- CFA Exams
- CFA Level I Exam
- Study Session 1. Ethical and Professional Standards
- Reading 3. Guidance for Standards I-VII
- Subject 5. Standard II (A) Material Nonpublic Information
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
|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.|