Standard 2 Integrity Capital Markets Flashcards
What are the two subjects of Standard 2?
Material Nonpublic Information
Market Manipulation
What is Material Information?
Information is material if its disclosure would probably have an impact on the price of a security or if reasonable investors would want to know the information before making an investment decision. The less reliable a source, the less likely the information provided is to be considered material. Also, if the information is ambiguous, the information is also less likely to be considered material.
What is Nonpublic Information?
Information is nonpublic until it has been disseminated or is available to the marketplace in general.
What is the Mosaic Theory?
A financial analyst gathers and interprets large quantities of information from many sources. The analyst may use significant conclusions derived from the analysis of public and nonmaterial nonpublic information as the basis for investment recommendations and decisions even if those conclusions would have been material inside information had they been communicated directly to the analyst by a company. Under the Mosaic Theory, analysts are free to act on this collection, or mosaic, of information without risking violation.
Trading or inducing others to trade on material nonpublic information erodes confidence in capital markets, institutions, and investment professionals by supporting the idea that those with inside information and special access can take unfair advantage of the general investing public. Although trading on inside information may lead to short-term profits, in the long run, individuals and the profession as a whole suffer from such trading.
What are recommended procedures for firms to avoid action on material nonpublic information?
Achieve public dissemination of material information!
Adopt compliance procedures.
Adopt disclosure procedures.
Issue press releases.
Firewall elements.
What is the second subject of Standard 2?
Market Manipulation - members must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.
What are two forms of market manipulation?
Information-based manipulation
Transaction-based manipulation
