Reading 2-II: Standards of Professional Conduct & Guidan Lisa, center, div, class

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Session 1: Ethical and Professional Standards
Reading 2-II: Standards of Professional Conduct & Guidance: Integrity of Capital Markets

LOS A.: Material Nonpublic Information.

 

 

 

Lisa Pierce, CFA, has been researching Lander Manufacturing for the past three weeks. She likes the company’s history of fulfilling its contracts on time and within budget. She learns from the uncle of a maintenance worker at Lander’s headquarters that a group of well-dressed individuals arrived at headquarters in a lime green-colored limousine. Pierce knows from publicly available information that Gilbert Controls needs a large supply of specialized motors in its domestic division. She also knows that the executive officers of Gilbert usually travel in a lime green limousine. Pierce concludes that it is very likely that Gilbert will offer a large contract to Lander. Based on this development and her prior research Pierce would like to acquire Lander Manufacturing shares for her client accounts.

Pierce should:

A) not acquire the shares because she possesses material nonpublic information.

B) not acquire the shares until after she has contacted Lander's management and encouraged them to publicly announce information about the Gilbert Controls contract. She should also wait until Lander has made the announcement and the public has had time to react to it and then make the acquisition.

C) proceed to acquire the shares.

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Standard II(A) prohibits members from taking investment action if they possess material nonpublic information. Pierce combined information that was not misappropriated, with her knowledge of the company, to reach a conclusion under the mosaic theory, which is permissible under the standards. She can proceed to buy the shares.

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c

bmaggie

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) trade using insider information.

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

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.

bmaggie

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

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

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

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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.

bmaggie

Don Benjamin, CFA, is the compliance officer for a large brokerage firm. He wants to prevent the communication of material nonpublic information and other sensitive information from his firm’s investment banking and corporate finance departments to its sales and research departments. The most common and widespread approach that Benjamin can use to prevent insider trading by employees is the:

A) fire wall.

B) Wall Street Rule.

C) legal list.

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To comply with Standard II(A), a fire wall provides an information barrier that prevents communication of material nonpublic information and other sensitive information from one department to another within a firm.

bmaggie

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

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

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

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

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Members may not use material nonpublic information for trading purposes unless, the information was developed under the Mosaic Theory. There is no provision for CFA Institute to issue fines to members.

bmaggie

An analyst is allowed to trade on information that he has predicted, such as a corporate action or event, using perceptive assembly and analysis of material public information or nonmaterial, non-public information. This is called the:

A) mosaic theory.

B) assessment theory.

C) deduction theory.

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This deductive reasoning is legal (does not constitute trading with inside information) and is called the mosaic theory.

bmaggie

Which of the following statements concerning Standard II(A), Material Nonpublic Information, is TRUE? A member:

A) cannot trade on material non-public information.

B) can trade on material non-public information if the information was not obtained through a breach of duty.

C) can trade on material non-public information if the information has not been misappropriated.

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Members cannot trade on material nonpublic information until that same information is made public. It does not matter if the information was not misappropriated or not obtained through a breach of duty

bmaggie

A CFO who is a CFA Institute member is careful to make his press releases—some of them containing material and previously undisclosed information—clear and understandable to his readers. While writing a new release, he often has his current intern proofread rough drafts. He also sends electronic copies to his brother, an English teacher, to get suggestions concerning style and grammar. With respect to Standard II(A), Material Nonpublic Information, the CFO is:

A) violating the standard by either showing the pre-release version to his intern or sending it to his brother.

B) not in violation of the Standard.

C) only in violation by e-mailing the pre-release version to his brother but not the intern, because the intern is in essence an employee of the firm.

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Standard II(A), Material Nonpublic Information, says that a member must be careful about handling material non-public information. As a member of CFA Institute, the CFO must limit the people who see important information before it is released. It would not be appropriate to involve an intern or a relative in the process.

bmaggie

A stockbroker who is a CFA Institute member is called on the telephone by the CEO of a large company. The CEO asks to buy shares of the CEO’s company for the accounts of the CEO’s children. In the course of the conversation, the CEO says this will really pay off when the upcoming takeover goes through. The stockbroker checks her sources and finds no information about the takeover. In this case the broker should:

A) only execute the order in compliance with Standard III(A), Loyalty, Prudence, and Care. Since the client is buying the stock for the children, there is not a problem.

B) do neither of the actions listed here.

C) execute the order for all clients as required by Standard III(B), Fair Dealing.

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Doing any of these actions would be a violation of Standard II(A), Material Nonpublic Information. Members and Candidates must not act or induce others to act on material nonpublic information.