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FRM Part I · FRM Exam Part I · GARP Code of Conduct

A GARP member at a hedge fund is told by a colleague that a listed company will announce a major loss of a key contract tomorrow. The colleague obtained this from a friend at the company, and it is not public. The member's model, if rerun, would show a short position in that stock as attractive. Which action is most consistent with the GARP Code of Conduct?

The member should not use the information in any way and should escalate to compliance. The Code forbids acting on material nonpublic information, whether by personal trading, recommending trades, or adjusting fund exposure, so every alternative still exploits the inside information.

  1. ATrade the stock for the member's personal account only, since the fund is not involved
  2. BRecommend the short position to the fund but not trade personally
  3. CRefrain from using the information, avoid trading or recommending on it, and escalate to complianceCorrect
  4. DUse the information only to reduce the fund's existing long exposure

Explanation

The Code prohibits using material nonpublic information for personal or others' benefit and requires members to comply with laws and rules. Personal trading, recommending, or even de-risking on that information are all uses of it. The proper step is to not act and to involve compliance.

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