NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues
Ms. Kavita Rao, an investment adviser, learns from a friend at a listed company that the firm will announce a major order loss tomorrow. She advises her clients holding the stock to sell today without disclosing the source. What is the most appropriate ethical assessment?
The conduct is unethical because the order-loss news is unpublished price sensitive information. Advising clients to trade on it is misuse of confidential information and may constitute insider trading, even if the adviser does not trade herself and means to protect clients from losses.
- AAcceptable, since she is protecting clients from loss
- BAcceptable, provided she does not trade for herself
- CUnethical, as acting on unpublished price sensitive information misuses confidential information and may amount to insider tradingCorrect
- DAcceptable if the clients' risk profile is conservative
Explanation
Information about an unannounced major order loss is unpublished price sensitive information. Advising clients to trade on it misuses it and can amount to insider trading, regardless of her own non-participation or the clients' benefit. Intent to protect clients does not make the use lawful or ethical.
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