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CFA Level I · CFA Level I Exam · Guidance for Standard II: Integrity of Capital Markets

An analyst studies a retailer by combining public filings, supplier interviews, and observations of customer traffic at stores. She concludes that the retailer's quarterly sales will exceed consensus, a conclusion that would have been material had the company disclosed it directly. Under the mosaic theory, her best course of action is to:

She may act on her conclusion and should document all her research. The mosaic theory lets analysts use conclusions from public and nonmaterial nonpublic information even if the same conclusion would be material if given by the company, and documentation supports that she used appropriate methods.

  1. Adelay any recommendation until the company confirms her conclusion publicly
  2. Bact on her conclusion and keep documentation of all her researchCorrect
  3. Cavoid acting because the conclusion would have been material if disclosed by the company

Explanation

Under the mosaic theory, analysts may act on conclusions drawn from public and nonmaterial nonpublic information, even if those conclusions would have been material had the company communicated them directly. The guidance advises saving and documenting all research to support that her conclusions came from appropriate methods.

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