1215

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.

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There is no provision for CFA Institute to issue fines to members. Members may not use material nonpublic information for trading purposes. Nonmaterial, nonpublic information may be used together with analysis of public information under the Mosaic Theory.

1215

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.

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The mosaic theory permits an analyst to make recommendations based upon several pieces of public or nonmaterial information, even though the complied result is both material and nonpublic.

1215

Insider trading can be defined as information that is:

A) material and public.

B) material and nonpublic.

C) nonmaterial and nonpublic.

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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.

1215

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.

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This deductive reasoning is legal (does not constitute trading with inside information) and is called the mosaic theory.

1215

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.

Fritz Fox, CFA, maintains and updates the WizeGuy site and has learned how to determine if the quotes being attributed to Gerber are actually valid. Several days later, he observes an investment recommendation, posted on the site, to buy Gresham, Inc. The investment recommendation is purported to be from Gerber, but Fox actually knows it to be bogus. He immediately sells 1,000 Gresham short and e-mails Gerber to inform him of the bogus recommendation. Gerber immediately issues a rebuttal, and Gresham falls by 14%. Fox's action is:

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.

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Even though the information is false, this fact is known only to Fox and is thus nonpublic information. Since such recommendations have in the past had a significant affect on the price of the security in question, the information is clearly material. Fox is in violation of Standard II(A) Material Nonpublic Information.

1215

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.

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According to Standard II(A), Material Nonpublic Information, an analyst is prohibited from trading on information that is both material and nonpublic.