CFA Level II ExamEthical and Professional StandardsMedium
A portfolio manager, Lisa Chen, CFA, works for 'Ascendant Investments.' She receives an email from a former colleague, Mark, now working at a competing firm. Mark suggests that Ascendant Investments' new quantitative model, which Lisa helped develop, significantly undervalues a specific biotech stock, 'BioGen Corp.' Mark states he has 'learned from reliable sources' within BioGen Corp. that the company is about to announce a breakthrough drug approval. Lisa's firm has a strict policy against using external research not formally approved. What is Lisa's most appropriate action under the CFA Institute Standards of Professional Conduct?
- AImmediately update her firm's model to reflect the new information and trade on behalf of her clients.
- BInform her compliance department about the unsolicited information and refrain from acting on it.
- CVerify the information with her firm's research department before making any investment decisions.
- DContact her former colleague to understand the specifics of his 'reliable sources' at BioGen Corp.
Show answer & explanationAnswer & explanation
Correct answer: B. Inform her compliance department about the unsolicited information and refrain from acting on it.
Lisa has received what appears to be material nonpublic information. Her primary duty is to her clients and the integrity of the market. She should inform her compliance department to ensure proper handling and refrain from acting on the information to avoid violating Standard II(A) Material Nonpublic Information.
Why the other options are wrong
- A. Acting on potentially material nonpublic information would be a direct violation of Standard II(A).
- C. While verification is good, the immediate concern is the potential for insider trading. The first step is to report to compliance, not to use the information for 'verification' that could lead to trading.
- D. Engaging with the source of potentially material nonpublic information further risks violating Standard II(A) and could lead to market manipulation concerns.
Standard II(A) Material Nonpublic Information
Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.
- Information is 'material' if its disclosure would affect the price.
- 'Nonpublic' means it has not been disseminated to the market.
- Must not trade or induce others to trade based on such information.
Memory trick: Report, Don't React, Regarding MNPI.