Non-Public Information

[Tartaglia]

Hey folks,
the following two questions seem contradictory to me:
Alan Powers, CFA, is a trader with Rogers Securities. His sister works for Potter Steel and has told him that Potter’s earnings, which will be released two days from now, are significantly less than expectations. Powers receives a buy order for the firm’s client accounts for a block of Potter shares. According to the Code and Standards, Powers’ most appropriate action is to:
A)
enter the trade without mentioning the coming earnings disappointment.
B)
ask his compliance officer to place Potter stock on the firm’s restricted list because he has material nonpublic information, to avoid making the trade.
C)
inform only the firm’s head of trading that the trade would not be in clients’ best interest, without disclosing the information.


Standard II(A) Material Nonpublic Information requires members and candidates not to act or cause others to act based on material nonpublic information. As a general rule, if a member acts as he would if he did not possess the information, he will not violate this Standard.

 

[Tartaglia]

Andrews, a private wealth manager, is conducting interviews for a new research analyst for his firm. One of the candidates is Wright, an analyst with a local investment bank. During the interview, while Wright is describing his analytical skills, he mentions a current merger in which his firm is acting as the adviser. Andrews has heard rumors of a possible merger between the two companies, but no releases have been made by the companies concerned. Which of the following actions by Andrews is least likely a violation of the Code and Standards?

Waiting until the next day before trading on the information to allow time for it to become public.

Notifying all investment managers in his firm of the new information so none of their clients are disadvantaged.

Placing the securities mentioned as part of the merger on the firm’s restricted trading list.


Answer C is correct. The guidance to Standard II(A)–Material Nonpublic Information recommends adding securities to the firm’s restricted list when the firm has or may have material nonpublic information. By adding these securities to this list, Andrews would uphold this standard. Because waiting until the next day will not ensure that news of the merger is made public, answer A is incorrect. Negotiations may take much longer between the two companies, and the merger may never happen. Andrews must wait until the information is disseminated to the market before he trades on that information. Answer B is incorrect because Andrews should not disclose the information to other managers; no trading is allowed on material nonpublic information.

 

[Tartaglia]

Why didn’t we place the stocks on a restricted list in the first question?? I do see the point, that the trade is executed for a client and I do understand that in that case we should just execute the trade without alarming anyone. But should’t we still place the stock on a restricted list for proprietary trading?

 

[Tartaglia]

Is it possible that once a company receives non-public (and material) information it will:
1) not act on it, with regard to executing trades (say a broker firm)
2) place the stock on a restricted list with regard to proprietary trading or regarding discretionary portfolios

 

[ejs190]

Taking a stab –> The client is not acting on non-pub. mat. info when he asks you to buy the shares. Therefore you should accept the trade. You should not place it on the restricted list because this IS acting on the non-public material info, by restricting your clients trade.
The second question allows you to place on the restricted because you would not be benefiting from this (i.e. you wont be preventing any loses to your clients because no one has asked you to trade yet).
I.e. you cannot place on the restricted list once someone has asked you to trade.
… just a guess

 

[Tartaglia]

I see your point, and it makes sense.
The line just seems a bit blurry….
Thank you!!!