Restricted Lists Query - Schweser vs CFAI

CFA Level I Ethics
#1

Per CFAI Ethics EOC Q32: Standard II(A) recommends adding securities to firm restricted list when the firm has material nonpublic information.

Schweser Mock 2 Morning paper Q16: Placing a stock on a restricted list or refusing to trade in the stock are violations of Standard II(A) since they involve acting or causing others to act on material nonpublic information.

Clearly conflicting points being made here…can anyone advise?

Thanks in advance,

Heathcliff

#2

Are you sure that that’s what Schweser’s saying? I find that difficult to believe.

#3

Yep I’m positive…the exact wording:

“Standard II(A) Material Nonpublic Information requires that members and candidates who possess material nonpublic information not act or cause others to acton the information. Putting the stock on a restricted list or refusing the trade are violations of this Standard since they involve acting or causing others to act on the nonpublic information he possess”.

#4

Look at SchweserNotes, vol. 1, p. 31, top of page, first two sentences. That covers the “refusing to trade” bugaboo. The firm can (and, indeed, should) put such securities on a restricted list.

By the way, if CFA Institute’s interpretation disagrees with anyone else’s, guess whose interpretation you should follow.

#5

Wow! This was what I was thinking a couple of days ago.

I have a question related to this. Let’s say a firm has nonpublic material information and it puts the stock on a restricted list. Let’s assume that people aren’t always honest. Won’t they know what shares to trade when they are looking at the restricted list? Isn’t it better to keep the info to a few people?

#6

In a similar vein, it’s probably a bad idea to buy a safe to hold your jewelry and gold, because when people know you have a safe they’ll know they should break into your house because you have something worth stealing.

#7

I think my understanding is that, adding a stock to a restictied list also raises suspision and thus increased outside trading.

Therefore, depending on the other answers you could work out the answer that this question wants you to give.

So basically, adding a stock to a restictive list can be done, but think of it as a last available option.