- Zhao Xuan, CFA, is a sell side investment analyst. While at a software industry conference, Zhao hears rumors that Green Run Software may have falsified
its financial results. When she returns to her office, Zhao conducts a thor- ough analysis of Green Run. Based on her research, including discussions with some of Green Run’s customers, Zhao is convinced that Green Run’s reported 50% increase in net income during recent quarters is completely fictitious. So far, however, Zhao is the only analyst suspicious about Green Run’s reported earnings. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the LEAST appropriate action for Zhao is to:
A. report her suspicions to Green Run’s management.
B. do nothing until other analysts support her analysis.
C. recommend that her clients sell their Green Run shares immediately.
Correct answer is B.
I answered C which is incorrect,
C is incorrect as analysts are in the business of formulating opinions and insights that are not obvious to the general investing public about the attractiveness of par- ticular securities. In particular, under the mosaic theory, as outlined in the Guidance to Standard II(A)–Material Nonpublic Information, an analyst is free to trade based upon information developed in the course of her own research even if this information would have been material inside information had it been communicated directly to the analyst by the company. However, members and candidates should make reasonable efforts to achieve public dissemination of information that is material and nonpublic. This effort usually entails encouraging the issuer company to make the information public, which has not been done in this case, so the analyst would be premature in making a sell recommendation to clients.
Isn’t the information is Material and non- public which is prohibited to rely this information to make trading decision ? or from what the answered explained it means that: you can indirectly use non-public and material information to do a research and then make investment decision based on the research on the material non-public information ? I was really confused. Hope to clear the confusion. Thank you