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).