A portfolio manager learns at a lunch that a target firm's CFO has resigned, three days before the public announcement. He trims the position before close. Every Standard I, II, and III question on exam day is a variation on this scenario: who knew what, who owed what, and what should have been written down first.
Resolving the opener: the lunchtime CFO tip is material AND nonpublic. Trimming the position before the public announcement violates II.A. The mosaic defense fails because the single overheard item is itself material.
Memory and oral instructions are unauditable, which lets an adviser rationalize unsuitable trades after the fact. Regulators and the Code therefore require a written baseline. A written investment policy statement (IPS) exists to make suitability auditable. It codifies objectives, risk tolerance, and constraints up front. III.C recommendations are tested against that documented baseline rather than memory.
I.A Knowledge of the Law. You must know and comply with all applicable laws, rules, and the Code and Standards.
Common mistakes
- Treating "local law permits it" as a defense. The stricter of local law, governing law, or the Code controls. The answer is almost never the permissive jurisdiction.
- Confusing mosaic with MNPI. Mosaic combines public + nonmaterial-nonpublic. A single material nonpublic item (overheard CFO comment) cannot be laundered through mosaic.
- Naming the pension sponsor as the client. Under III.A, beneficiaries are the client. Acting in the sponsor's interest against beneficiaries violates loyalty.
Bottom line
- Standard I.A: when laws conflict, follow the stricter of local law, the law of the country governing the conduct, or the Code and Standards
- Standard II.A: material nonpublic information cannot be traded on; the mosaic theory permits trading on public plus nonmaterial nonpublic analysis
- Standard III.A: client interest above employer, above self; pension plan beneficiaries are the client, not the sponsor
- Standard III.C: suitability runs to the investment policy statement (advisory) or the mandate (funds); update the IPS at least annually and on material life events
Exam shortcut
When the vignette mentions overhearing, golf-course chat, or a single executive contact, the answer is II.A violation, not mosaic. When the question asks "what should the firm have done," the answer is a written procedure: compliance manual, firewall, restricted list, IPS, allocation policy. Pick the procedure that matches the failed Standard. When two jurisdictions are described, the answer is the stricter regime applied across all conduct, never the permissive one.
The full lesson (about 1,831 words, 12 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- code and standards
- guidance i-vii
- application l3
- asset manager code
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