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CFA Ethics Standard II (INTEGRITY OF CAPITAL MARKETS)
CFA Standard II (A) – Material Nonpublic Information
CFA Standard II (A) makes it clear that using material non-public information is prohibited. But how do we know that we’re dealing with material non-public information?
The key issue here is the influence of the information on the price of a security. Notice that not every piece of information will affect the price and not every piece of information will affect the price to the same extent. To identify material non-public information, you should take into account the impact of the information on the price of a security, as well as the source and reliability of the information.
Material non-public information – examples:
- mergers and acquisitions,
- annual reports and auditor reports,
- innovation-oriented initiatives,
- tender offers,
- contracts with customers, etc.
Using public information as well as nonmaterial non-public information for investment actions is beyond any violation. On the basis of these types of information, analyst are allowed to form their own opinions. This kind of approach is called mosaic theory. From different bits and pieces of information available to analysts, they draw their own conclusions and, thus, are able to provide a valuable service to their clients.
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CFA Standard II (B) – Market Manipulation
The aim of CFA Standard II (B) is to secure the market and its participants against the adverse effect of manipulation.
There are two major issues that you need to associate with this Standard. The first one is information-based manipulation and the other is manipulation based on transactions.
Information-based manipulation is when you spread false information in order to obtain some unfair gain at somebody else’s expense. Transaction-based manipulation, on the other hand, is when you aim at obtaining this unfair gain through artificially conducted transactions. In both cases what decides about whether an action is a manipulation or not is the intent that lies behind the action.