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 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

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

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

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

C) cannot trade on material non-public information.

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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

1215

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) not in violation of the Standard.

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

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.

1215

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

C) do neither of the actions listed here.

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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.

1215

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) Wall Street Rule.

B) legal list.

C) fire wall.

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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.