A financial analyst, David Lee, CFA, works for a sell-side research firm. He is currently working on a research report for 'Tech Innovations Inc.' (TII). During his due diligence, he discovers a significant, previously undisclosed liability that could materially impact TII's financial health and stock price. This information is not yet public but was inadvertently shared with him by a mid-level employee at TII during an informal conversation, who seemed unaware of its materiality. David has not yet finalized or published his report. What is David's most appropriate course of action under the CFA Institute Standards of Professional Conduct?
- AExclude the information from his report but use it to adjust his internal rating for TII.
- BPublish the report immediately, including the new information, to ensure timely disclosure to the market.
- CInform his supervisor, and the firm's compliance department, about the material nonpublic information.
- DContact TII directly to verify the information before proceeding with his report.
Show answer & explanationAnswer & explanation
Correct answer: C. Inform his supervisor, and the firm's compliance department, about the material nonpublic information.
David has come into possession of material nonpublic information. Under Standard II(A) Material Nonpublic Information, he must not act or cause others to act on this information. The most appropriate course of action is to inform his supervisor and the firm's compliance department. They can then determine the best way to handle the information, which may involve walling off David from TII research, or advising TII on their disclosure obligations.
Why the other options are wrong
- A. Using the information to adjust an internal rating is still acting on material nonpublic information and is a violation.
- B. Publishing the report with material nonpublic information would be a direct violation of Standard II(A).
- D. Contacting TII directly might be appropriate in some circumstances, but the immediate and most crucial step is to inform his firm's compliance department to prevent a breach of duty.
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 likely affect the price of a security or if investors would want to know it.
- Information is 'nonpublic' until it has been disseminated to the market generally.
- Do not act or cause others to act on such information.
Memory trick: Integrity: No Insider Info, No Market Manipulation.