CFA Level I · CFA Level I Exam · Guidance for Standard II: Integrity of Capital Markets
Mei, a buy-side analyst, visits a retailer's stores, talks to its suppliers and reads public filings. A supplier's employee then privately tells her the exact, unannounced quarterly earnings figure the retailer will report, which she recognizes as material and nonpublic and which comes from the company. Her most appropriate course of action is to:
Mei should refrain from trading or recommending based on the exact earnings figure and rely only on public and nonmaterial nonpublic inputs. The mosaic theory does not cover material nonpublic information, and mixing it with public data or documenting it does not make using it permissible.
- Ainclude the figure in her mosaic because other inputs were public
- Brefrain from trading or recommending on it, and rely only on her permitted inputsCorrect
- Ctrade after documenting the figure in her research file
Explanation
The mosaic theory protects conclusions drawn from public and nonmaterial nonpublic information. A specific material nonpublic earnings figure is not part of that protection, so acting on it would violate Standard II(A). Documentation or the presence of other public inputs does not cure it.
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