Integrity of Capital Markets

CFA Level III Ethics
#1

So I am looking at this ethics issue from the curriculum that kind of got me confused. From some examples it seems that if you are an insider and give material nonpublic information to someone, you are not violating the standard but if the person who received that information passes along the information violates the standard. Should not both be in violation? If not, why? Here are two examples from the curriculum:

Frank Barnes, the president and controlling shareholder of the SmartTown clothing chain, decides to accept a 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 (SmartTown’s treasurer), who conveys it to her daughter (who owns no stock in the family company at present), who tells her husband, Staple. Staple, however, tells his stockbroker, Alex Halsey, who immediately buys SmartTown stock for himself.

L3V1R2-296 Comment : The information regarding the pending sale is both material and nonpublic. Staple has violated Standard II(A) by communicating the inside information to his broker. Halsey also has violated the standard by buying the shares on the basis of material nonpublic information.

(Institute 63-64)

Institute, CFA. 2020 CFA Program Curriculum Level III Volume 1 . CFA Institute, 08/2019. VitalBook file.

The next day, Clement is preparing to be interviewed on a global financial news television program where he will discuss his changed recommendation on Turgot Chariots for the first time in public. While preparing for the program, he mentions to the show’s producers and Mary Zito, the journalist who will be interviewing him, the information he will be discussing. Just prior to going on the air, Zito sells her holdings in Turgot Chariots. She also phones her father with the information because she knows that he and other family members have investments in Turgot Chariots.

L3V1R2-308 Comment : When Zito receives advance notice of Clement’s change of opinion, she knows it will have a material impact on the stock price, even if she is not totally aware of Clement’s underlying reasoning. She is not a client of Clement but obtains early access to the material nonpublic information prior to publication. Her trades are thus based on material nonpublic information and violate Standard II(A).

L3V1R2-309 Zito further violates the Standard by relaying the information to her father. It would not matter if he or any other family member traded; the act of providing the information violates Standard II(A). The fact that the information is provided to a family member does not absolve someone of the prohibition of using or communicating material nonpublic information.

(Institute 65-66)

Institute, CFA. 2020 CFA Program Curriculum Level III Volume 1 . CFA Institute, 08/2019. VitalBook file.

#2

Without digging into all of the details, a lot of it has to do with who’s covered by the Code and Standards (C&S): members of CFA Institute (including charterholders) and CFA candidates; they used to call these people covered persons. If Barnes’ sister isn’t a covered person, she cannot violate the C&S because they doesn’t apply to her. If her daughter and her son-in-law aren’t covered persons (it should be covered people; I don’t know why it isn’t), they cannot violate the C&S because they don’t apply to them.

#3

Yeah, that makes total sense but the issue I am having is that if I recall correctly, CFAI says that all names are assumed to be Charterholders unless otherwise stated. Here they did not specify anything.

#4

I recall asking if they had some generic statement such as that, but I don’t recall ever having received an answer. I’ll ask them again.

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