Q5. Myers has disclosed her partnership interest in the software company to Harrison, including the potential for additional compensation and the possible conflicts of interest.  

• One of Myers’ software clients, Breakthrough Pharmaceuticals (“Breakthrough”), is a publicly traded corporation that is also held in portfolios of Ironclad’s clients.  In the course of their business relationship, Breakthrough’s chief executive officer informs Myers that the company has been experiencing problems making retirement benefit payments, and its pension plan has recently gone from “overfunded” to “significantly underfunded” as a result of market conditions.

• Breakthrough’s chief executive officer indicates to Myers that he is attempting to source additional short-term financing to make retiree benefit payments and will disclose the significant “underfunded status” of the pension plan in the upcoming financial statements.  

• Myers, concerned about Ironclad clients holding stock of Breakthrough given the impact on earnings from the current pension troubles and short-term liquidity issues, informs Harrison of the impending disclosure. 

• Ironclad sells 1,800,000 shares of Breakthrough for clients, causing the price to drop $4 per share. 

• Upon disclosure of the pension troubles, Breakthrough’s stock dropped 18 percent. 

According to Standard II: Integrity of Capital Markets, Myers:

A)   has not violated the Standard since the information shared with Harrison was used to fulfill Ironclad’s fiduciary duty to avoid significant losses.

B)   has violated the Standard by sharing material nonpublic information with Harrison.

C)   has not violated the Standard by sharing material nonpublic information with Harrison because the information did not involve a tender offer.

答案和详解如下：

Q5. Myers has disclosed her partnership interest in the software company to Harrison, including the potential for additional compensation and the possible conflicts of interest.  

• One of Myers’ software clients, Breakthrough Pharmaceuticals (“Breakthrough”), is a publicly traded corporation that is also held in portfolios of Ironclad’s clients.  In the course of their business relationship, Breakthrough’s chief executive officer informs Myers that the company has been experiencing problems making retirement benefit payments, and its pension plan has recently gone from “overfunded” to “significantly underfunded” as a result of market conditions.

• Breakthrough’s chief executive officer indicates to Myers that he is attempting to source additional short-term financing to make retiree benefit payments and will disclose the significant “underfunded status” of the pension plan in the upcoming financial statements.  

• Myers, concerned about Ironclad clients holding stock of Breakthrough given the impact on earnings from the current pension troubles and short-term liquidity issues, informs Harrison of the impending disclosure. 

• Ironclad sells 1,800,000 shares of Breakthrough for clients, causing the price to drop $4 per share. 

• Upon disclosure of the pension troubles, Breakthrough’s stock dropped 18 percent. 

According to Standard II: Integrity of Capital Markets, Myers:

A)   has not violated the Standard since the information shared with Harrison was used to fulfill Ironclad’s fiduciary duty to avoid significant losses.

B)   has violated the Standard by sharing material nonpublic information with Harrison.

C)   has not violated the Standard by sharing material nonpublic information with Harrison because the information did not involve a tender offer.

Correct answer is B)         

Although the information shared by Myers may have helped Ironclad’s clients avoid losses in shares of Breakthrough, the information was material nonpublic information. In this example, Myers’ software company owes a duty of loyal and confidentiality to Breakthrough. Information is “material” if its disclosure would have an impact on the stock or if a reasonable investor would want to know the information prior to making an investment decision. Material is “nonpublic” until it has been generally disseminated to the marketplace and investors have had an opportunity to react to the information. The information about Breakthrough’s pension difficulties was both material and nonpublic, as the stock dropped significantly upon disclosure of the information in the market. Therefore, Myers had a duty to keep the information confidential and not to trade, or cause others to trade, on the information.

3X

thanks