CFA Practice Question

There are 361 practice questions for this study session.

CFA Practice Question

Mr. A hears from the wife of the CEO of Company Q that they are about to fire the CFO. Mr. A immediately sells his shares in Company Q. Has Mr. A violated the standard?
Correct Answer: Mr. A has violated the standard. This information is material and non-public.

User Contributed Comments 15

User Comment
0is4eva The CFA Institute material, in example 5 p. 39 of 2006 year's material, has a similar example (abbreviated here):

"Mr N & wife volunteer in a charity org. N:s wife receives a call from Mr V's wife, another volunteer couple, asking Mr N & wife to fill in for them as the CFO has just been fired in the company where Mr V is CEO. Mr N determines this is material and nonpublic and sells his holding in Mr V's company."

CFA Institute's comment: "Because the information is material and nonpublic, Mr N has violated standard II(A) by trading on this information.".
ggupta But is Mr. A a simple guy like us, who could possible use the nformation from the sources. I am confused. Please clarify
Dudum Am confused too, because how was Mr A to know that the material is non-public?
endeca It is non-public: you should always check the source of the information when doing investment analysis. Obviously this is from a non-public source.
Laurier Reliability of source plays a role as well. While gossip may be non-public, its materiality is not certain.
mrushdi The source or relative reliability of the information determines materiality. The less reliable a source, the less likely the information provided would be considered material. Here the source is highly reliable so the information is material.
bundy It not a matter of whether Mr A knew or not..its just simply that the standard was violated
niemeljason I'm also confused !!! Is Mr A an ordinary guy or a CFA member/candidate ? because if he is an ordinary guy (The question doesn't state that he is not !) how on earth will he violate the CFAI standards?
I am of the opinion that the question gave us all the infos and based on that the answer is: "Mr A did not violate......"
rhardin niemeljason, ALWAYS assume that these ethics questions are talking about CFA members/candidates. Whether Mr. A is a CFA charterholder or not, it does not change whether or not the standards were violated.
jorgeman81 rhardin I see your point but I am not so sure. Maybe it's just that this question is tricky but all these questions usually start with "John Doe, CFA..." so if this time it is only "Mr X" I don't know why we should assume it is talking about a CFA members/candidate. Regarding your statement about it doesn't matter wheter MR X is a CFA I disagree with that. In my view it's quite ridiculous to say you are violating a standard you don't need even to comply with (I mean in the case Mr X is not a CFA member/candidate) I can not imagine the rabbi of the synagogue in my neighbourhood blaming me for not complaying with the Torah when I am not even a jew.
johntan1979 Look guys... it's not that hard. Examine the source... People like CEO's wife should always be the number one suspect of nonpublic info.
Yrazzaq88 It's obvious that it's material "non-public" information because it clearly says "They are ABOUT to fire the CEO " and therefore haven't disclosed it to the public yet. It's material because obviously the share price would be effected.
raffrobb Straight forward...material and non-public. He violated the standard whether or not he is a CFA, which is what the question asks. Slightly tricky and thought provoking.
Inaganti6 "ALWAYS ASSUME the ethics section is asking about CFA candidate or a member"

I guess you're right. If they weren't, then why the heck would the question even be relevant and why would it even be on the test ?
degosan9 Insider trading isn't okay, even if you're just a regular guy. Making trades based on knowledge of a C-level ousting before it is made public is material and, well, non-public. This isn't your bartender saying he heard a rumor. Its the CEO's wife.
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