Hey Guys, If one is in position of non-material, public information that has been compiled using the mosaic theory, does one have to make the finding public before one can trade? The CFA handbook states the following which is confusing: (Taken from chap 9 and 10 Ethics) In chapter 9 “To reach a conclusion about the value of the company, Clement has pieced together a number of nonmaterial or public bits of information that affects Turgot Chariots valuation.” continuing … In Chapter 10 “Clement’s opinions will have a strong influence on the stock’s behavior,” and prior to his announcements he tells a colleague about his findings, colleague then trades on this information and "has violated the standard IIA ? Why would this be…information was compiled under mosaic? Or has this information changed from being public-non material to being material -non public due to the analysts reasearch…and if so what incintive would there be to do in deepth reasearch on companys if your findings are going to be violating the standards? Thanks
Ch 9: Clement has used Mosaic theory to form his view. That’s fine. In Ch 10 it says “Clement’s opinions will have a strong influence on the stock’s behaviour”. This tells us his opinion (once released) is material information (by defn as it will have a strong opinion). It then says “prior to his announcements he tells a colleague about his findings, colleague then trades on this information”. This tells us the info is non-public (prior to the announcement). Therefore you have a breach by the colleague who traded on material non-public info. Clement may have breached by telling the colleague prior to releasing the info. Need more info to confirm this. The qn may also try to get you to pick that Clement or the colleague has violated by not having reasonable and adequate basis for his view point or. This is incorrect.
ok, so if i’ve understood correctly…A analysts concludes a analysis on a particular stock based on the mosaic theory, can he deal on this information, when well knowing that the information complided (if brought public would have an impact on the share overall share price)??
Can’t front run, no.
So he has to make his findings public before he can trade?
base on my understanding, he can act on the analysis since it’s not material nonpublic information, and as long as his act is ethical (away from conflict interest, fair trading, etc). He doesn’t need to make his finding public (read page 39. book 1 last paragraph of mosaic theory) hope this helps…
but then it contradicts question 10 of the cfa text. as mentioned above.
This whole scenario is not very clear. It’s mixing market manipulation with mosaic theory. One can use non material non public info to create an analyst report for clients. This is what a good analyst does. One may not use material nonpublic info. A collegue may not use an analyst report for their personal account prior to the release to clients, this is frontrunning as mentioned and violates fair dealings. After a reasonable amount of time after the report is sent to all clients (via fax/email/etc) the analyst and colleague may trade on their conclusions. The conflict of interest is not present here.
Roger Clement prepared the report using pieces of non-material information and made the report. The result of the report was information that had material impact. Before trading on the material information, Clement took steps to make the information public. For the purpose the interview he discussed the information with one of the journalist, even though she (Journalist) knew that information was material in nature, she went ahead and traded. Her action violated the ethics, not Clement’s actions.
Thanks DD2, that seems to clear things up.