Lynne Jennings is a research analyst for a large brokerage company following the chemical industry. While flying through Chicago, Jennings visited her sister who works in the airport hospitality center for an airline. Many meetings take place at the center on any given day. At the center Jennings saw several senior officers who she knows are from the largest and fourth largest chemical companies walk into a conference room. She concluded that negotiations for an acquisition might be taking place. She told her sister this, and her sister asked her not to disclose how she got the information. Jennings should: A) write a research report describing that she witnessed the senior officers together in the hospitality center, and must mention in the report that her sister is an employee of the center. B) not write a research report disclosing the meeting. C) write a research report mentioning the meeting but not disclose how she knew that the meeting occurred. D) write a research report describing that she witnessed the senior officers together in the hospitality center, but need not mention in the report that her sister is an employee of the center.
if I recall correctly, the answer to this question was B because this was material nonpublic information… I think the key was the fact that she saw the senior officers from the largest and fourth largest chemical comps walking into a conference room (so it makes this reliable cos she saw it), and since a meeting between the high ranking officers from the 2 comps at a place where meetings are often conducted can reasonably lead to beliefs that something drastic related to the 2 comps is being discussed, so this have the makings of material nonpublic information because it could affect the price of the associated comps stocks (even though she did not see them physically negotiating an acquisition deal, but the fact the high ranking officers met at a place where business is usually conducted, rather than a lunch gathering or social meeting, makes this information relevant and whether or not an acquisition deal was indeed discussed was not the most important and her conclusion was only included to throw you off), and mosaic theory doesn’t apply because this is material information on its own…
It’s B, but because she lacks a reasonable basis. Note that she didn’t overhear any of the conversation so her conclusion, while plausible, is mere speculation. The meeting she witnessed is not appropriate content for a research report. Note that if she had already researched the company and had a reasonable basis for recommending a “buy,” she’d still be able to recommend the stock under Mosaic Theory. Witnessing the meeting is non-public but it’s not material unless she overhears specific details or witnesses any other details that confirm her suspicion. CFAI doesn’t penalize you for being attentive and being able to recognize the senior executives of corporations.
if I remember correctly, this question came from schweser from the material nonpublic section, and they argued that this was material information however, I do agree you can reject it with V. A)
Thanks, guys! Great comments!