CFA Level I · CFA Level I Exam · Code of Ethics and Standards of Professional Conduct
An analyst at an investment firm builds a detailed model from public filings, industry surveys and channel checks, and concludes that a retailer's earnings will fall well short of consensus. The conclusion is not yet widely known. Acting on this conclusion for clients is most likely:
Acting on the conclusion is permitted because of the mosaic theory: an analyst may combine public information and immaterial nonpublic information to reach a conclusion, even if it is not widely known. It is not material nonpublic information and is not market manipulation.
- Aa violation of Standard II(A), because the conclusion is not yet public
- Bpermitted, because the mosaic theory allows combining public and immaterial nonpublic informationCorrect
- Ca violation of Standard II(B), because it could move the share price
Explanation
Under the mosaic theory, an analyst may act on conclusions drawn from public information and immaterial nonpublic information. The conclusion is the analyst's own work product, not material nonpublic information from an insider. Trading on it does not distort prices with intent to mislead.
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