Reading 3.2 Standard 2: Integrity of Capital Markets Flashcards
What makes information “material”?
If its disclosure would likely have an impact on the price of a security, or if reasonable investors would want to know the information before making an investment decision.
Give examples of what may be considered material information.
Earnings
Mergers, acquisitions, tender offers, or joint ventures
Changes in assets
Innovative products, processes, or discoveries
New licenses, patents, registered trademarks, or regulatory approval/rejection of a product
Developments regarding customers or suppliers
Changes in management
Change in auditor notification or the fact that the issuer may no longer rely on an auditor’s report or qualified opinion
Events regarding the issuer’s securities
Bankruptcies
Significant legal disputes
Government reports of economic trends
Orders for large trades before they are executed
New or changing equity or debt ratings issued by a third party
Describe examples of transaction-based manipulation.
Transactions that artificially affect prices or volume to give the impression of activity or price movement in a financial instrument, which represent a diversion from the expectations of a fair and efficient market.
Securing a controlling, dominant position in a financial instrument to exploit and manipulate the price of a related derivative and/or the underlying asset.
Describe the mosaic theory.
Financial analysts are free to act on a collection, or mosaic, of information without risking violation, even when the conclusion they reach would have been material inside information had the company communicated the same.
List the recommended procedures to be in compliance with issues related to Material Nonpublic Information.
Achieve public dissemination
Adopt compliance procedures
Adopt disclosure procedures
Issue press releases
Establish firewall elements
Establish appropriate interdepartmental communications
Physical separation of departments
Prevention of personnel overlap
A reporting system
Describe the Integrity of Capital Markets standard as it applies to Market Manipulation.
Members and candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.
Define “nonpublic information.”
Information is “nonpublic” until it has been disseminated or is available to the marketplace in general (as opposed to a select group of investors).
List the minimum elements of a Material Nonpublic Information firewall.
Substantial control of relevant interdepartmental communications.
Review of employee trading through the maintenance of “watch,” “restricted,” and “rumor” lists.
Documentation of the procedures designed to limit the flow of information between departments and of the enforcement actions taken pursuant to those procedures.
Heightened review or restriction of proprietary trading while a firm is in possession of material nonpublic information.
Describe the Guidance related to the Integrity of Capital Markets standard as it applies to Material Nonpublic Information.
Material nonpublic information must not be used for direct buying and selling of individual securities or bonds, nor influence investment actions related to derivatives, mutual funds, or other alternative investments.
