Ethics Quiz

Carter Pewterschmidt, CFA is the CEO of a boutique asset management firm, Shallow & Pedantic Capital, which follows the CFA Code of Ethics & Standards of Professional Conduct. One day, he is notified by an analyst, Peter Griffin, about a potential violation within Shallow & Pedantic’s market-making department. Griffin tells Pewterschmidt that Glen Quagmire, the head market maker, overheard a conversation in the ladies restroom between the CEO of Pawtucket Brewery and a managing director of the investment banking department of Shallow & Pedantic. The conversation was material and nonpublic, and Quagmire made the appropriate disclosures to his immediate supervisors and Chief Compliance Officer. Pewterschmidt calls both Griffin and Quagmire into his office to discuss whether the any violations of the code occurred. Quagmire: “Shallow & Pedantic should not entirely prohibit proprietary trading when in possession of material nonpublic information. Giggity.” Griffin: "The CFA Code of Ethics strictly prohibits trading activities, including proprietary trading, based on material nonpublic information. However, it is acceptable when non-material nonpublic information is acquired through the mosaic theory. According to the Code, who is right? 1) Both are incorrect. 2) Quagmire only. 3) Griffin only. 4) Both are correct.


B, not all proprietary trading is prohibited – market making activities can continue so long as contra side of trades is taken in a passive role

this sounds alot like an episode of family guy… I think youve done a good job of highlighting the gray area, according to CFAI code, i would imagine the answer is B…but tough to say

I think it’s A, the wording is a bit tricky here. You must stop all proprietary trading, but passively taking the other side of client orders is okay.

I’d go with 4 - what you need to do is carry on as before basically so if you were planning to trade based on reasons other than material nonpublic information, even for your own account, e.g. portfolio rebalancing etc you ok. strictly prohibits trading activities, including proprietary trading, based on material nonpublic information. Ok for trading activities, including proprietary trading, for other reasons.

D it is only a word trick doesn’t make sense

I thought multiple choice questions only had three answer choices


We are talking prop trading, not all trading. I think prop trading is prohibited w/ material non-public. If you have possession of material non-public and take the other side of a unsolicited trade, you are not in violation…but i would say such trading is not “based on materal non-public info”. So griffin is rght… I say 3

Page 55 of text. Answer should be B IMO.

great question B

You are correct. i didnt think of market making as prop trading but it is. Stopping market making could be a sign, so they should continue to make the market.

Answer is 2) Quagmire Only. btw. I made this question up from scratch. So I hope it’s the right answer. Haha!