Colleen Collins, a research analyst, approaches McGuinn, concerned that she may be in possession of insider information. Collins relates that she was at a party the night before and overheard a conversation between two CEOs of competing, publicly listed manufacturing companies. The CEOs discussed, but did not express their opinions on, the validity of a recent article published in an online industry newsletter, which was speculating on the benefits of a merger between their two companies. The newsletter is available by subscription only. One of these companies is on Forster’s recommended buy list.
Following this conversation, McGuinn feels it is necessary to enhance Forster’s rules and procedures when dealing with possible insider information. He recommends the following changes to the company’s policies and procedures:
- Recommendation 1: Stop market-making activities when in possession of material nonpublic information.
- Recommendation 2: Regularly review employee and proprietary trading.
- Recommendation 3: Require all employees to attend an annual refresher course on how to identify and handle material nonpublic information.
Q. Which of McGuinn’s recommendations is least appropriate to implement as per recommended procedures for compliance of Standard II(A)–Material Nonpublic Information?
- Recommendation 1
- Recommendation 2
- Recommendation 3
Answer is recommendation 1. But as per recommendation 1, “stop market making activities”, if it is least violating the CFA codes means continuing market making activities while having insider information is okay !!
please explain
Solution
A is correct. When a firm acts as a market maker, a prohibition on proprietary trading may be counterproductive to the goals of maintaining the confidentiality of information and market liquidity, as outlined in Standard II(A)–Material Nonpublic Information. In some cases, a withdrawal by the firm from market-making activities would be a clear tip to outsiders. Firms that continue market-making activity while in the possession of material nonpublic information should, however, instruct their market makers to remain passive to the market (i.e., take only the opposing side of unsolicited customer trades).
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