Betsy Fox is an investment advisor who has a client, Don Gordon, who is an employment lawyer. At lunch, Fox noticed Gordon and the Chief Financial Officer of Blue Star Company at the next table. She overhears them talking and ascertains that Blue Star is about to announce higher than expected earnings. Before the earnings release, Gordon contacts Fox and asks her to purchase 3,000 shares for his portfolio. Fox: A) must refuse to purchase shares for Gordon. B) can only purchase shares for her personal account after informing all of her clients about the potential of the increase in earnings. C) can purchase shares for Gordon, but cannot ever purchase shares for her personal account. D) must wait until after she purchases the 3,000 shares for Gordon to purchase shares for her personal account, and then must keep the information quiet.
is the ans A?
yes its A. but, client (gordon in this case) requested her to purchase the stock. Just because she overheard the discussion, means she won’t buy. What if some other client (not gordon) asked her to purchase the stock ? will she still refuse to buy ?
it’s clearly A. Read: Standard IIa)
So Betsy should tell Gordon :" I saw you talking to that snazzy Blue Star CFO and i won’t put your trade through, since you are trying to undermine the foundations of capital markets!"
How does Betsy know that Gordon wants to act on inside information? He might have already made the decision to buy the stock before talking to the CFO. Also, He could just go to another broker and have him do the order, so Betsy isn’t really doing any favors for the integrity of capital markets anyway. I like the “Wall Street” references. Makes the time studying go by quicker. Allen Resources does this kind of thing a lot.
Even if he had already made the decision prior, once he gets a hold of inside info that even simply reinforces his good opinion of a stock, I believe it’ll still be considered inside trading. Also, regardless of whether Gordon can go to other advisors to put through the trade, Fox still has an obligation to uphold capital market integrity as much as she can - just because the “crime” can still somehow be committed doesn’t mean Fox has to acquiesce and help Gordon commit it.
I think this was a question during my Series 7 continuing education a few weeks ago.
Now makes sense, thanks Jamms.
Thanks Jamms, dreary and others. Jamms- I liked your explaination better than Qbank explaination for this question
Can he refuse to do it? I think he can advise not to do it, but no where is it said that he can refuse it? He can advise, this is not someone in the firm doing it - its his client… ?