Ethics and Standards - Standard II-B: Market Manipulation

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


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