By Teresa Gonzalez,2014-06-12 23:58
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Standards of Professional Conduct & Guidance: Integrity of Capital Markets ( Reading 2-II )

    ; Material Nonpublic Information. ( LOS A. )

    ; Market Manipulation. ( LOS B. )

    LOS A:

    The mosaic theory permits an analyst to make recommendations based upon several pieces of public or nonmaterial information, even though the complied result is both material and nonpublic.

    Information is material if it would be important to the investor in their investment making decision. Information is nonpublic if it is not yet available to the public.

    Members cannot trade on material nonpublic information until that same information is made public. It does not matter if the information was not misappropriated or not obtained through a breach of duty

    a fire wall provides an information barrier that prevents communication of material nonpublic information and other sensitive information from one department to another within a firm. An employee/employer relationship does not necessarily mean monetary compensation for services. Complying with the request is a violation of II(A) which prohibits trading on insider information. Standard IV(A) Loyalty deals with going into business for yourself, leaving an employer and continuing to act in the employer's best interest until their resignation becomes effective, and whistleblowing which means that the member's interests and their firm's interests are secondary to protecting the integrity of capital markets and the interests of the clients

    The information is clearly material, so Klatt is not permitted to trade on it. Klatt should make reasonable efforts to achieve public dissemination of the information by contacting management and encouraging them to make the information public. Klatt may not trade on the information until it is made public.

    The physical and information barrier erected between departments to prevent communication of material nonpublic information from one department to another is called a "firewall." Departments should be separated. For example, the investment banking and corporate finance departments of a brokerage firm should be segregated from the sales and research departments. Family member accounts who are also clients should be treated like any other client accounts and should not be given special treatment or disadvantaged.

    Standard II(A), Material Nonpublic Information, states “a member cannot trade or cause others to trade in a security while the member possesses material nonpublic information” A tender offer would certainly be material nonpublic information. Knowing that the meeting took place, and nothing else, does not restrict the broker. A reasonable investor would need to know more to determine if the information was material.

    Standard II(A), regarding material nonpublic information, prohibits those possessing material nonpublic information from trading or causing others to trade on that information. Members or candidates should make reasonable efforts to make sure the information is disseminated to the public. Trading based on the mosaic theory is acceptable because this is based on the analysis of public and nonmaterial nonpublic information.

    Standard II(A), Material Nonpublic Information, states that information is “nonpublic” until it has been disseminated to the marketplace in general as opposed to a select group of investors.

    An item of information is material if its disclosure would be likely to have an impact on the price of a security, or if reasonable investors would want to know the information before investing.

    Members who can piece together items of nonmaterial nonpublic information with public information can, based upon the mosaic theory, use such information for trading purposes.

    Material Nonpublic Information, says that a member must be careful about handling material non-public information. As a member of CFA Institute, the CFO must limit the people who see important information before it is released. It would not be appropriate to involve an intern or a relative in the process.

    Members and Candidates must not act or induce others to act on material nonpublic information.


    Market Manipulation. Transaction-based manipulation includes, but is not limited to, transactions that artificially distort prices or volume. Information-based manipulation includes, but is not limited to, spreading false rumors about a firm in order to induce others to trade.

    Market Manipulation, is not intended to prohibit transactions that are done in order to minimize income taxes or trading strategies that are not intended to distort prices or artificially inflate trading volume. Overstating earnings projections in order to increase the price of a stock is a direct violation.

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