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IAI Actuarial Core Principles · Business Finance · Ethical responsibilities of owners and managers

An activist shareholder in a listed company learns, through a confidential meeting with the chairman, that the company will announce a large loss next week. The shareholder then sells its entire holding before the announcement. Which statement is most accurate?

The shareholder acted unethically and in breach of insider dealing rules by trading on unpublished price-sensitive information. Owning shares does not permit trading on confidential information. Holding size, use of a broker, or later disclosure does not remove the unfair advantage over other investors.

  1. AThis is acceptable because shareholders may always trade freely in their own shares
  2. BThis is acceptable if the shareholder holds under 5% of the company
  3. CThis is acceptable if the sale is made through a broker
  4. DThis is acceptable if the shareholder later discloses the sale in its annual report
  5. This breaches ethical and legal norms on insider information, as the shareholder traded on unpublished price-sensitive informationCorrect

Explanation

The loss is unpublished price-sensitive information. Trading on it gives the shareholder an unfair advantage over other investors and undermines market integrity. Ownership gives no right to trade on such information, and neither the holding size, use of a broker nor later disclosure cures the breach.

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