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Answer: Passive proprietary
## Explanation **Correct Answer: C (Passive proprietary)** **Analysis:** 1. **Material Nonpublic Information (MNPI) Context:** - Merchant Capital Partners has obtained material nonpublic information about Vital's planned reverse takeover. - Under CFA Institute Standards, particularly Standard II(A) - Material Nonpublic Information, firms must not trade or cause others to trade while in possession of MNPI. 2. **Types of Trading Activities:** - **Personal Trading (Option A):** Staff members' personal trading must be suspended when they have MNPI. This is clearly prohibited under Standard II(A). - **Risk Arbitrage Trading (Option B):** This involves trading based on anticipated corporate events (like mergers/takeovers). Since Merchant has MNPI about the reverse takeover, engaging in risk arbitrage would be trading on that information, which is prohibited. - **Passive Proprietary Trading (Option C):** This refers to market-making activities where the firm acts as a dealer, providing liquidity without taking directional bets. Market makers have some exemptions under certain regulatory frameworks to continue providing liquidity even when possessing MNPI, as long as they maintain normal course of business. 3. **Why Passive Proprietary Trading is Least Likely to Suspend:** - Market makers have a special role in maintaining market liquidity. - Regulatory frameworks often allow market makers to continue their market-making activities even when possessing MNPI, provided they: - Continue their normal course of business - Do not trade on the MNPI - Maintain their usual trading patterns - This exception recognizes that suspending all market-making activities could harm market liquidity and functioning. 4. **CFA Standards Application:** - Standard II(A) prohibits trading while in possession of MNPI. - However, there are limited exceptions for market-making activities. - Personal trading and risk arbitrage (which involves taking positions based on anticipated events) clearly violate the standard when done with MNPI. **Conclusion:** Merchant should suspend personal trading and risk arbitrage trading in Vital shares due to the MNPI about the reverse takeover. However, as a market maker, Merchant may be able to continue passive proprietary trading (market-making activities) in compliance with regulatory exceptions for maintaining market liquidity.
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Merchant Capital Partners, a regional investment bank, acts as a market maker for Vital Link Health Services and other small firms listed on an over-the-counter exchange. For those shares for whom Merchant acts as market maker, it trades for its own book as well as engaging in risk arbitrage trading. Merchant allows staff members to trade in shares once clients and the company have traded. Merchant recently obtained material nonpublic information regarding Vital's planned reverse takeover of a publicly listed competitor. In order to be in compliance with the CFA Institute Code and Standards, which type of trading in Vital shares should Merchant least likely suspend?
A
Personal
B
Risk arbitrage
C
Passive proprietary