CFA Level I · CFA Level I Exam · Guidance for Standard II: Integrity of Capital Markets
A buy-side analyst concludes from interviews with retailers, designers and public financial reports that a furniture maker's next-quarter earnings will fall sharply, and issues a sell recommendation. Managers then reduce their holdings. The analyst's actions are most likely:
The actions are permitted. The analyst built his conclusion from public information and nonmaterial nonpublic items such as designers' and retailers' opinions, not from inside earnings data. Earnings being material and nonpublic does not create a violation, so trading on the correct conclusion is not prohibited by Standard II(A).
- Aa violation because quarterly earnings data are material and nonpublic
- Bpermitted because the conclusion rests on public and nonmaterial nonpublic informationCorrect
- Ca violation because the recommendation moved the market before the company announced earnings
Explanation
Although the company's quarterly earnings are material and nonpublic, the analyst did not obtain them from the company. He reached the conclusion from public information and nonmaterial nonpublic items such as opinions of designers and retailers. Trading on that conclusion is not prohibited by Standard II(A).
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