The Investment Banking Department of MLB&J often receives material nonpublic information that could have considerable value to MLB&J’s brokerage clients. To protect itself and to conform to the Code of Ethics and Standards of Professional Conduct MLB&J should: A) Temporarily prohibit buy and sell recommendations on the securities during periods when the investment Banking Department has access to material nonpublic information. B) Carefully monitor the flow of information btw the investment Banking Department and the brokerage operation Which will you choose btw A) and B)? Why? The correct answer is A) Thanks!
I think the correct answer must be B given the information is non-public. I cannot really see how A is possible. IBD departments receive MNPI almost every day on companies and the recommendations are not prohibited at this stage. To do so would alert the market to the fact that there is MNPI. Instead, there is a reliance on information barriers/Chinese walls and it is assumed the research department are not exposed to the MNPI. The company is normally placed on a grey or watch list and the bank’s trading/sales/research/personal account dealing are monitored to ensure no flow of information (i.e. answer B). Once the transaction is public and IBD are mandated, it may be advisable to restrict recommendations as in answer A.
Actually looking at this again, maybe the point is that there is a public mandate and the company is on the “Restricted List” - in which case A may be possible. Not clear from the question
There should be no communication between investment Banking Department and the brokerage operation, period.
dreary is correct. Even though the IB department has material non-public information, if this info gets to brokerage they may be able to trade on on it which is a violation.
The two can and do talk about more general non-IBD related matters - and sales and research can provide a lot of non-specific background information about sectors / marketing without being exposed to any MNPI. Even in the US this is permitted (provided chaperoned by compliance). However, monitoring is needed to ensure no MNPI is being transferred. I may be mistaken - does it say anywhere in the CFA guidelines that IBD-brokerage communication is always strictly prohibited?
Dreary Wrote: ------------------------------------------------------- > There should be no communication between > investment Banking Department and the brokerage > operation, period. Only unsolicited orders from clients. No recomendations.
Snippets from the standards follow. I think that means they have to be as separated as possible. 1) Given the symbiotic relationship between research and investment banking, the traditional approach to building “firewalls” between these two functions must be managed to minimize resulting conflicts of interest. 2) As a practical matter, to the extent possible, firms should consider the physical separation of departments and files to prevent the communication of sensitive information. 3) There should be no overlap of personnel between such departments. A single supervisor or compliance officer should have the specific authority and responsibility to decide whether or not information is material and whether it is sufficiently public to be used as the basis for investment decisions. Ideally, the supervisor or compliance officer responsible for communicating information to a firm’s research or brokerage area would not be a member of that area. 4) For a fire wall to be effective in a multi-service firm, an employee can be allowed to be on only one side of the wall at any given time. Inside knowledge may not be limited to information about a specific offering or a current financial condition of the company. 5) If an employee behind a fire wall believes that he or she needs to share confidential information with someone on the other side of the wall, the employee should consult a designated compliance officer to determine whether sharing the information is necessary and how much information should be shared.
All of those points imply that no MNPI should be passed on but they do not rule out normal-course, non-deal related discussions between the two. There should be a separation between the two - otherwise it would be impossible to prevent the flow of sensitive information. So the important point is to monitor the flow of information to ensure it is not sensitive so that those on the public side, the brokerage ops, cannot be guilty of market abuse. There are also some instances ie. IPOs, 2ndry offerings, book builds, where it is necessary for IBD to work with sales in order to fill the book - but because it is a publicly announced transaction, there can be no market abuse. If communication between the two was totally prohibited, surely an IPO would be impossible?
ok, here is another one from the standards directly (problem 23). As I mentioned before, the standards are not always direct…you will see “best policy”, or “best practice”, etc. 23. The correct answer is b. The best policy to prevent violation of Standard II(A) – Material Nonpublic Information, is the establishment of “Fire Walls” within a firm to prevent exchange of insider information. The physical and informational barrier of a Fire Wall between the investment banking department and the brokerage operation prevents the investment banking department from providing information to analysts on the brokerage side who may be writing recommendations regarding a company stock. Prohibiting recommendations of the stock of companies that are clients of the investment banking department is an alternative, but answer a states that this prohibition would be permanent, which is not the best answer. Once an offering is complete and the material nonpublic information obtained by the investment banking department becomes public, resuming publishing recommendations on the stock is not a violation of the Code and Standards because the information of the investment banking department no longer gives the brokerage operation an advantage in writing the report.
Thanks all! I have found the explanation of the answer as below: "Standard V(A), Prohibition against Use of Material Nonpublic Information, applies in this situation. Standard V(A) suggest the use of “fire walls” to protect the firm and conform to the Standards. A fire wall is an information barrier designed to prevent the communication of material nonpublic information btw departments of a firm. In this situation, MLB should remove any controversial companies from the research universe and put them on a restricted list so that the firm disseminates only factual information about the company. A restricted list is one example of a “fire wall” The statement,“carefully monitor the flow of information btw the investment Banking Department and the brokerage operation” should read “…restrict the flow of information” I think it is a “word game” rather than a test of the understanding of Ethical Code.