CFA Practice Question

CFA Practice Question

Dayon Grimley has been working as a tech sector analyst with an advisory firm for the past 3 years. Recently, he read an analytical report by Sam Swetson about trends and research developments in the computer chip industry. The report was an in-depth analysis of how the industry had developed, where it seemed to be headed, and what impact the developments could have on the growth of the entire industry. In a footnote, Sam had speculated about a secret, ultra-fast chip rumored to be under development by Chipcorn, Inc. Dayon decided to pursue this line of research and called up a highly placed official at Chipcorn. While the official did not confirm or deny the existence of the ultra-fast chip, he did reveal enough for Dayon to conclude that the development was, in fact, in the final stages and the chip could be out in the market in as little as 3 months. He quickly modified Sam's report, with a separate section on the super-chip, and recommended that his clients increase the weighting on tech stocks by 20%. The report made no mention of his interview with the Chipcorn official nor Sam Swetson's report. Dayon has violated ______.

I. Standard I (C) - Misrepresentation
II. Standard I (D) - Misconduct
III. Standard V (A) - Diligence and Reasonable Basis
IV. Standard II (A) - Material Nonpublic Information
A. II and IV
B. I and III
C. I and IV
Explanation: By not properly acknowledging Sam's report, Dayon violated Standard I (C) - Misrepresentation. Also, since the information about the super-chip was non-public and obviously material, Dayon violated Standard II (A) - Material Nonpublic Information.

User Contributed Comments 24

User Comment
Rguerra First I would say that the information was not misappropriated. In fact, facts were given to Dayon and he constructed his own recomendation. Second, he does not have any fiduciary duty towards the company. I would not mark C either.
lemec Tricky but whether the info was misappropriated is not the issue. The point is that he used nonpublic and material info in his report. Because the info is material, mosaic theory do not apply here.
shasha the tipper didn't breach the duty, 'coz no benefit involved, nor the info was misappropriated. Dayon made his own conclusion after his calling with Chipcorn, and the calling couldn't be treated as "confidencial". my believe: Dayon didn't violate choice II "use of material nonpublic info".
tomlinson34 I don't see how he can't confirm that the chip even EXISTS, but has material non-public info on it?
kamal3r I marked B. I dont see how he breached II A. Though the info was non public (debatable) and material, he did not misappropriate, or obtained it thru a breach of duty. Its not a tender offer. So he is not restricted to trade this info.
swift i think the call is confidential?
frcfa it's a very close call though i feel inclined to believe that a footnote in a research paper it's already "public" info. Hence I'd not mark I and IV.
JZino I chose B. This really comes obscenely close to mosaic theory. One could reasonably infer that Dayon came to his conclusion based on not-material revelations. I can see how 'C' is the other option.
orchid I choose A too. he didnt credited Sam's report after he modified it. and I thought that footnote on Sam's report is considered "public" already. If it is non-public, then Sam violated St II(A)too.
antony I chose B as well. Standard I is obviously violated; however, it didn't seem like he had a reasonable basis to recommend increasing weighting on "all tech stocks" based on this one supposed super chip. I didn't choose C because it does seem the mosaic theory applies and the call to the company didn't even confirm existence of the project in question.
Nightsurfer B makes the most sense. This guy's making things up when he concludes that the chip is near completion. Should have cited the call to the company though. Ideally I, III and IV.
surob ".....he did reveal enough for Dayon to conclude that the development was, in fact, in the final stages and the chip could be out in the market in as little as 3 months."
That is material non-public info. Dayon didn't conclude using mosaic theory. So, he violated
cahiz84 I chose B, he reached to his own opinion through a mosaic theory
Xocrevilo Material Nonpublic Information was revealed to him in his call to the company. Arguably this is not an issue unless someone trades on it (i.e. ups their tech sector weighting inline with his recommendation). Key point: do not simply insert information from a call to company management into your report unless you are sure it is public! As an analyst this will be an issue you face.
ousituo The material nonpublic info standard is "Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information". By publishing this material, nonpublic info in a report to clients, the standard was clearly violated.
u0302638 I disagree with Xocrevilo:
The info is not material and non-public. The officials at Chipcorn didnt confirm anything: black and white, the analyst based on his own judgement to conclude about the chip.

I dont think C is the correct choice.
Instead it should be B,
The release of the chip alone wont be sufficient for a Buy Recommendation, other factors like economics, market should be considered as well.
pepper wonder will it be a violation if you reveal a material information in your report, but did not trade on it?
MylesGrenier I didn't pick C because although the info is material and non-public, he came to the conclusion based on his own findings which he pieced together and was not told the chip was actually in progress. I agree with JZino that this is Mosaic Theory. Can someone explain why this is not Mosaic Theory?
cslau83 I put B too. Since it appeared that his conclusion was more of a hunch... which means it should be diligent and reasonable basis which he violates.
ninad123 You cannot conclude that chip is in final stages and will be out in 3 months using mosaic theory, "final stages, 3 Months" this is material non public info revealed and used in research paper
darin3200 how is this material non-public if he was told by the firm? mosaic theory definition, makes no sense
moneyguy A little tricky. I picked A. Misrepresentation is a form of misconduct, right?
ashish100 Here's where the money is at.

"he did reveal enough for Dayton to conclude that the chip was in final stages"

That's material info ladies and gentlemen. Case closed.

AN : 1 million
Candidates : 0
jstid40 I think the Material Non-public information portion of the question boils down to deciding was it more of "he (the highly placed official at Chipcorn) revealed enough" or more of "Dayon...concluded(ed)". It does not appear possible to me for the official to both "not confirm or deny the existence of the ultra fast chip" while at the same time giving enough information to Dayon to where he knows that the development is in the final stages and that it could be to market in 3 months. I therefore disagree that this was material non-public information and think Dayon either used other information (mosaic theory) or just guessed which would be why I chose B.
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