NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues
Ms. Kavita, a registered investment adviser, learns from a friend working at a listed company that the company will announce a large order win tomorrow, which is not public. She is advising a client, Mr. Sethi, on stock purchases. What should she do?
She should not act or advise on the basis of the information. It is unpublished price sensitive information, and using it, even only to advise a client, amounts to misuse and potential insider trading, which is unethical and unlawful.
- ARecommend the stock to Mr. Sethi but not buy it herself
- BNot act or advise on the basis of the unpublished price sensitive informationCorrect
- CBuy a small quantity for herself and recommend the stock to Mr. Sethi after the announcement
- DAdvise Mr. Sethi to buy and tell him the source of the information
Explanation
Information that is not public and likely to affect the price is unpublished price sensitive information. Using it for advice or trading is insider trading and violates ethical and regulatory standards. Recommending it to a client without trading herself still misuses the information, so the only correct action is to refrain.
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