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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues

An investment adviser learns, through a client who is a company director, about an unannounced merger that will almost certainly lift the company's share price. The adviser buys the shares for his own account before the announcement. This conduct is best described as:

The conduct is unethical and violates insider trading norms. Information about an unannounced merger is unpublished price sensitive information, and using it for personal trading breaches both integrity and confidentiality duties. Whether the trade was for the client or personal, or how long the shares are held, does not make it acceptable.

  1. APermissible, because the adviser did not trade on behalf of the client
  2. BPermissible, if the adviser holds the shares for more than one year
  3. CAcceptable, provided the adviser informs the stock exchange afterwards
  4. DUnethical and a violation of insider trading norms, as it uses unpublished price sensitive informationCorrect

Explanation

Unannounced merger details are unpublished price sensitive information. Trading on such information for personal gain breaches insider trading regulations and the duty of confidentiality and integrity. The holding period or later reporting to the exchange does not cure the violation.

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