Ethics Case Study of the Week: Selectively Disclosing Material Non-Public Information

By Gary Sarkissian posted 5 days ago


CFA Institute’s Code of Ethics and Standards of Professional Conduct codify the ethical guidelines for the investment profession that are critical to maintaining the integrity of capital markets and investor trust.  Members, candidates, and even firms make a commitment to uphold these standards as they help elevate ethical decision-making universally around the globe.  

As investment professionals, we are certain to face important ethical decisions in our day-to-day activities.  Some scenarios we encounter will be straightforward, while others may be more complex.  No matter what circumstances we face, continuous learning remains imperative in an investment industry that continues to e volve with products undergoing innovation and a regulatory environment continuing to adapt. 

For that reason, each week we will feature a sample case from CFA Institute’s Ethics in Practice Casebook.  Each case is built upon a real-life example that may involve a regulatory matter or even a CFA Institute Professional Conduct investigation.  At the end of the case is a multiple-choice question that addresses the ethical nature of the actions taken in that case.  

This week’s case involves Standard II(A) Material Non-Public Information. 

Selectively Disclosing Material Non-Public Information
Greenfield is the chief financial officer of HumanaHealthMD, a biotech firm that researches, develops, and commercializes pharmaceutical drugs for women’s health issues. Humana submits a new drug application to government regulators for a promising new drug for treating hormone deficiency. Two meetings scheduled with regulators to discuss the drug are postponed when the regulator states that unspecified deficiencies with the drug make such discussions premature. The public announcement of each meeting postponement results in a decline of more than 10% in the company stock.

When the meeting between regulators and company executives finally happens, Humana presents yet-to-be published preliminary test data with favorable indicators for the drug. The regulators react positively and give Humana preliminary regulatory approval contingent on further studies. After the meeting, six sell-side research analysts covering Humana inquire with Greenfield about the meeting. Greenfield responds by email and indicates that he believes the meeting with regulators was “very positive and productive” and that the company was “pleasantly surprised” by the reaction of the regulators. Greenfield does not share the favorable preliminary test data with the analysts. After the emails to the analysts, the stock price of the company increases 19%. Greenfield’s actions are

A. appropriate because Greenfield does not share the unpublished preliminary test data with the analysts but restricts his comments to the general tenor of the meeting.
B. appropriate because Greenfield responds to questions from research analysts covering the company.
C. appropriate because Greenfield communicates with all six research analysts covering the company.
D. inappropriate.
E. none of the above.

What do you think is the correct choice?  Click the “Analysis” button below to see the analysis for this case, and feel free to discuss in the comments below.  The completion of this case qualifies for 0.25 hour of Standards, Ethics, and Regulation (SER) credit

This case relates to selective disclosure of material nonpublic information. CFA Institute Standard of Professional Conduct II(A): Material Nonpublic Information prohibits CFA® charterholders from causing others to act on material nonpublic information. Information is material if its disclosure would affect the price of a security or if reasonable investors would want to know that information before making an investment decision. Information is “nonpublic” until it has been disseminated or is available to the marketplace in general. In this case, both the positive preliminary test results for the drug and the positive reaction of the regulators about a new drug is information that would have an impact on the price of the security and reasonable investors would want to know about.

Although Greenfield does not share the test results, he does share the fact that meeting with regulators was “positive and productive.” Greenfield also shares this information with only a select group of analysts who regularly cover Humana and not the general investing public. The fact that Greenfield is only responding to questions and not affirmatively contacting the select group of analysts is irrelevant. Greenfield and Humana should have issued a public announcement about the nature of the meeting with regulators prior to or simultaneously with disclosing that information to analysts in response to their questions. Choice D is the best response.

This case is based on a US SEC Enforcement Action in August 2019.

Image by Michal Jarmoluk from Pixabay  

© 2019 CFA Institute. All rights reserved. You may copy and distribute this content, without modification and for non-commercial purposes, provided you attribute the content to CFA Institute and retain this copyright notice.  This case was written as a basis for discussion and is not prescriptive of how a business situation or professional conduct matter should or should not be handled or addressed. Certain characters mentioned are fictional to facilitate discussion, and any resemblance to actual persons is coincidental.

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