CFA Practice Question

CFA Practice Question

Brittany Friar is an analyst for Freeman and Porter Securities. She has often traded ahead of her firm's recommendations. When it comes to filing monthly disclosure reports, she does not submit them for the month in which she has executed such trades. Brittany
A. has violates Standard VI (B) and her supervisor has violated Standard IV (C) - Responsibility of Supervisors.
B. has violated Standard II (A) - Material Nonpublic Information and Standard VI (B) - Priority of Transactions.
C. All three standards have been violated: Standard VI (B), Standard IV (C) and Standard II (A).
Explanation: Brittany has violated Standard VI (B) - Priority of Transactions and her supervisor has violated Standard IV C for failing to enforce the firm's disclosure requirements when she did not file her report. This would have enabled the compliance department to identify the violations quickly and discipline Brittany before she can do more harm.

User Contributed Comments 17

User Comment
joshnick Isn't this also a situation of material nonpublic informations since buy and sell recomendations often result in stock price changes. I read a mail man once got arrested for insider trading when he bought stocks recommended by finance magazines b4 they were issued to the general public. Isn't this the same deal?
Carol1 NO, he trade the info on his form' info rather inside info from related info company
mark98007 One could easily assume the motive to trade ahead of issue is because the information is material and non-public; in an instance where the stock moved huge after their report, it would appear that way, and the burden of proof that it wasn't a form of "insider" effect would be on her to show that it was a coincidence; a court would not believe it was merely an incompetent coincidence instead of material knowledge advantage that motivated the pre-dissemination trading behavior; thus "C" is correct
jjohnson "She has often traded ahead of her firm's recommendations" does not mean she uses material non-public info to trade, otherwise all violators of Priority of Transactions would simultaneously violate the inside trading rule as well. You cannot "assume" in this case but asnwer based on facts given. I believe A is right.
wollogo I suppose you cannot consider a research report material non-public information because if it was then the report should not be released.
sbakar disagree. p.39 implies that reports or recommendations from well-known or respected analysts could be considered material by the public.
dealsoutlook i think she has violated material non public info as well since analyst rating could have huge impact on stock price especially from a credible source
kevinf12 This is violation of non-public material info. There is an example at the CFA institute, as Ethics readings are available in their entirety. There is an example that is similar (about trading ahead).
carnival I don't think so kevinf12. A firm's recommendation is typically not inside info , unless that firm knows some "inside info" and writes the recommendation.
steved333 Thank you, Carnival. I have been waiting for someone to point that out. This is actually quite simple. A firm's recommendation means nothing as far as non-public info is concerned. The main point is that she made the trades before the info was disseminated to her clients. That doesn't mean that other outsiders didn't have the info yet.
Analizer Those guys referring to non-public material information have not read the question properly. There is no indicia in the scenario given that Brittany overhears any converstion that has to do with trading on the security, in which instance, the issue of material non-public information should come into play. The issue here is,she has often traded ahead of her firm's recommendation which violates the principle of "priority of transactions".That is trading on her behalf before forst trading on behalf of her employer.
rhardin Carnival... sorry, but a firm's recommendation can be inside info IF it has not been released yet and will affect the stock price. Recommendations from top firms DO change stock prices and investors would like to know the information before they trade. So it's material and inside. Inside does NOT have to mean that it is from the company itself!
Friso Material non-public information is more than just inside info. Any information that has a significant impact on stock price (such as reports from highly respected sources) is considered material non-public information.
So I disagree with about half the comments and with the answer to the question, I feel it should be C.
alles She has traded on material non-public information.
GBolt93 Yeah, Material Non-Public information that is no yet accessible to the public and can materially affect the stock price if it was known, which a recommendation can clearly do. Doesn't necessarily have to be insider information.
ctschro i also agree that the analysis and integration of all of the materials in the report makes the report itself material non-public
ctschro i also agree that the analysis and integration of all of the materials in the report makes the report itself material non-public
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