This ethics question really surprised me...

[Robert A]

I guess I never really understood how broadly defined the term, “induce,” was.
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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) do neither of the actions listed here.
B) 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.
C) execute the order for all clients as required by Standard III(B), Fair Dealing.
Your answer: B was incorrect. The correct answer was A) do neither of the actions listed here.
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.

 

[job71188]

It’s pretty black and white to me. The person is clearly trying to benefit off of material nonpublic information. Aiding him in doing so would be a violation.

 

[newsuper]

so obvious it’s MNP

 

[Robert A]

I don’t doubt that insider trading took place, but our question is whether a CFA violated the standards of practice. Here’s how I analyze this fact pattern:
There has to be possession of material, nonpublic information, and the performance of an act based on that information. All elements are present, but not linked as to the actions of the broker. The broker’s act is linked to his client’s instruction, not to new-found illegal information.

 

[manowar]

Dear Robert A, the question is clear and the correct answer is A. I understand your point of view. The thing is you should pay attention to the order of the standard. Insider trading is number 2 and duties to client is number 3. Which means that you should put the integrity of the market above your fiduciary duties. Therefore, candidates must not support insider trading by any means.

 

[devildog]

Robert A
Don’t equate these to real world situations. No trading took place….this is just a question. I know that is obvious, but when you look at ethics you have to look at what is being tested. CEO….for his children=beneficial interest
CEO saying that it will payoff when the takeover goes through+no sign of it in the broker’s sources=mat inside info.
You sound like you are splitting a legal hair as if you were defending his choice to make the trade. “I was only acting on his orders”….is something you would say to regulators when accused of trading on….you guessed it material inside info
The info does not have to be in posession of the broker. The facts in this question are saying he knows it is inside info. He cannot be a party to it.

 

[cfagoal2]

Robert A, when in doubt, choose A

 

[nuppal]

No news on the merger, CEO is trading on the Merger = illegal.