Lisa Pierce, CFA, has been researching Lander Manufacturing for the past three weeks. She likes the company’s history of fulfilling its contracts on time and within budget. She learns from the uncle of a maintenance worker at Lander’s headquarters that a group of well-dressed individuals arrived at headquarters in a lime green-colored limousine. Pierce knows from publicly available information that Gilbert Controls needs a large supply of specialized motors in its domestic division. She also knows that the executive officers of Gilbert usually travel in a lime green limousine. Pierce concludes that it is very likely that Gilbert will offer a large contract to Lander. Based on this development and her prior research Pierce would like to acquire Lander Manufacturing shares for her client accounts.

Pierce should:

A) proceed to acquire the shares.

B) not acquire the shares because she possesses material nonpublic information.

C) not acquire the shares until after she has contacted Lander's management and encouraged them to publicly announce information about the Gilbert Controls contract. She should also wait until Lander has made the announcement and the public has had time to react to it and then make the acquisition.

Klaus Gerber, CFA, is a regular contributor to the Internet site WizeGuy. This past week Gerber has been incorrectly quoted as recommending that investors buy shares in Bradford, Inc. He is unaware that this message has been placed on the site as the quote was placed as a prank by an unknown source. This is the third time this has happened over the past month.

A) a violation of the Standard concerning fiduciary duties.

B) a violation of the Standard concerning use of material nonpublic information.

C) not in violation of the Code and Standards.

While working on her report, Jean Paul, CFA, learns from her friend in the investment banking department that the company she is analyzing can expect a tender offer very soon. Concerning this conclusion, Paul can:

A) trade on it, because it is public information.

B) trade on it, because she figured it out by herself.

C) not trade on it because it is material nonpublic information.

The mosaic theory is the idea that an analyst can:

A) make investment recommendations on the basis of several pieces of nonpublic information as long as the aggregate information remains nonmaterial.

B) base his recommendations on nonpublic material information only for the clients of the company, but not for the general public.

C) make recommendations or trade based on several pieces of public or nonpublic information, each piece by itself being nonmaterial, but when compiled the information becomes material.

Insider trading can be defined as information that is:

A) material and public.

B) material and nonpublic.

C) nonmaterial and nonpublic.

An analyst is allowed to trade on information that he has predicted, such as a corporate action or event, using perceptive assembly and analysis of material public information or nonmaterial, non-public information. This is called the:

A) assessment theory.

B) deduction theory.

C) mosaic theory.

Which of the following statements concerning Standard II(A), Material Nonpublic Information, is CORRECT? A member:

A) can trade on material non-public information if the information was not obtained through a breach of duty.

B) can trade on material non-public information if the information has not been misappropriated.

C) cannot trade on material non-public information.

A CFO who is a CFA Institute member is careful to make his press releases—some of them containing material and previously undisclosed information—clear 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) violating the standard by either showing the pre-release version to his intern or sending it to his brother.

C) 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.

A stockbroker who is a CFA Institute member is called on the telephone by the CEO of a large company. The CEO asks to buy shares of the CEO’s company for the accounts of the CEO’s children. In the course of the conversation, the CEO says this will really pay off when the upcoming takeover goes through. The stockbroker checks her sources and finds no information about the takeover. In this case the broker should:

A) only execute the order in compliance with Standard III(A), Loyalty, Prudence, and Care. Since the client is buying the stock for the children, there is not a problem.

B) execute the order for all clients as required by Standard III(B), Fair Dealing.

C) do neither of the actions listed here.

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 firm’s 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.

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

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

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

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

A CFA Institute member is a U.S. citizen living and working in a foreign country. That country has no laws against insider trading. Based on this information, the CFA Institute member may:

A) not trade using insider information based upon the CFA Institute Standards.

B) trade using insider information.

C) not trade using insider information based upon the rules of the SEC.

An analyst provides services for a charitable organization and in return gets free membership in the organization. Part of her job is to manage the liquid assets of the organization, and those assets include stocks. Her supervisor in the organization calls her and tells her to buy a certain stock for the portfolio based upon insider information from a board member in the organization. The analyst objects, but the supervisor says this is what they have always done and sees no reason for changing now. The analyst complies with the request. With respect to Standards IV(A), Loyalty to Employer, and II(A), Material Nonpublic Information, the analyst violated:

A) both Standards IV(A) and II(A).

B) only Standard IV(A) requiring duty of loyalty.

C) only Standard II(A) that prohibits insider trading.

Which one of the following constitutes the illegal use of material nonpublic information?

A) Trading on information your sister, the firm's attorney, told you over dinner.

B) Trading based on your analytical review of the firm's future prospects.

C) Trading immediately after attending the firm's annual shareholders’ meeting.

Marion Klatt, CFA, is a representative for Thiel Financial Network. Klatt received a phone call at home from William Kind, a junior executive at Westtown Development Company, asking whether Klatt had heard that Westtown had just reached an agreement to acquire a major shopping mall chain at a very favorable price. (Klatt had not heard this news, and Klatt was able to confirm that the information had not yet been made public.) Kind requested that Klatt acquire 10,000 shares of Westtown for Kind’s personal account.

Klatt should:

A) not acquire the shares until he has contacted Westtown's management and encouraged them to publicly announce the merger discussion.

B) not acquire the shares.

C) not acquire the shares until the information is made public.

Regarding non-public information, which one of the following statements is NOT correct?

A) An analyst may use some types of non-public information.

B) Disclosing material non-public information would have an impact on the price of a security or be of interest to a reasonable investor.

C) A member can be summarily suspended for having received material non-public information.

The investment-banking department of the XYZ Brokerage House often has information that would be of significant use to the firm's brokerage clients. In order to conform to CFA Institute Standards of Professional Conduct, which of the following policies should XYZ adopt?

According to Standard:

A) III(B), Fair Dealing, all clients should be informed of the information at the same time.

B) II(A), Material Nonpublic Information, XYZ should encourage their investment banking clients to publicly disseminate this information.

C) II(A), Material Nonpublic Information, XYZ should establish physical and informational barriers within the firm to prevent the exchange of information between the investment banking and the brokerage operations.

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) for both of the reasons listed here.

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

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

A brokerage firm has a trading department and an investment-banking department. Often the investment-banking department receives material non-public information that would be valuable in advising the firm’s brokerage clients. In order to comply with the Standards, the firm:

A) should record the exchange of information between the investment-banking department and the brokerage department.

B) must divest one of the departments.

C) should restrict employee trading in securities for which the firm is in possession of material non-public information.

According to CFA Institute Standards of Professional Conduct, which of the following statements about material nonpublic information is NOT correct? Information is:

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

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

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

The term "material" in the phrase "material nonpublic information" refers to information that is likely to affect significantly the market price of the issuing company's securities or that:

A) is acquired by the financial analyst from a special or confidential relationship with the issuing company.

B) is likely to be considered important by reasonable investors in determining whether to trade a particular security.

C) is derived by the financial analyst from direct communication with an issuing company's management.

Andrea Waters is an investment analyst who has accumulated and analyzed several pieces of nonpublic information through her contacts with drug firms. Although no one piece of the information she collected is "material," Waters correctly concluded that the earnings of one of the drug companies would be unexpectedly high in the coming year. According to CFA Institute Standards of Professional Conduct, Waters:

A) cannot legally invest or make recommendations based on this information.

B) may use the information, but only after approval from a compliance officer or supervisor.

C) can use the information to make investment recommendations and decisions.

Which of the following statements regarding Standard II(A), Material, Nonpublic Information, is least accurate?

A) Material, non-public information regarding a tender offer may not be traded on.

B) If you receive the information in a public forum, it has been disseminated, and you can trade on it.

C) Information received from an insider who is not breaching his fiduciary responsibility may be traded on.

Trude Front, CFA, is a portfolio manager. While in the normal course of her duties, she happens to overhear material non-public information concerning the stock of VTT Bowser. She purchases several exchange traded funds which contain VTT Bowser, while shorting similar exchange traded funds which do not contain VTT Bowser. This is most likely:

A) not a violation of Standard II(A) "Material Non-Public Information."

B) only a violation of Standard II(A) "Material Non-Public Information" because Front is simultaneously shorting the funds which do not contain VTT Bowser.

C) a violation of Standard II(A) "Material Non-Public Information."