cfaedu

A stockbroker who is a member of CFA Institute has a part-time housekeeper who also works for the CEO of Festival, Inc. One day the housekeeper mentions to the broker that she saw the CEO of Festival having a conversation at his home with John Tater, who is a nationally known corporate lawyer and consultant. The stockbroker is restricted from trading on this information:

A) only if the broker knows that the meeting is non-public information.

B) if the broker is friends with the CEO of Festival.

C) for all of the reasons listed here.

D) if the housekeeper says the meeting concerned a tender offer and the broker knows that it is non-public information.

---

Answer and Explanation

Standard II(A), Material Nonpublic Information, states a member cannot trade or cause others to trade in a security while the member possesses material nonpublic information A tender offer would certainly be material nonpublic information. Knowing that the meeting took place, and nothing else, does not restrict the broker. A reasonable investor would need to know more to determine if the information was material. Certainly being friends with the CEO is not an issue, so the answer all of the reasons is not correct.

cfaedu

Don Benjamin, CFA, is the compliance officer for a large brokerage firm. He wants to prevent the communication of material nonpublic information and other sensitive information from his firms investment banking and corporate finance departments to its sales and research departments. The most common and widespread approach that Benjamin can use to prevent insider trading by employees is the:

A) Wall Street Rule.

B) legal list.

C) fire wall.

D) mosaic approach.

---

Answer and Explanation

To comply with Standard II(A), a fire wall provides an information barrier that prevents communication of material nonpublic information and other sensitive information from one department to another within a firm.

cfaedu

Which one of the following least accurately describes the CFA Institute Standard about using material nonpublic information?

A) An analyst may not use material nonpublic information secured from sources that misappropriated the information.

B) An analyst may use material nonpublic information as long as it has been developed under the Mosaic Theory.

C) An analyst may violate this Standard by passing information to others even when it has been obtained from outside the company.

D) An analyst using material nonpublic information may be fined by CFA Institute.

---

Answer and Explanation

Members may not use material nonpublic information for trading purposes unless, the information was developed under the Mosaic Theory. There is no provision for CFA Institute to issue fines to members.

cfaedu

A CFO who is a CFA Institute member is careful to make his press releasessome of them containing material and previously undisclosed informationclear and understandable to his readers. While writing a new release, he often has his current intern proofread rough drafts. He also sends electronic copies to his brother, an English teacher, to get suggestions concerning style and grammar. With respect to Standard II(A), Material Nonpublic Information, the CFO is:

A) not in violation of the Standard.

B) only in violation by showing the pre-release version to the intern but not to a relative such as his brother.

C) violating the standard by either showing the pre-release version to his intern or sending it to his brother.

D) only in violation by e-mailing the pre-release version to his brother but not the intern, because the intern is in essence an employee of the firm.

---

Answer and Explanation

Standard II(A), Material Nonpublic Information, says that a member must be careful about handling material non-public information. As a member of CFA Institute, the CFO must limit the people who see important information before it is released. It would not be appropriate to involve an intern or a relative in the process.

cfaedu

According to CFA Institute Standards of Professional Conduct, which of the following statements about material nonpublic information is FALSE? Information is:

A) nonpublic until it has been disseminated to the marketplace in general.

B) material if its disclosure would be likely to have an impact on the price of a security.

C) nonpublic until it has been disseminated to a select group of investors.

D) material if reasonable investors would want to know the information before making an investment decision.

---

Answer and Explanation

Standard II(A), Material Nonpublic Information, states that information is nonpublic until it has been disseminated to the marketplace in general as opposed to a select group of investors.