Page 20 - FINAL CFA II SLIDES JUNE 2019 DAY 1

READINGS 1 AND 2: CFA INSTITUTE CODE OF ETHICS AND STANDARDS OF
MODULE 2.3: PROFESSIONAL CONDUCT GUIDANCE FOR STANDARDS I–VII
STANDARDS II(A) AND II(B)

D. II Integrity of Capital Markets
II(A) Material Nonpublic Information.

Information disclosure - Information is “material” if its disclosure would impact security price or if reasonable investors would want the information
before making an investment decision. If ambiguous information but can affect price, may not be considered material. Information is “nonpublic” until it
has been made available to the marketplace (conference call is not!) Selective disclosure creates the potential for insider-trading violations. The
prohibition against acting on material nonpublic information extends to mutual funds containing the subject securities as well as related swaps and
options contracts. Only use provided nonpublic information for its intended purpose, unless it becomes public information.

Mosaic Theory: No violation when a perceptive analyst undertakes A and reached RA by combining public information and nonmaterial nonpublic
information.
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Social Media: Not every info found on internet or social media sources is necessarily public information. You should confirm that any such material
information is also available from public sources, such as company press releases or regulatory filings.

Industry Experts: You may seek insight from individuals who have specialized expertise in an industry. However, you cannot act or cause others to act
on any material nonpublic information obtained from these experts until that information has been publicly disseminated.

Recommended Procedures for Compliance

Make reasonable efforts to achieve public dissemination of the information. Encourage firms to adopt procedures to prevent misuse of material
nonpublic information. Use a “firewall” within the firm, with elements including:
• Substantial control of relevant interdepartmental communications, through a clearance area such as the compliance or legal department.
• Review employee trades—maintain “watch,” “restricted,” and “rumor” lists.
• Monitor and restrict proprietary trading while a firm is in possession of material nonpublic information.