Financial Conduct Authority (FCA) UK Regulation Sample Exam

What special defense is available to market makers against accusations of insider dealing?

1. They were acting in ignorance

2. They were following industry practice

3. They were acting in good faith

4. They had prior permission

The correct answer is: They were acting in good faith

Market makers have a special defense against accusations of insider dealing by demonstrating that they were acting in good faith. This defense is significant because it acknowledges the role of market makers in providing liquidity and facilitating trading within financial markets. In this context, good faith pertains to their intent to perform their functions and transactions without the intention of using non-public information to gain an unfair advantage. Good faith acts as a protective measure because it reinforces the expectation that market makers operate transparently and in accordance with regulatory standards, thereby fulfilling their obligations to the market. This is particularly relevant given their daily activities that may involve substantial volumes of trades, where the use of information is critical. By establishing that they were acting in good faith, market makers can counter claims of malpractice tied to insider dealing, thereby protecting their reputation and operations within the financial system. In contrast, the other options do not provide a robust legal defense in the context of insider dealing allegations. Ignorance does not absolve them from responsibility, following industry practice alone may not suffice to demonstrate compliance with regulatory standards, and while having prior permission could theoretically serve as a defense, it is not a universally applicable safeguard for market makers in the context of insider dealing accusations.