Material Nonpublic Information

CFA Level III Ethics
#1

The following problem:

Roberta Conn is an investment advisor who has a client, Ernie Ray, who is a tax lawyer. At lunch, Conn noticed Ray and the Chief Financial Officer of CDH Company at the next table. She overhears them talking and ascertains that CDH is about to announce higher than expected earnings. Before the earnings release, Ray contacts Conn and asks her to purchase 3,000 shares for his portfolio. Conn:

… the answer says: “must refuse to purchase the shares for Ray”

My thought on this: Conn does not know what the basis of the purchase is. She just received a call with request from a client to make the purchase. In reality, the client does not have to explain the reasons behind his request, right? How would you imply from the text that Conn knows that is is material nonpublic information which drives the purchase request?

Thanks for comments in advance!

#2

It’s not what the client knows, it’s what Conn knows. She has MNP info so she shouldn’t make any trades.

It’s been a while, so I don’t remember if/why she could not take the contra position instead…

#3

should not ACT or cause others to ACT on MNP info!

#4

And CFA Institute takes a very liberal view on what constitutes “causing others to act”; essentially, if you tell anyone, you’ve violated the Standards.

#5

So what about them contra trades? Can she accept the purchase order and then short the stock in her firm’s account?

#6

I don’t think this applies, she didn’t tell the client to buy the stock.

EDIT: executing the order would be ALLOWING the client to act on MNP info, not CAUSING them to act.

#7

I agree. I wasn’t suggesting that that was the case here; I was addressing the use of material nonpublic information in general.

Still . . . here you could be associating with behavior that is unethical, and doing so is a violation, no?

#8

If Conn has not “spied” the meeting and “ascertained” the earnings information, she could have executed the trade without any violation, right?

Let’s take the case, when Conn has not noticed the meeting between the client and CFO, but she has the MNI from another source. In this case, she will be again in vaiolation if executing the trade, as she should have put the stock on the restricted list, right?