CFA Practice Question

There are 361 practice questions for this study session.

CFA Practice Question

Gaines, a financial analyst for Skinner Investment Counseling, is told by the investor relations representative for Firebird Avionics, a major aircraft manufacturer, that the firm is in the final stages of building a new fuel-efficient jet engine. This information is divulged by Firebird at the most recent quarterly conference call for analysts. In a research report, Gaines uses this information, along with other information he obtained from the company (distributed to the public), in a research report that includes a "buy" recommendation for Firebird stock. Which of the following statements is (are) true?

A. Gaines violated CFA Institute's Standards of Professional Conduct because he used material inside information.
B. Gaines violated CFA Institute's Standards of Professional Conduct because he has a material misrepresentation in his report.
C. Gaines' actions did not violate CFA Institute's Standards of Professional Conduct.
Correct Answer: C

User Contributed Comments 30

User Comment
kalps Conference for analysts - public, buy recommendation has evidence fto do so
mtcfa The info is not public, but the company in question never asked that this information be kept silent for any length of time. If he had done so, the analyst should reccomend to the investor relations manager that the information be released to the public as soon as possible.
DonDon The key here is the information he used was already distributed to the public. Therefore, Gaines did not violate.
Slothrop Why not A? The information about the engine could be considered material nonpublic information. It was divulged to a group of analysts which does not make the information public be itself. He makes recommendations based on that information.
valeris Agree with slothrop. It all depends whether info about engine is material or not.
surob I thought it was A, but looks like it is a tricky one. As valeris mentioned we don't know whether info about engine is material or not.
Khadria A is correct if information about the jet engine is considered 'material' (which I think it is). The answer is correct if this information is considered 'non-material'. Will it be specifically written if the information is MATERIAL or not?
huig key words should be "from the company distributed to the public"
sanyukta mtcfa is right, even i chose A. however the company didnot ask the info to be kept private, what does it expect analyst to do, sit and stew??
ggupta The question is "How to decide whether the building of new engine was a material or non material information.
dinozavr it was pubic information, because "is told by the investor relations representative for Firebird Avionics" - it was told by person who communicate with investors. A public person.
dblueroom when you do a conference call for all analysts, it's meant to be publicly disseminated.
dblueroom about this question - definitely from the time of conference call to a research report being written up, the materials covered in the call have been made public. It's not immediatedly after the conference call, the analyst acted on the information, in that case, it would have been a violation.
hocj Mosaic theory?

Conclusion was reached with other public information
CFunder one thing to consider is that usually when there is a quarter conference call for analysts to discuss quarterly financial information, a company releases information to the public prior to this call and calls are usually scripted in advance.
bantoo DonDon you are wrong. Divulging any information in analysts conference is not akin to public disclosure.
cfaajay it depends upon when did the last quarterly meet with analysts happened ,if it has happened quite a while ago or even a day ago ,then information will be public by now...... if the question would have said that gaines attended the analyst meet (where the information was released for the first time ) and consequently acted upon that ,then he would have violated CFA standard of acting on material non public information...
having said all t his..i recommend reading the question carefully and interpret what it says rather then adding your own assumptions to the question.
gill15 All that matters is he reached a conclusion about action through analysis of public material information and items of material non public information - exact definition of mosaic....its allowed...

seems kind of dumb though...if i got material non public information I would just go snoop around for some material public information so i dont violate the code.
geofin Mosaic theory refers to NON-material non-public information ...
geofin Here is from the official guidance:
"Members and candidates must be particularly aware of information that is selectively disclosed by corporations to a small group of investors, analysts, or other market participants. Information that is made available to analysts remains nonpublic until it is made available to investors in general. Corpora- tions that disclose information on a limited basis create the potential for insider-trading violations."

CFA Institute. Level I Volume 1 Ethical and Professional Standards and Quantitative Methods, 7th Edition. Pearson Learning Solutions.Page 50.
johntan1979 Have you guys thought about the BUY recommendation on the stock that is already existing even BEFORE Gaines wrote his research report?

This means that this information on the engine is no longer material. Stock already have a buy rating so having the additional info, even though is nonpublic, makes no difference. So no violation.
Shaan23 No idea where you got the buy recommendation before Gaines wrote his research projet
Shaan23 He's using Material Non public info along with public information.....thought mosaic had to do with non material non public with any type of public...
kumru plz check basic question number 10
Correct Answer: A.
The participants in the conference call would be viewed as a select group. The SEC expects that management will be careful not to disclose information, which has not been previously disseminated, to a select group. The Standards require that CFA Institute's members refrain from trading on information released to a select group before that information is more broadly disseminated.
raffrobb A clear application of Mosaic Theory. I found that not over-thinking the answers, assuming I adequately comprehended, provides the best answer. Actions seem very typical and prosaic for industry.
degosan9 Quarterly conference calls are public you guys. Has no one here dialed into one before? Then transcripts are released, generally with an audio playback, on the company's website. That's about as publicly available as it gets.
Mwito Assuming Firebird Avionics had FIREWALLS in place, then the information by the investor relations officer might be said to originate from a lesser reliable source and therefore it is nonmaterial
gerdvar The info was disseminated to the appropriate peer group to carry out their job, who after the conference, used additional public info to come up with their recommendation, ie mosaic theory. When you mix these different kind of info, it's mosaic as far as the nonmaterial nonpublic, material public or nonmaterial nonpublic DID influence the recommendation. If he had use solely the material nonpublic info to issue his response he would,ve violated II(A) and V(A)
Inaganti6 it says the info is distributed to the public.
b25331 Totally agree with degosan, the information is public.
Answer: C
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