Lynn Black, CFA, is an analyst with the underwriter for an upcoming issue of Mtex Software debentures. Black learns from an employee in Mtex’s programming department that there is a serious problem with Mtex’s newest software program and that many customers have canceled their orders with Mtex. There is no mention of these problems in the prospectus for the debentures, which has been circulated. According to the CFA Institute Standards of Professional Conduct, Black’s best course of action is to:
inform her supervisor of her discovery.
Black is in possession of material nonpublic information, and her most appropriate course of action is to inform her supervisor (or the firms compliance officer) of what she has learned. She may not simply share the information with prospective buyers; if her firm determines that the information affects the value of the debentures, they must revise and recirculate the prospectus. Failing to do so may violate Standard 1(C) Misrepresentation. Not informing her employer may be detrimental to her firm’s interests and reputation if proceeding with the new issue without disclosure would violate regulations or laws.
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