Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

Reasoning behind Standard II-B
As markets evolve, standards of conduct must evolve with them. The CFA Institute's role in promoting the need for integrity in publicly-traded capital markets has traditionally covered the use of material nonpublic information, but there are other ways to engage in unethical and unfair conduct.

Standard II-B is intended to cover two types of activities:

1. Transaction-Based Manipulation - This Standard is intended to prohibit activities designed to distort - for example, if an institutional investor with more than one account were to trade a micro-cap stock between two accounts with the sole intention of creating artificial volume and drawing attention to the stock. The capital markets have established a number of price-setting mechanisms that can be artificially distorted to create a perception that there is strength or weakness in a particular security, or a certain level of trading volume.

This Standard also covers those market participants who attempt to secure a "dominant" market position in a security and artificially inflate the price in an effort to benefit from a related (derivative) instrument.

2. Disseminating False Information - Some examples of this behavior include spreading false rumors that prompt others to buy or sell, or "pumping up" a price by issuing overly positive or optimistic projections, then "dumping" the stock once it has rallied. Another example would be if companies hired to promote a recently issued small-cap stock were to issue "independent research" that only served to promote that company. This scheme is also referred to as a "pump and dump" strategy.

How to Comply
Establish a compliance program that sets out rules of conduct for those engaged in market transactions, as well as a set of rules governing any activities that involve the distribution or promotion of information on a publicly-traded company.



Standard III-A: Loyalty, Prudence And Care

Related Articles
  1. Investing

    The Short and Distort: Stock Manipulation in a Bear Market

    High-quality stock reports needn't be confused with stock manipulators' dramatic claims.
  2. Investing

    Financial Statement Manipulation An Ever-Present Problem For Investors

    The SEC has taken steps to eliminate this type of corporate fraud, but it remains a real risk for investors.
  3. Financial Advisor

    Asset Manager Ethics: Rules Governing Capital Markets

    The integrity of the capital markets needs to be kept at utmost importance for all investors. This article shows how to maintain the integrity while investing.
  4. Investing

    How Financial Statements Are Manipulated

    Financial statement manipulation is an ongoing problem, and investors who buy stocks or bonds should be aware of its signs and implications.
  5. Investing

    How To Identify A Micro-Cap Scam

    Discover how to distinguish a real investment opportunity from a fraudulent one.
  6. Investing

    5 Reasons Why Currency Manipulation Matters for Average Investors

    Find out why the Treasury Department identified five potential offenders of currency manipulation, and see how this affects investors in the United States.
  7. Investing

    Quantitative Easing vs. Currency Manipulation

    In theory, quantitative easing and currency manipulation aren't the same thing, but it's much more difficult to tell one from the other in practice.
  8. Trading

    A Guide To Finding The Most Actively Traded Stocks

    Knowing the trading volume of a stock helps traders understand price movements and forecast future movements. This short guide helps investors locate actively traded data.
  9. Investing

    International Financial Reporting Standards (IFRS)

    International Financial Reporting Standards are accounting rules and guidelines governing the reporting of different types of accounting transactions.
Trading Center