Standard 2A - Material Non Public Information help!

I was reviewing the material under Standard 2A - Material Non Public Information and the example below confuses me.

I’m not sure why the comment in the CFAI text suggests that Tej is in violation of the standard. He has merely assumed that the next quarter results will drop - nothing has been confirmed or produced in this respect. Any ideas why they are regarding this as material non-public information.

Initially when I read the example I was expecting there to be no real issue with this approach.

Example 5 (Applying the Mosaic Theory):

Jagdish Teja is a buy-side analyst covering the furniture industry. Looking for an attractive company to recommend as a buy, he analyzes several furniture makers by studying
their financial reports and visiting their operations. He also talks to some designers
and retailers to find out which furniture styles are trendy and popular. Although none
of the companies that he analyzes are a clear buy, he discovers that one of them, Swan
Furniture Company (SFC), may be in financial trouble. SFC’s extravagant new designs
have been introduced at substantial cost. Even though these designs initially attracted
attention, the public is now buying more conservative furniture from other makers.
Based on this information and on a profit-and-loss analysis, Teja believes that SFC’s
next quarter earnings will drop substantially. He issues a sell recommendation for
SFC. Immediately after receiving that recommendation, investment managers start
reducing the SFC stock in their portfolios.


Information on quarterly earnings data is material and nonpublic. Teja arrived at his conclusion about the earnings drop on the basis of
public information and on pieces of nonmaterial nonpublic information
(such as opinions of designers and retailers). Therefore, trading based on
Teja’s correct conclusion is not prohibited by Standard II(A).

Doesn’t it say that it didn’t violate the standard? “Therefore, trading based on
Teja’s correct conclusion is not prohibited by Standard II(A).”

Looks like Mosaic theory (combination of public information and nonmaterial nonpublic information)

Ahhh I missed the “not” before the prohibited…my bad totally…:woozy_face:

Which part you missed ? There’s something amiss or CFAI has made a blunder at that. From the narrative above there is no violation ( a slight doubt remain over the word “discover”. Did he discover the financials before hey were made public or after that )

My initial thoughts was that there was no violation and CFAI have made a error in the comment to this example.

However having re-read this specific example multiple times and having tied it back to the guidance on this standard it seems that the profit and loss computed by the analyst allows him to arrive at a view on the quarterly estimates which he believes will drop (i.e. this now constitutes material non-public information). For this reason, I think they conclude that it is in violation due to this piece of material non-public info.

What do you guys think? Now I’m confused if I have got this right or if CFAI have got it wrong.

Not sure why they have to make things so more complicated than it needs to be.

“Thinking “ or “Estimating” is an individual act . It is based on certain belief system, skills. There is no evidence that the quarterly financials were preempted or the analyst was privy before it went public…

I can’t seem to reason why this is a violation. May be magician can help.