CFA Practice Question

There are 361 practice questions for this study session.

CFA Practice Question

Brad, the president and controlling shareholder of ABC clothing company, decides to accept a proposed tender offer and sell the family business at a price almost double the market price of its shares. He describes this decision to his sister, ABC's treasurer, who conveys it to her daughter, who owns stock in the company, who tells her husband, Ed. Ed tells his stockbroker, Darren, who immediately buys ABC's stock for Ed. Who has violated Standard II (A) Material Non-public Information?
A. Brad and Darren
B. Ed and Darren
C. Darren only
Explanation: The information regarding the tender offer is both material and nonpublic. Both Ed and Darren have violated Standard II (A).

User Contributed Comments 26

User Comment
sarath If the information invloves a tender offer, regardless of how it was obtained...the trading is prohibited...
ptchan the information was gratuiously communicated to Ed ***
Adas83 Why did Ed violete standard?? Anyone can hel me?
adeelj Ed was the one who 'leaked' the material non-public information. Darren traded on it, so both of them are in violation of Standard.
matt2noel which was previously "leaked" by two other people, one of which was a corporate treasurer to a stock holder.
ThePessimist Brad didn't "leak" the information - telling the company treasurer is appropriate in the course of business. Brad's sister did err in telling Ed, but that wasn't part of the question.
volkovv This question is contradicting to another question on this site, where exactly the same situation is given, with chain of people passing the information, and only the last guy, the stockbroker, who acted on it was in violation, but here it was both Ed and stockbroker. I guess the explanation could be that Darren violated because he acted on the information but Ed is in violation since the trade was made for Ed's benefit, whereas in the other example it wasn't clear if broker made the trade for the person who passed that information to him.
volkovv I think the morale of this question is: you break the standard if you act on inside information or personally benefit from leaking it. If you just leak it, but gain nothing from it than its not a violation.
tomn similar to an "application of the standard" example on page 42, June 2008, level 1 curriculum.
jmcarr02 What about the stupid sister who is treasurer of the company ?? She is thus in a management position which implies she should not disseminate such a material information outside the company.
Smiley225 Ed benefited, Darren traded, both violated. If Ed did not benefit then he would not have been in violation.
hannovanwyk Leaking = violation
trading = violation
accidentally noticing = no violation as long as you don't trade and spread.
hannovanwyk just another addition :
Standard II (A) Material non-public information.

In terms of compliance with this Standard members should:

* Require communication to supervisors of any information that is believed to be material or non-public.
* Establish training and compliance procedures.
* Review accounts of customers for any patterns that would reflect any suspicious trading.
* Keep all research such that the firm is able to substantiate all its investment decisions.
dobrekone ? what does the stockbroker (Darren) has to do with it. He just executes the trade.
midwest in this question, it doesn't refer to any of these individuals as charterholders - does that matter?
ljamieson Is Ed a CFA? Does he know the info from his wife is material or rumor?
scprior we assume all characters are CFA. darren would have been only violator if it was for a different persons account, but since he traded for ed's account, knowing that ed had MNP info, they both violated. you can share MNP info, as long as there is no acting on it and the intent on sharing is not to provide unfair benefit when compared to general public. obviously if you leak info in the attempt to get business or keep customers, its a violations.. but conversationally sharing with the expectation no one is going to act isnt a clear violation.. :) gotta love CFA
gill15 This should be difficult with respect to the other question. Good Q though.

Broker on behalf of the stupid husband who married a stupid wife. All of them are in violation but question only asks about Sir Ed and broker.

Other question Ed does not benefit so not in violation. Really in this situation he's even dumber.
kumru Ed told his broker! but it is not explicitly stated that Ed recomend his broker to buy shares! Ed does not take any advantage from information, therefore; Ed is not in violation!
vinoth84 Ed is not the violeter, he just advised and as an trader he normally passes the information.Its brokers reponsibility to not to do so.Another thought comes in my mind, even Broker is not CFA, so it is not mandatory for him to follow CFA rules.
DPBass88 I agree that Ed and the broker violated for trading on insider information, however, can anyone answer if these standards only apply to CFA. It does not seem that E has received his CFA, he's just married to ABC treasurer. Can anyone help on this?
ashish100 CFA charterholder or not, the point is to figure if that event would be considered a violation of THE STANDARDS!
Live and die by the standards ya'all...
kingirm Ed is just a stockholder, he is not obliged by the standards I think
kingirm In the LOS it explicitly says "members and candidates who posses non-public material info.... ". There is no mention of stockholders
yesitan is Ed a charterholder? question wasnt clear enough..
9271299 I am asking the same question as Yesitan as I believe that Ed is unaware of the violations in the CFA Ethical & Professional Standard and he only acting in his best interest.
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