By using the information obtained as a result of participating in the drug study, did Taylor likely violate any CFA Institute Standards of Professional Conduct?

Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment advice and financial planning services globally to institutional and retail clients. Shortly after the company opened an office in Malaysia, Montpier’s supervisor in the New York office. Rick Reynolds, asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a source of international investment opportunities for U.S. clients. Montpier’s main task is to cover small-cap stocks in the region and develop a network of contacts with other investment firms in the region.

Through her interaction with other analysts in Malaysia, Montpier learns that the use of material nonpublic information is common practice in analyst research reports and recommendations. Such practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she recently observed several investment bankers meeting numerous times at an exclusive local country club with the CEOs of two Malaysian rival companies. It is public information that one of the companies is searching for potential acquisition targets. She has thought several times about issuing a recommendation on one of the companies but has not done so for fear of breaking the law. After learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition target, which she had already established as a good investment through prior research.

Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements by investment professionals. It is common for analysts and portfolio managers to maintain ongoing consulting contracts with entities other than their primary employer. As a result of this, Montpier has begun financial service consultations for members of a local investment club. The club is developing an appropriate compensation package for her services, which to date have included financial planning activities and investment research. When Montpier established the relationship with the investment club, she informed them that she had a full-time job at World Renowned Advisers, which offers similar services.

After a year of consulting with the investment club, Malaysian law changed, requiring investment bankers, securities analysts, and portfolio managers to register with the Malaysian Securities Commission in order to engage in independent consulting practice. Since she is unaware of the change, Montpier does not file the proper registration forms and is later investigated, fined, and temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the sanction, but not the fine, removed after appealing the Commission’s ruling. Montpier’s counterpart in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for approximately seven years. Taylor researches health care and biotech stocks for the firm and participates in client meetings when managers are recommending stocks that Taylor covers. Taylor recently completed Level 1 of the CFA examination and is waiting for his results so he can register for the Level 2 examination.

In preparation for a client meeting, Taylor’s supervisor, Jessica James, asks him to prepare a research report on attractive companies in the health care industry. Since Taylor is busy preparing for company conference calls, James tells him to "throw something together from the street." To meet James’ request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has heard about but has not researched. Taylor takes the original reports he obtains from a third-party, adds some general industry information, and submits "strong buy" recommendations to James for the stocks. He does not credit the original authors in the report, which is a violation of copyright law. Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA Program." Although written procedures require James to review all analyst reports prior to release, time constraints often prevent her from reviewing the reports prior to distribution. James recommends the stocks to her clients, who then purchase them. Several months later, the clients are able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21% and 17%, respectively. James informs Taylor of the clients’ successful investments and requests that he begin investigating potential biotech investments for the same group of investors.

To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor indicates that he has the appropriate medical condition for the study and signs a confidentiality agreement, but he leaves the question about his occupation blank. During the study, Taylor learns that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have serious negative side effects in patient testing. This information confirms existing research that Taylor has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next Breakthrough releases information that the drugs in question have been held up by a regulatory agency pending additional investigation. The stock plunges over 30% on the news.

By using the information obtained as a result of participating in the drug study, did Taylor likely violate any CFA Institute Standards of Professional Conduct?
A . Yes.
B . No. By participating in the study, Taylor had permission to use the information for the benefit of his clients.
C . No. The information received supplemented Taylor’s existing research and was non-material, nonpublic information.

Answer: A

Explanation:

Although the information received supplemented Taylors current research, it was material, nonpublic information. The fact that Taylor obtained the information by participating in a confidential study, and the fact that once the news was eventually released by Next Breakthrough the stock plunged by over 30%, confirms that the information was material and nonpublic. Taylors sell recommendation to clients based on the information received was a violation of Standard 11(A) Material Nonpublic Information, which prohibits trading or causing others to trade on material nonpublic information. (Study Session 1, LOS 2.a)