Trading Ahead of Research Reports

A research report moves a price when it is published. The trading ahead of research reports rule attacks the window before publication, when the desk knows what the report will say, or simply when it will land, and the market does not.

What Does the Trading Ahead of Research Reports Rule Prohibit?

The rule names four inventory actions and no others. No member shall establish, increase, decrease or liquidate an inventory position in a security, or in a derivative of that security, based on non-public advance knowledge of the content or timing of a research report in that security.

Read the elements one at a time.

• The actor is the member. This prohibition is written against the firm alone, unlike the front-running, anti-intimidation and order-splitting rules, which name the member and the associated person.
• The act is any of four moves on an inventory position. Opening, adding, trimming and closing out are all named, so selling down ahead of a negative report is covered as squarely as buying ahead of a positive one.
• The instrument reaches past the stock. An inventory position in a derivative of the security sits inside the prohibition alongside a position in the security itself.
• The knowledge is content or timing. Advance knowledge of when the report will be issued is enough on its own.

Exam Tip: Gotchas

• The rule carries no customer element and no materiality element. A scenario needs no customer order and no materiality finding. A member's move in one of the four named ways, on an inventory position in a security or its derivative, made based on non-public advance knowledge of the content or timing of a research report in that security, completes the description.
• Timing alone is inside the prohibition. A trader who knows only the publication date, and nothing about the rating or the price target, still holds non-public advance knowledge of the timing of the report.
• Reducing a position is named as squarely as building one. Decrease and liquidate sit in the same list as establish and increase, so an answer that limits the rule to accumulation is reading only half of it.

What Information Barrier Must a Member Maintain?

A member must establish, maintain and enforce policies and procedures reasonably designed to restrict or limit the information flow between two named populations and trading department personnel.

The purpose clause states the aim: to prevent trading department personnel from utilizing non-public advance knowledge of the issuance or content of a research report for the benefit of the member or any other person.

Exam Tip: Gotchas

• The two paragraphs do not use the same pair of words. The prohibition turns on content or timing. The purpose clause of the barrier is worded issuance or content, while the persons inside the barrier are described with the content or timing pair.
• Restrict or limit is a disjunction and the standard is reasonably designed. The rule asks for no barrier that works in every case, but it does ask that the member establish, maintain and enforce policies and procedures reasonably designed to restrict or limit the flow, so a flow that happens to be limited is not compliance on its own.
• The benefit clause reaches a customer. The barrier exists to stop trading department personnel using the knowledge for the benefit of the member or any other person, and a customer is another person.
• Someone who knows only the publication date is inside the barrier. The second population is defined by knowledge of the content or timing, so a calendar clerk with no view of the text still belongs behind the wall.

Where Does the Definition of a Research Report Come From?

This rule uses the term research report and never defines it, and it carries no Supplementary Material below its two paragraphs. The definition a candidate needs comes from the research report definition rule, which the payments for publicity rule borrows for one of its exceptions. That definition, with its four exclusion branches, is taught in the lesson on payments involving publications that influence the market price of a security.

Exam Tip: Gotchas

• The rule stops at two paragraphs. There is no Supplementary Material here, so a scenario that turns on an interpretive item is describing a different rule.
• A separate rule bans trading ahead of a customer order. The trading ahead of customer orders rule, known on the desk as the Manning rule, is a distinct prohibition and is covered in the unit on identifying and avoiding prohibited practices with customer orders.

What Should You Check on Exam Day?

• Confirm the position moved in one of the four named ways: established, increased, decreased or liquidated. Any other verb is outside the prohibition as written.
• Check whether the trader knew the content or the timing. Timing alone satisfies the rule, so do not look for knowledge of the rating.
• Confirm the instrument. A derivative of the security is inside the rule, so a position in options on the stock counts.
• Do not add a customer or a materiality test to the prohibition; neither element appears in it.
• For the barrier, confirm the policies and procedures are established, maintained and enforced, and note that this rule asks only that they be reasonably designed.