Tonya Tucker, CFA, is a financial analyst at Bowron Consolidated. Bowron has numerous subsidiaries and is actively involved in mergers and acquisitions to expand its businesses. Tucker analyzes a number of companies, including Hanchin Corporation. When Tucker speaks with the CEO of Bowron, she indicates many of the companies she has looked at would be attractive acquisition targets for Bowron. After her discussion with the CEO, Tucker purchases 100,000 shares of Hanchin Corporation at $200 per share. Bowron does not have any pre-clearance procedures, so the next time she meets with the CEO, Tucker mentions she owns shares of Hanchin. The CEO thanks her for this information but does not ask for any details. Two weeks later, Tucker sees a company-wide email from the CEO announcing Bowron’s acquisition of Hanchin for $250 a share. In regard to her purchase of Hanchin stock, Tucker least likely violated the CFA Institute Standards of Professional Conduct concerning:
A. Loyalty. B. Priority of Transactions. C. Material Nonpublic Information.
Answer = C C is correct because there is no indication the analyst had access to material nonpublic information and was in violation of Standard II (A) Material Nonpublic Information. Specifically, Tucker did not have information concerning any decision by Bowron to acquire Hanchin stock because she is not a part of the decision-making team at Bowron, which determines the companies it plans to take over. The analyst had indicated numerous companies were viable options for take over, and she did not single out any one company in particular.
First, the fact that the company was on a list of companies considered for acquistion by Bowron is undisputably non-public information that may or may not be considered material. I would personally consider it material because it increases the liklihood that it will be the target of an acquisition.
More importantly, the question is worded as “least likely violated” implying that Tucker “more likely” violated either loyalty or priority of transactions. As far as priority of transactions, clients were not involved in this case. I suppose she should have given the company the right to “buy shares” (in this case acquire) before she did but as the answer to the question states, she did not know they were going to try to acquire the company.
Loyalty was my choice, as I see no loyalty issue with her purchasing shares of a company she is analyzing, unless the volume of her purchase was significant enough to affect prices. Although, even in that case I don’t see how there was a violation with regard to loyalty. I don’t see how answer A is wrong.
Am I missing something? I got to say, there are a few questions in the mock exam that I disagree with. Taking the time to post them all seems unfruitful but I really hope that the actual exam takes more care to prevent these sort of ambiguities.