1. B. Market Manipulation
1.1. Guidance
1.1.1. PROHIBITS practices that distort prices/ artificially inflate trading volume (intent of misleading market participation)
1.1.1.1. Info-based manipulation: dissemination of false or misleading info to induce trading by others
1.1.1.2. Transaction - based manipulation Transactions deceive/likely mislead the market by distorting the price-setting mechanism
1.1.2. NOT PROHIBIT
1.1.2.1. Legitimate trading strategies: E.g. Hedge fund (their long-short position strategies)
1.1.2.2. Transactions for tax purposes
2. A. Material Nonpublic Information
2.1. Guidance
2.1.1. Prohibition on using MNI MUST NOT *Use MNI to directly sell/buy securities * Use MNI to influence investment activities related to derivatives mutual funds and other alternative investment * Use MNI to execute trading
2.1.1.1. Material infomation include:
2.1.1.1.1. *earnings *M&A, tender offer, joint venture * innovative products, process discoveries * new licences, patents, registered trademarks, regulatory approval/rejection of a product * developments of customers and suppliers * changes in management * changes in auditor notification * events regarding the issuers securities bankruptcies * significant legal disputes * government reports of economic trends * orders for large trade before they are executed * new changing equity or debt ratings
2.1.1.2. Non public information: is nonpublic until it has been disseminated to the general market. Information "selective disclosed" by corporation to a small group of investors analysts (disclose on a limited basis) -> may still be considered as Nonpublic information
2.1.2. Mosaic Theory: Public Info + Nonmaterial Nonpublic Information -> Investment conclusions => Fee to act without violations
2.2. Recommendation
2.2.1. * Adopt compliance procedure & policies preventing misuse of MNI * Communicate to all employees about the procedure and the policies.
2.2.1.1. Dissemination procedures
2.2.1.1.1. Achieve public information: * Make reasonable efforts to achieve public dissemination of material info * If not possible, MUST communicate the info only to the designated supervisory and compliance personnel within the firm and MUST NOT take investment actions/alter recommendation on the info * MUST NOT knowingly engage in conduct inducing the insiders to privately disclose MNI
2.2.1.1.2. Adopt disclose procedures to ensure proper dissemination
2.2.1.1.3. Issue press releases if MNI is disclosed for the 1st time in an analyst meeting/call.
2.2.1.2. Interdepartmental communication procedures
2.2.1.2.1. Firewall elements * Substantial control of relevant interdepartmental communication * Documentation of the procedures designed to limit the flow of info between departments
2.2.1.2.2. Physical seperation of departments * In a brokerage firm: Investment banking & corporate finance areas // Sales & research department * In a bank: Commercial lending department // Trust & research deparment
2.2.1.2.3. Prevention of personnel overlap
2.2.1.2.4. Record maintenance -> written records of communication between department
2.2.1.2.5. A reporting system: * Authorized people review & approve communication between departments * Process of "looking over the wall" in case sharing info is necessary
2.2.1.2.6. Trading procedures: * Review of employee trading through maintenance of " watch", "restricted", "rumor" lists * Review of restriction of proprietary trading while firm is in possession of MNI Exception: - Prohibition of ALL proprietary trading while firm is in possession of MNI may not be appropriate.