Ethics clarification business, president, committee, his

ShooterMcCFA

Q1) Reference: CFAI V1- Reading 2 (page 42: Example 1)

- Material nonpublic information

A president of a publicly traded family business decides to tell a family member (who is also a committee member of the firm) of his decision to sell the business. The family member passes this info to other distant members of the family. A distant family member breaks the news to his broker, who decides to buy the shares of the firm.

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The comments section on page 42 claims that the distant family member (Staple) and the broker are the only ones in violation. I would have thought the family member employed by the firm, who passed the info onto an outside family member not employed by the firm would be in violation - as well as all of the distant family members, and not just Staple.

The info from all the way up to the president got to Staple through a channel of other relatives. A common sense says those relatives are also accomplices, so to speak. Or is there a certain regulation (apart from CFA) where the guilty party (the broker) and the immediate accomplice (Staple) are the only violators. Can someone please clarify.
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Q2) Reference: Schweser Book 1: page 77- Q10

The answer to this question claims that "..factual data from a recognized statistical reporting service need not be cited" - in this case the Federal Reserve.

The question is which organizations are considered 'recognized statistical reporting service'? SEC comes to mind ....any others?


Thanks.

joemoran

Ambiguous indeed...

Here are some other hypothetical situations I can think of:

1) A family member communicates to her husband and a broker. No one acts on the info. Is the family member in violation (since the intention is implicit when relaying this info to a broker)?

2) Staple communicates to multiple brokers. And only one broker acts on the info. Are other brokers who did not act on the info in violation?

3) A family member communicates to a husband, who also happens to be a broker. The husband does not act on the info. Is the family member in violation?

I just wanted to throw these out there to see if they help pin down the theories.

In concluding within our discussion, it seems to me a family member will be in violation if the communication is to a broker, irrespective of whether the broker action on that information. And a broker will be in violation only if the info is acted upon on. Let me know if your thoughts are different.

JGovender

I would have thought that by passing the info to a broker, Staple has the intention to benefit from the info, either for himself or from the broker indirectly.

Whereas for the family member who passed to Staple, the former is less likely to have the intention as he is just sharing the news to his relatives.

Really an ambiguous area.

draz

I think you can consider telling your broker a clearer violation of the standard than telling your husband. I read the example in the book. I think it comes from the fact that the other people involved did not tell anyone who could act directly on the info.
I think if you understand it to the degree that we have discussed here, including the options of urging the President to make the info public, you won't have a problem with most of the exam questions.

chetan86

Thank you devildog for the very well thought-out and clear explanations.

In the case of Staple though, is his action considered 'acting' on the material non public info - as opposed to the broker who is clearly in violation. I am not trying to be difficult here; I am just trying to understand why Staple would be in violation when he has not personally benefited from the insider info.

So, in other words, is there a fine line that says if you tell another family member you are clearly NOT in violation (as long as no one acts on the info), however if you communicate that same info onto an entity outside the family and the entity acts and benefits from it then you are in clear violation. Or to put it more succinctly, the violators will be ONLY those (i) who acts on the info and (ii) the immediate accomplices who communicate that info to the person who acts on it. Is this right?

I also agree that the story would have been more credible had the violators been CFA members.

Thanks.

hariRaj

Sujan Wrote:
-------------------------------------------------------
> Q1) Reference: CFAI V1- Reading 2 (page 42:
> Example 1)
>
> - Material nonpublic information
>
> A president of a publicly traded family business
> decides to tell a family member (who is also a
> committee member of the firm) of his decision to
> sell the business. The family member passes this
> info to other distant members of the family. A
> distant family member breaks the news to his
> broker, who decides to buy the shares of the
> firm.
>
> ------
> The comments section on page 42 claims that the
> distant family member (Staple) and the broker are
> the only ones in violation. I would have thought
> the family member employed by the firm, who
> passed the info onto an outside family member not
> employed by the firm would be in violation - as
> well as all of the distant family members, and not
> just Staple.
>
> The info from all the way up to the president got
> to Staple through a channel of other relatives. A
> common sense says those relatives are also
> accomplices, so to speak. Or is there a certain
> regulation (apart from CFA) where the guilty party
> (the broker) and the immediate accomplice (Staple)
> are the only violators. Can someone please
> clarify.
> ------

I think the violation comes from ACTING on the material non public info. Being in posession of it is not a violation. If you hear non public info that doesn't put you in violation of the code. Someone saying "I heard John say...." is not really a violation, especially for a lay person, not a Charterholder. I would have expected a choice where the CFA member should "Urge the person at the company to make the info public".
My concern with the way this information is presented is not a violation of using material non public info. Is it material...yes, non public....yes, but it is so far removed from the source can it be considered factual. I would think the issue might be one of buying the security without reasonable basis. (rumor)
Also, only the Charterholder can be in violation of the code. The family members, company president etc. are not subject to the code. Might the SEC have an issue with their disseminating of mat non pub info? Maybe, but for the exam that's not our job
to determine.


> Q2) Reference: Schweser Book 1: page 77- Q10
>
> The answer to this question claims that "..factual
> data from a recognized statistical reporting
> service need not be cited" - in this case the
> Federal Reserve.
>
> The question is which organizations are considered
> 'recognized statistical reporting service'? SEC
> comes to mind ....any others?
>
>
> Thanks.

I think you should recognize in a question when they are using a recognized statistical reporting service. Don't just think government agencies, think S&P, Moody's, Bloomberg etc. If the question says the analyst used closing market prices in their report for the last year obtained from Bloomberg, it is obvious that they are using a "recognized statistical reporting service" for statisitics. If they use an analyst's opinion excerpted from Bloomberg they need to credit the analyst. I would say don't go by the organization, but by the situation.

ogoluwa

Newswires? are we sure?

The context of the second question is around the use of research material from the Fed where the author does not need to cite it. Are we saying that if the research material comes from S&P and the likes it does not need to be cited?

bluejazzy

Factual source where data are widely expected to be "public" - Standard And Poor's, Morningstar etc .