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According to Standard II(A), prohibition against the use of material nonpublic information, which of the following statements is least accurate? Members who possess material nonpublic information related to the value of a security are expected to:

A) not trade on the information.

B) not trade on the information unless it was arrived at through the "mosaic theory."

C) make reasonable efforts to insure the information's accuracy before recommending that others trade on the information.

D) make reasonable efforts to achieve public dissemination of the information.

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Answer and Explanation

Standard II(A), regarding material nonpublic information, prohibits those possessing material nonpublic information from trading or causing others to trade on that information. Members or candidates should make reasonable efforts to make sure the information is disseminated to the public. Trading based on the mosaic theory is acceptable because this is based on the analysis of public and nonmaterial nonpublic information.

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Insider trading can be defined as information that is:

A) nonmaterial and nonpublic.

B) material and nonpublic.

C) material and public.

D) nonmaterial and public.

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Answer and Explanation

Information is material if it would be important to the investor in their investment making decision. Information is nonpublic if it is not yet available to the public.

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Regarding non-public information, which one of the following statements is FALSE?

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

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

C) Information that has been disseminated to a few select individuals is still non-public.

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

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Answer and Explanation

All of these are true except that a member can be suspended for having received material non-public information. The member can receive such information as part of their regular duties or by accident. Neither is punishable in and of itself, and penalties only apply if the member trades or causes others to trade on the information. The member may have certain duties, such as trying to disseminate the information after receiving it. An analyst may use nonmaterial non-public information.

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

C) must divest one of the departments.

D) must liquidate the stocks of companies for which the brokerage has material non-public information.

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Answer and Explanation

Restricting employee trading in stocks for which the firm has material non-public information is the best answer. Recording the exchange of information between the two departments is not the best option because there should be no exchange of information between these two departments. The other two answers, divesting a department or liquidating stocks of clients, are not suitable methods for addressing this potential problem.

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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) should urge the drug firm to make public dissemination of the information immediately.

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

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

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Answer and Explanation

Members who can piece together items of nonmaterial nonpublic information with public information can, based upon the mosaic theory, use such information for trading purposes.