Given this is a mock question, I won’t post it, but for anyone who has access, can you please comment on question 5?
I am having a problem recognising how II(A) material non-public information applies here exactly. I get that the hedge fund should not be allowed to trade after market close, but where exactly does material non-public info come in? How is Charlie providing mnp info to the fund, he may be “inducing them to trade” by providing them access, but what mnp info do they get? Markets are closed, as I read the question, so they are not shifting the market, they are just submitting their orders out of market hours or am I misunderstanding the mechanics?
Charlie Mancini, CFA, is the Managing Director for Business Development at SV Financial (SVF), a large US-based mutual fund organization. Mancini has been under pressure recently to increase revenues. In order to secure business from a large hedge fund manager based in Asia, Mancini recently approved flexible terms for the fund’s client agreement. To allow for time zone differences, the agreement permits the hedge fund to trade in all of SVF’s mutual funds six hours after the close of US markets, which is prohibited by US regulators. Did Mancini violate any CFA Institute Standards of Professional Conduct?
A No. B Yes, with regard to Fair Dealing. C Yes, with regard to Fair Dealing and Material Nonpublic Information.
C is correct because clients should be treated fairly and impartially [Standard III(B)]. In addition, the flexible trading terms allow the hedge fund manager to enrich themselves and is a violation of Standard II(A), concerning trading on material nonpublic information. This is also a conflict of interest [Standard VI(A)–Disclosure of Conflicts]. A is incorrect because violations of several Standards have occurred. B is incorrect because a violation of the Fair Dealing standard has occurred.
If you submit mock exam questions online, there is a chat thread under which other candidates post their explanation. One of them pointed this out: ’ The Standard of Practice Handbook states that “Trading or inducing others to trade on material nonpublic information erodes confidence in capital markets, institutions, and investment professionals by supporting the idea that those with inside information andspecial access can take unfair advantage of the general investing public” and that “Standard II(A) promotes and maintains a high level of confidence in market integrity, which is one of the foundations of the investment profession”. ’
So I guess it’s not explicitly stated in the standards but still apply in this case.