Stephen Smith, CFA, works across from Chen on the trading desk at Omega. His seat is close to a speaker for the company’s squawk box, which is used to broadcast information about current analyst recommendations, news about market events, and information about pending block trades.
Smith’s young brother-in-law, Adolfo Garcia, recently accepted a position as a broker at a third-party broker/dealer that trades with Omega. Garcia has a modest income and little savings. He is enthusiastic about investments and has enrolled as a CFA candidate. Smith calls Garcia early each morning to talk about the previous day’s events. At the end of their conversation, Smith places the call on speakerphone and resumes his work.
In his office, Garcia can hear Omega’s squawk box over the speakerphone. Garcia enjoys listening as Omega analysts discuss changes in ratings, economic forecasts, and capital market developments. He is careful not to trade in stocks mentioned explicitly on the squawk box. Rather, he sometimes researches competitors and other firms operating in the same industry. In one case, he immediately shorts the stock of Tefla Corporation after an Omega analyst downgrades a firm in the same industry.
Garcia frequently places large block orders for low-priced, small-capitalization stocks at the market price. Once the new system is operational, Smith processes the orders through the new trading system mechanism, which delays execution of portions of the orders and allows the firm to obtain a better price for Garcia
Q.1 When listening to the Omega squawk box, does Garcia violate any of the CFA Institute Standards?
A. No
B. Yes, the standard regarding professionalism
C. Yes, the standard regarding material nonpublic information
answer given in core- Garcia violated Standard I: Professionalism by engaging in eavesdropping on confidential information, including changes in analyst recommendations and pending block trades. According to Standard I(D): Misconduct, members must not engage in professional conduct involving dishonesty, deceit, or fraud or commit any act that reflects adversely on their professional reputation, integrity, or competence. Garcia engages in deceitful conduct in obtaining information from the squawk box. His actions reflect adversely on his professional reputation and integrity and thus violate Standard I(D). Although he listens to the material nonpublic information on pending block trades, Garcia is not in violation of Standard II(A): Material Nonpublic Information because he does not act on it. Possession of such material nonpublic information is not a violation of the Standard, but acting on the information is.
Q.2 When shorting Tefla stock, does Garcia violate any of the CFA Institute Standards?
A. No
B. Yes, because he does not have a reasonable basis for the trade
C. Yes, because he is in possession of material nonpublic information
core answer- Garcia is in possession of material nonpublic information and acted on it in violation of Standard II(A). After the analyst’s recommendation has been issued and/or distributed publicly, Garcia would be free to make the trade. Because this is a personal purchase, the standard relating to diligence and reasonable basis is not applicable.
the first ques. says he does not act on material non public info. but second ques contradicts that statement
please help
1 Answer