CME-1 Market Integrity & Insider Trading 1 — Questions and Answers
Question 1: What constitutes 'insider trading' under the Saudi Capital Market Law?
- Trading based on publicly available information
- Trading in securities based on material, non-public information obtained through a privileged position (Correct answer)
- Purchasing shares of a competitor
- Trading during market hours
Correct answer: Trading in securities based on material, non-public information obtained through a privileged position
Insider trading is the buying or selling of securities based on material, non-public information (MNPI) by persons who owe a duty of confidentiality to the company.
Question 2: Who qualifies as an 'insider' under CMA rules?
- Any shareholder
- Directors, senior executives, employees, and anyone with access to material non-public information due to their position (Correct answer)
- Only board members
- Foreign investors only
Correct answer: Directors, senior executives, employees, and anyone with access to material non-public information due to their position
Insiders include directors, executives, employees, advisors, and anyone who obtains MNPI because of their relationship with the company.
Question 3: What is 'tipping' in the context of insider trading regulations?
- Paying a broker commission
- Passing material non-public information to another person who then trades on it (Correct answer)
- Disclosing information to the CMA
- Publishing a research report
Correct answer: Passing material non-public information to another person who then trades on it
Tipping is the act of passing MNPI to a third party (tippee) who subsequently trades on the basis of that information; both the tipper and tippee may be liable.
Question 4: What penalties can the CMA impose for insider trading violations?
- Warning letter only
- Fines up to three times the profit made or loss avoided, disgorgement of profits, and referral for criminal prosecution (Correct answer)
- Only licence suspension
- Civil penalties only with no criminal element
Correct answer: Fines up to three times the profit made or loss avoided, disgorgement of profits, and referral for criminal prosecution
CMA penalties for insider trading include significant financial fines, disgorgement of all gains, trading bans, and referral to the Public Prosecution for criminal charges.
Question 5: What is 'front running' in securities markets?
- Placing orders ahead of market open
- A broker trading for its own account ahead of a large client order, profiting from the anticipated price movement (Correct answer)
- Submitting research before public release
- Speed trading by algorithms
Correct answer: A broker trading for its own account ahead of a large client order, profiting from the anticipated price movement
Front running occurs when a broker or trader executes trades in their own account ahead of a client's order they know will move the price, violating their duty to the client.
Question 6: What is the 'Chinese Wall' concept in a securities firm?
- A physical security barrier
- Information barriers between departments to prevent the flow of MNPI from advisory to trading divisions (Correct answer)
- A regulatory filing requirement
- A market surveillance tool
Correct answer: Information barriers between departments to prevent the flow of MNPI from advisory to trading divisions
Chinese Walls are internal information barriers that prevent MNPI from flowing between different departments (e.g., M&A advisory and trading) within the same firm.
CME-1 Market Integrity & Insider Trading 1
What constitutes 'insider trading' under the Saudi Capital Market Law?