CMFAS RES 1A Ethics, Codes & Standards of Professional Conduct question: colleague in corporate finance mentions over lunch

CMFAS RES 1AEthics, Codes & Standards of Professional Conduct

Bernard sits on a dealing desk. A colleague in corporate finance mentions over lunch that an auditor is about to issue a qualified opinion on a listed client. That afternoon Bernard sells the holdings of four discretionary clients and trades nothing for himself. The qualified opinion is published a week later and the price rises. Which statement is correct?

A The breach is only of the firm's internal Chinese wall policy, because the clients benefited from the sales
B The information was not material, because the share price did not fall when the opinion was published
C There is no breach, because Bernard made no personal gain and the price rose after publication
D Bernard caused others to act on material non-public information, which is barred whatever his gain or the later price move

Show the answer and explanation

Answer: D. Bernard caused others to act on material non-public information, which is barred whatever his gain or the later price move

RES 1B section 4.4.1.2(i) and RES 2B section 5.4.1.2(i): a representative holding material non-public information must not act on it or cause others to act on it. An auditor's qualified opinion is in the guide's list of material information, and SFA section 216 addresses information with a material effect on price. RES 1B section 4.4.2.1 requires the segregation that the lunchtime disclosure defeated. Takeaway: passing it on counts as acting on it.

Common mistake

Materiality is judged on the information, not on the price move afterwards.

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