information was material.

1215

A brokerage firm has a trading department and an investment-banking department. Often the investment-banking department receives material non-public information that would be valuable in advising the firm’s brokerage clients. In order to comply with the Standards, the firm:

A) should record the exchange of information between the investment-banking department and the brokerage department.

B) must divest one of the departments.

C) should restrict employee trading in securities for which the firm is in possession of material non-public information.

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Restricting employee trading in stocks for which the firm has material non-public information is the best answer. Recording the exchange of information between the two departments is not the best option because there should be no exchange of information between these two departments. Divesting a department is not a suitable method for addressing this potential problem.

1215

According to CFA Institute Standards of Professional Conduct, which of the following statements about material nonpublic information is NOT correct? Information is:

A) material if reasonable investors would want to know the information before making an investment decision.

B) nonpublic until it has been disseminated to the marketplace in general.

C) nonpublic until it has been disseminated to a select group of investors.

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Standard II(A), Material Nonpublic Information, states that information is “nonpublic” until it has been disseminated to the marketplace in general as opposed to a select group of investors.