R3-Gi lance for Standards 1-VII STANDARD = II INTEGRITY OF CAPITAL MARKETS INPUBLIC INFORMATION Members and Candidates who possess material nonpublic information that The Standard | could affect the value of an investment must not act or cause others to act on the information ANY TRADING ACTIVITY IS A VIOLATION Members and candidates must not use material nonpublic information to influence their investment actions related to derivatives, mutual funds, or other alternative investments. Any trading based on material nonpublic information constitutes a violation of Standard II(A) (MEANING OF THE TERM “MATERIAL” 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, RELIABILITY IS CRUCIAL The less reliable a source, the less likely the information provided would be considered material. For exampl 1, Factual information from a corporate insider regarding a significant new contract for a company is likely to be material, whereas an assumption based on speculation by a competitor about the same Contract is likely to be less reliable and, therefore, not material. Guidance 2. Information about trials of a new drug product, or service under development from qualified personnel involved in the trials is likely to be material, whereas educated conjecture by subject experts not connected to the trials is unlikely to be material. UNABMIGUITY OF IMPACT OF INFORMATION IS CRUCIAL ‘The more ambiguous the effect of the information on price, the Jess material that information is considered. If it is unclear whether and to what extent the information will affect the price of a security, the information may not be considered material. MEANING OF THE TERM “NON-PUBLIC 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). For example: Information that is made available to analysts remains nonpublic Until it is made available to investors in general. MOSAIC THEORY Violations of Standard I(A) will not result when a perceptive analyst reaches a conclusion about a corporate action or event through an analysis of public information and items of nonmaterial nonpublic information. You can enroll for this course by calling us/ messaging us on: +91 9903721140 (Edutors, India)xy dutors se centevett Evolve, Ech & Empower By Gourav Kabra RECORD RETENTION IS CRUCIAL Although analysts are free to use mosaic information in their research reports, they should save and document all their research. [See Standard V(C)-Record Retention]. ‘SOCIAL MEDIA (GROUPS) MAY NOT BE CONSIDERED PUBLIC It is important for investment professionals to understand the implications of Using information from the internet and social media platforms because all such information may not actually be considered public. Guidance —_| INDUSTRY EXPERTS. If an expert provides material nonpublic information, members and candidates ‘would be prohibited from taking investment actions on the associated firm until the information became publicly known to the market. INVESTMENT RESEARCH REPORTS ‘When a particularly well-known or respected analyst issues a report or makes changes to his or her recommendation, that information alone may have an effect on the market and thus may be considered material. Investors who want to use that report must become clients of the analyst. ‘ACHIEVE PUBLIC DISSEMINATION 1. Ifa member or candidate determines that information is material, the member or candidate should make reasonable efforts to achieve public dissemination of the information. 2. If public dissemination is not possible, the member or candidate must communicate the information only to the designated supervisory and ‘compliance personnel within the member's or candidate's firm and must mot take investment action or alter current _ investment recommendations on the basis of the information. ‘ADOPT COMPLIANCE PROCEDURES 1. Members and candidates should encourage their firms to adopt compliance procedures to prevent the misuse of material non-public information. 2. Members and candidates are encouraged to inform their supervisor and compliance personnel of suspected inappropriate use of material non- Procedures public information. ‘ADOPT DISCLOSURE PROCEDURES Members and candidates should encourage their firms to develop and follow disclosure policies designed to ensure that information is disseminated to the marketplace in an equitable manner. ISSUE PRESS RELEASES PRIOR TO ANALYST MEETINGS, Companies should consider issuing press releases prior to analyst meetings and conference calls and scripting those meetings and calls to decrease the chance that further information will be disclosed. FIREWALL TO PREVENT INTER-FIRM COMPARISON. ‘An information barrier commonly referred to as a “firewall” is the most widely used approach for preventing the communication of material nonpublic information within firms. Recommended You can enroll for this course by calling us/ messaging us on: +91 9903721140 (Edutors, India)édutors Evoke, Eich & Empower lance for Standards 1-VII PHYSICAL SEPARATION OF DEPARTMENTS Firms should consider the physical separation of departments and files to prevent the communication of sensitive information that should not be shared PREVENTION OF PERSONNEL OVERLAP There should be no overlap of personnel between the investment banking and corporate finance areas of a brokerage firm and the sales and research departments or between a bank’s commercial lending department and its trust and research departments. ‘APPOINTMENT OF A SUPERVISOR OR COMPLIANCE OFFICER A single supervisor or compliance officer should have the specific authority and responsibility of deciding whether information is material and whether it is Recommended | sufficiently public to be used as the basis for investment decisions. Procedures PERSONAL TRADING LIMITATIONS 1. Firms should consider restrictions or prohibitions on personal trading by employees and should carefully monitor both proprietary trading and personal trading by employees. 2. Firms should require employees to make periodic reports of their own transactions and transactions made for the benefit of family members. 3. Securities should be placed on a restricted list when a firm has or may have material nonpublic information. PROHIBITION OF ALL ACTIVITY IS NOT APPROPRIATE A prohibition on all types of proprietary activity when a firm comes into possession of material nonpublic information is not appropriate. You can enroll for this course by calling us/ messaging us on: +91 9903721140 (Edutors, India)CFA Level 1 By Gourav Kabra CASES BASED ON STANDARD II(A} Case Study #2 ACTING ON NON-PUBIC INFORMATION The president and controlling shareholder of a clothing chain, decides to accept a tender offer and sell the family business at a price almost double the market price of its shares. He describes this decision to his brother who tells his stockbroker. The stockbroker immediately buys the company’s stocks for himself ‘What's your say? President's brother has caused his broker to act of the material non-public information, while broker hhas acted on that. Both of them have violated Standard iN). ‘Case Study #2 FAILURE TO CONTROL MISUSE OF NON-PUBLIC INFORMATION An analyst was attending a video conferencing with the CEO of a listed company who addresses that the company’s quarterly earnings have dropped. This information was over-heard by the analyst's sales team who trade the stock of the company on behalf of the firm’s clients. What's your say’ The analyst has violated Standard |I(A) because he failed to prevent the transfer and misuse of material nonpublic information to others in his firm, The salespeople who traded on the information have also violated Standard II(A) by trading on inside information Case Study #3 SELECTIVE DISCLOSURE IS NOT PUBLIC DISCLOSURE ‘An analyst changes the rating of the company on the basis of material non-public information obtained during a group meeting (with 10 more analysts) with its management. ‘What's vour sav? According to Standard II(A), if the company has not made this information public (a small group forum does not qualify as a method of public dissemination), she cannot use the information, Case Study 44 IMMATERIALITY BECAUSE OF UNREALIABLE SOURCE OF INFORMATION Based on industry trends, an analyst thinks that ABC Inc. could be a takeover target soon. After talking to various investment professionals and checking their opinions on the company as well as checking industry trends, the analyst decides the next day to accumulate more stock of ABC inc. What's your say? Since the source of information is unreliable, so the information cannot be considered material. Therefore, the analyst is not prohibited from trading the stock on the basis of this information. Case Study #5 MOSAIC THEORY Based on the market's study, an analyst thinks that 2 company is going to lose its market share, Based on this information and on a profit-and-loss analysis, the analyst believes that company’s next quarter earnings will drop substantially, He issues a sell recommendation immediately. What's your say? You can enroll for this course by calling us/ messaging us on: +91 9903721140 (Edutors, India)édutors R3 - Guidance for Standards I-VII eecasan eee Information on quarterly earnings data is material and nonpublic. The analyst arrived at his conclusion about the earnings drop on the basis of public information and on pieces of nonmaterial nonpublic information (such as the market study). Therefore, no violation has occurred. Case Study #6 ACTING ON NON-PUBLIC INFORMATION ‘An analyst is in a conversation about the economy and the banking industry on the golf course with the senior executive of a bank. The senior executive relays the information that the bank will surprise the investment community in a few days when it announces excellent earnings for the quarter. The analyst believes that the executive has not actually disclosed an inside information. Hence, he doubles his position in the bank. What's your say? It is the member's or candidate's responsibility to make sure, before executing investment actions, that comments about earnings are not material nonpublic information. The analyst has violated Standard li(A). ‘Case Study #7, RUMORED MESSAGES A trader for a mutual fund, gets a text message from another firm’s trader, whom he has known for years. The message indicates a software company is going to report strong earnings when the firm publicly announces in two days. The trader places his orders based on the message. ‘What's vour sav? There are often rumors and whisper numbers before a release of any kind. The text message from the other trader would most likely be considered market noise. Acting on the basis of the message is not aviolation. Case Study #8 PASSING ON MATERIAL INFORMATION ‘An analyst arranged a meeting with the head scientist of a technology company, The scientist indicates his disappointment with the performance of their new product. The analyst relays the insights he received to others at the fund, The fund sells its current position in the company. What's vour say? The analyst has violated Standard lI(A) by passing along material nonpublic information concerning the ongoing product tests, which the fund used to trade in the securities and options of the related company. You can enroll for this course by calling us/ messaging us on: +91 9903721140 (Edutors, India)& R3-Gi dut FS lance for Standards 1-VII STANDARD = II INTEGRITY OF CAPITAL MARKETS iI(6) | MARKET MANIPULATION Members and Candidates must not engage in practices that distort prices or The Standard |. ficialy inflate trading volume with the intent to mislead market participants. MEANING OF MARKET MANIPULATION Market manipulation includes practices that distort security prices or trading volume with the intent to deceive people or entities that rely on information in the market Market manipulation includes (1) the dissemination of false or misleading information and (2) transactions that deceive or would be likely to mislead market participants by distorting the price-setting mechanism of financial instruments, PUMPING UP & DUMPING Members and candidates must refrain from “pumping up” the price of an investment by issuing misleading positive information only to later “dump” the investment (ie., sel it) once the price, fueled by the misleading information's effect on other market participants, reaches an artificially high level KNOWINGLY INCLUDES “SHOULD HAVE KNOWN” Transaction-based manipulation involves instances where a member or candidate knew or should have known that his or her actions could affect the pricing of a security. LEGITIMATE TRADING STRATEGIES ARE OKAY! Standard II(B).is not intended to preclude transactions undertaken on legitimate trading strategies based on perceived market inefficiencies. Guidance You can enroll for this course by calling us/ messaging us on: +91 9903721140 (Edutors, India)xy dutors se centevett Evolve, Ech & Empower By Gourav Kabra CASES BASED ON STANDARD 11(B} Case Study #1 INACCURATE/PROMOTIONAL/SPECULATIVE RECOMMENDATIONS ‘An analyst made recommendations containing inaccurate and highly promotional and speculative statements which led to dramatically higher stock prices. What's your say? The analyst violated Standard 1i(B) by using inaccurate reporting and misleading information to artificially increase the stock price of the companies. Case Study #2 BUYING & SELLING THROUGH MULTIPLE ACCOUNTS TO RAISE VOLUME ‘An investor with a large concentrated position in an illiquid stock begins to buy and sell the stock using multiple accounts in hopes of raising the trading volume and the price. He also creates a rumor campaign on various blogs and social media outlets promoting the company. He conducts the trades through multiple brokers, selling slightly larger positions than he bought on a tactical schedule, and over time, he is able to reduce his holding as desired without negatively affecting the sale price. What's your say’ The investor violated Standard II(8) by fraudulently creating the appearance that there was a greater investor interest in the stock through the online rumors. Additionally, through his trading strategy, he created the appearance that there was greater liquidity in the stock than actually existed. He was able to manipulate the price through both misinformation and trading practices. Case Study #3 TIMING THE RELEASE OF A RESEARCH REPORT ‘An analyst times the release of his research report specifically to sensationalize the negative aspects of the message in order to create significant downward pressure on a stock. What's your say? The analyst violated Standard 1(B) by aiming to create artificial price volatility designed to have a material impact on the price of an issuer's stock. Case Study #4 LIQUIDITY PUMPING STRATEGY IS ALLOWED IF DISCLOSED A Futures Exchange is launching @ new bond futures contract. To convince investors, traders, arbitrageurs, hedgers, and so on, to use its contract, the exchange attempts to demonstrate that it has the best liquidity. To do so, it enters into agreements with members in which they commit to a substantial minimum trading volume on the new contract over @ specific period in exchange for substantial reductions of their regular commissions. What's your say? If the Futures Exchange fully discloses its agreement with members to boost transactions over some initial eunch period, it will not violate Standard iN(B). Exchnage’s intent is not to harm investors but, on the contrary, to give them a better service. For that purpose, it may engage in a liquidity-pumping strategy, but the strategy must be disclosed. You can enroll for this course by calling us/ messaging us on: +91 9903721140 (Edutors, India)Xx R3 — Guidance for Standards I-VIl Edutors Evoke, Eich & Empower Case Study #5 SPREADING RUMORS In an effort to pump up the price of his holdings in a stock, an investor logs on to several investor chat rooms on the internet to start rumors that the company is about to expand its network in anticipation of receiving a large contract. What's vour say? The investor has violated Standard II(B) by disseminating false information with the intent to mislead market participants, ‘Gase Study #6 MANIPULATING MODEL INPUTS ‘An analyst’s compensation at a rating agency is partially based on both the level of the rating assigned and the successful sale of new structured investment products but does not have a link to the long- term performance of the instruments, To achieve the best rating possible, the analyst uses mostly positive scenarios as model inputs— scenarios that reflect minimal downside risk in the assets. What's vour say? The analyst manipulates the inputs of a model to minimize associated risk to achieve higher ratings. This information manipulation for short-term gain, which is in violation of Standard II(B), may cause significant damage to many parties and the capital markets as a whole. Case Study #7 SPREADING RUMORS UNDER THE MANAGER'S NAME To incite a potential regulatory review of his manager, @ senior analyst creates user profiles on several online forums under the portfolio manager's name and starts rumors about potential mergers for several of the smaller companies in the portfolio. As the prices of these companies’ stocks increase, the portfolio manager sells the position, which leads to an investigation by the regulator as he desired. What's your say’ ‘The analyst has violated Standard II(B) even though he did not personally profit from the market's reaction to the rumor. In posting the false information, the analyst misleads others into believing the companies were likely to be acquired. Although his intent was to create trouble for the portfolio ‘manager, his actions clearly manipulated the factual information that was available to the market. You can enroll for this course by calling us/ messaging us on: +91 9903721140 (Edutors, India)