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Basic Question 2 of 15
Susan Roberts, CFA, a portfolio manager for Howard Investment Counsel, has just received a call from Michael Moore, an institutional broker. Moore is calling to recommend buying Megamove, an obscure stock on the Nasdaq Stock Market, as a takeover candidate. In the past, Moore has demonstrated an ability to pick takeover candidates. If Roberts buys the stock, is she violating CFA Institute's Standards of Professional Conduct involving trading on material nonpublic information?
B. No, because Roberts is basing the purchase on the "mosaic theory."
C. Yes, because Moore and his sources are breaching fiduciary duty and are receiving personal benefits as a result.
D. No, because Roberts neither knows nor has any reason to know of a breach in the laws about using material nonpublic information.
A. Yes, because Roberts is receiving confidential information.
B. No, because Roberts is basing the purchase on the "mosaic theory."
C. Yes, because Moore and his sources are breaching fiduciary duty and are receiving personal benefits as a result.
D. No, because Roberts neither knows nor has any reason to know of a breach in the laws about using material nonpublic information.
User Contributed Comments 25
| User | Comment |
|---|---|
| kalps | I think the answers are unclear, D should actually say that theere does not appear to be any breach of laws regarding use of non-public information. |
| Vernon | so since roberts is not an analyst, (institutional broker) he is unaware and doesn't have to be aware of laws that only anaylyst are resonsible to abide by? essentially it is the same as a joe schmoe telling you to buy a certain stock. |
| TheProfet | I believe what is key in looking at this question is that there is no evidence in the fact pattern that leads us to believe (or Roberts to believe) that Moore has possession of any material, nonpublic information. Therefore, there is no violation. If Roberts used this information to buy stock into his funds using Moore's statement as the basis for such investment, Roberts would most certainly be in violation of Standard V (A) for not performing the necessary due diligence and having a reasonable basis for investing in the stock. |
| mtcfa | The information is not material as it stems from a reccomendation absent of any "juicy tidbits." However, Roberts probably is guilty of violateing Standard V(B) by not discerning fact from opionion. |
| gomumia | yeah but she is CFA chartholder so she should know about that |
| Slothrop | V(B) is Communicating with Clients and Prospective Clients. V(A) is the Diligence and Reasonable Care. However, I assume that V(A) still allows a portfolio manager to use a recommendation (even if only an opinion) from a source that has a track record of success. |
| surob | Thanks TheProfet for clear explanation. Make sense big time. |
| buzai2000 | ya i agree with Theprofet |
| epizi | I think the issue of material non public info should not emerge here.It is clearly stated that Moore has in the past demonstrated ability to pick takeover stock, of course the present recommendation is base most probably on the same ability not because he is in possesion of material non public information. |
| danrow | Well, she did not broke the code by using material non public information, but she violated the code by not having reasonable basis for her judgment. |
| sanyukta | agree with danrow |
| TammTamm | D is the answer because Susan is getting the info from another broker who didn't mention anything about where he obtained the information. He's picked takeovers in the past. |
| ggupta | "how about the source of information".. Roberts is receiving information from another broker and therefore there is less materiality and less reliable is the source. Can this be the reason? |
| AUAU | Susan had no idea of what the info is (ie materiality or publicity). The case not said anything but only Moore's past experience. So, Robert not in violation. |
| dblueroom | well, ideally, Roberts should have reasonable basis rather than being told by Moore. The firm being a takeover target prior to public announcement should be material information, however, here we do not really know. |
| ljamieson | Michael Moore, an institutional broker... Or is he? |
| erinelize | I guess in this case we're supposed to assume that Roberts is buying the stock for herself and not her clients, so due diligence and reasonable basis don't have to apply? |
| nayagan | Well the answer was definitely yes, since there is no nonpublic info being exchanged (to her knowledge). From there, you know it isnt mosaic bc there is no nonpublic info avail, so I guess D |
| josie491 | Key sentence "demostrated the ability to pick takeover candidates" |
| kahh | If he did buy the stock without conducting substantial research and due diligence?? |
| Creep | D is the correct answer, but it doesn't mean he isn't breaking another standard or code of ethics. |
| gill15 | Note to self, when I become a CFA Charterholder, do NOT ask Brokers if the information is Material Non Public and then I will not break that rule. |
| Shaan23 | I dont get this either. There's a question from the text just like this where A gets info from B and A in the answer must NOT assume that it is non material. Need to check if it is insider information otherwise it violated IIA |
| Shaan23 | actually just looked it over...think the key is that he recommends and does not say anything definitive like this will happen.... |
| raffrobb | Lesson learned! Read the choices very carefully...Answer D makes sense now that I re-read answer choices with 20/20 hindsight. Roberts, the Portfolio Manager would have no basis for suspecting a breach or there is material non public information involved. |
I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach
Learning Outcome Statements
demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity
recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct
identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards
CFA® 2025 Level I Curriculum, Volume 6, Module 3.