CFA Practice Question

CFA Practice Question

Martin Kuboski has overheard in his office elevator, which is shared by other tenants in the building, that a certain publicly traded company is going to receive a tender offer in the course of the next few days. Martin is aware that as an employee of a securities firm he cannot trade on information related to a tender offer, that is not yet public. He discusses the news with his wife who is a member of an investor club. At the next night's meeting of the club, his wife mentions it privately to her good friend Amy. The next morning, Amy calls her broker and places a buy order for the company about to receive a tender offer.
A. Martin violated Standard II (A) - Material Nonpublic Information.
B. Amy violated Standard II (A) - Material Nonpublic Information.
C. Martin, his wife, and Amy violated Standard II (A) - Material Nonpublic Information.
Explanation: If the information is related to a not-yet publicly announced tender offer, one cannot trade on it, period. Amy has violated Standard II (A).

User Contributed Comments 14

User Comment
danlan Only Amy, not Martin or his wife.
PedroEdmundo I thought the COE said you should not act or make others act on such information, no?
mtcfa All this makes sense to me, but if someone is a housewife, are they really bound by CFA Standards. I can see that she may have in fact done something illegal, but to say that she is inviolation of a CFA Standard when she is not bound by such seems to be a stretch.
mark98007 NO! Dirks versus SEC... all parties in this should know better.... The Tippee (Amy) is in an investment club and would know it was wrong and faces the worst... BUT...there could be difficulty in proving that there was not intent for them to get some under-the-table cut after the dissemination; hands would get slapped for leaking it across the board
thekapila I agree. dissemenation of info let other to act on the info so i beleive everyone has violated 11A as standards dont act and dont let others act.
steved333 The CFA text gives a similar example and said the same. One must act or cause someone to act to be violate. Martin told his Amy about the offer, but she chose on her own to trade on it. And my understanding is that the broker would be violate only if he knew. Amy could have just had him make the trade without further explanation.
escempep Take p39 in the Ethical Book and check the first §§ in Procedures of the "Recommended Compliance " section. You can read : "...members and candidates must not knowingly engage in any conduct that may induce company insiders to privately disclos material non public information".

Then we can suggest that Martin violates the standards...

Furthermore, is the information really material? It is just a rumor in a elevator.
Rinoa86 amy has violated it because she acted upon the info by contacting her broker.
Bobokoko it's pretty obvious Amy is in violation, but i still believe the others are too.....one works for a security firm and another is in an investment club.
Insipidity All of them violated. By spreading the news, Martin and wife potentially allowed others to act on it.
tommyguard3 One question that people seem to continually ask in all the exams is whether this person is a CFA member or not.

It is irrelevant. While they may not be bound by the CFA standards they still violated them.

For example someone with diplomatic immunity steals a car. They broke the law but they are not bound by it. The questions do not ask about penalty just what standard has been violated.
mary11 How does Amy even know that it is from a reliable source? It was overheard in an elevator - who where these people talking? Were they management or someone of importance that we can assume its factual information? Geez the office is shared with tenants!
Ifi2703 I think tommyguard3 makes a very good point - i think the key is to ask ourselves whether or not a code has been violated, based on the actions described. I dont think it is all that important whether or not the person is explicitly said to be a charterholder.

In this question, i think the way to look at it is to remember that it is not a crime to merely hear something. What makes it a 'crime', so to speak, is acting on that information that you know is material/non-public.

This is why only Amy is in violation because she is the only one who has acted on/stands to benefit directly from this inside info.
Callie2 I was confused on this question too, as it seems to me that Martin also violated the standard. But, if you look at Question 9 on Mock Exam #3, the explanation states:

"Liability can be imposed on a tippee only when an insider breaches a fiduciary duty to shareholders by disclosing information to the tippee and when the tippee knows, or should know, that the insider is acting improperly by disclosing information." It also states that the tippee essentially inherits the tipper's liability.

I think what I misread in this scenario is that the tipper is not Martin, but the two guys having the conversation in the first place. They violated the standard, and when Amy acted on it she inherited their liability (I think it is assumed that she should have known better since she is in an investment club).
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