- CFA Exams
- CFA Level I Exam
- Topic 10. Ethical and Professional Standards
- Learning Module 71. Guidance for Standards I-VII
- Subject 5. Standard II (A) Material Nonpublic Information
CFA Practice Question
There are 356 practice questions for this topic.
CFA Practice Question
Olivia Hernandez's clients have substantial holdings of U.S. consumer goods manufacturer PXG Ltd. PXG has sales primarily in North America and Europe. Hernandez reviews research reports about the dollars and euro exchange rate; these mostly predict that the dollar will get more expensive, thus hurting PXG's exports to Europe. She speaks with representatives of PXG and visits PXG factories, where she meets production managers. Finally, she visits retailers, where she learns that over the last month many customers have expressed their dissatisfaction with PXG products. After reviewing her information, Hernandez sells her clients' PXG holdings.
A. Hernandez has violated Standard III (C) Suitability by having a substantial portion of her clients' wealth invested in PXG.
B. Hernandez has violated Standard II (A) Material Nonpublic Information by using information she received from PXG's representatives and production managers.
C. Hernandez has not violated the Standards.
Explanation: Hernandez has not violated the Standards by using the "mosaic theory."
User Contributed Comments 5
|JHumphrey22||could somebody describe the mosaic theory in more detail for me?|
|ChuongN||Mosaic theory is kinda like compiling a lot of data sometimes non-public, but in itself non-material. Once you compile that data you can make a judgement or investment decision. Though you have made an investment decision on non-public information you formed a picture or mosaic through tidbits of information rather than just one huge insider tip.|
|Inaganti6||So visiting a retailer to learn that customers of a publicly listed firm's end products are unhappy is NOT NONPUBLIC & MATERIAL ? ok... i hate this exam|
|hon132||Material is something that will affect their FSs significantly like an action the firm is planning on taking. Customers not liking a product is nonpublic but isn't material, probably fairly common for a consumer goods company.|
|dbedford||I think the further down the corporate ladder the "insider source" is the less material it is. What if she spoke to sales reps would anyone run out and buy or sell based on an interview with several sales reps? Granted these are store managers but a hand full of store managers isn't going to make everyone form a solid opinion. It could just be that region|