Use Standard II (Integrity of Capital Markets) to judge a case
The idea
Standard II covers material non-public information and market manipulation. Information is material if a reasonable investor would want it before deciding, or if its release would move the price; it is non-public until it has been broadly disseminated, and telling a few analysts is not dissemination. Possessing such information means neither acting on it nor causing others to, and the mosaic theory is the permitted route around it: conclusions built from public information and non-material non-public pieces are the analyst's own work, however valuable. Manipulation covers transactions intended to distort price or volume, and dissemination of false information — the test is the intent to mislead, not whether anyone was misled.
A practice question
Information is material if a reasonable investor would:
- want it before making a decision — correct
- find it interestingWhy not: Interest is a low bar that would sweep in almost everything published about a company.
- have to pay for itWhy not: Price paid reflects how information is distributed rather than whether it would affect a decision.
Standard II(A) makes information material if a reasonable investor would want it before deciding, or if its release would likely move the price.
A harder one
The mosaic theory permits an analyst to act on conclusions drawn from public information and:
- material non-public informationWhy not: That is precisely what the Standard prohibits acting on, whatever else it is combined with.
- nonmaterial nonpublic detail — correct
- information from a company insiderWhy not: The source does not settle it; what matters is whether the information is material and not public.
Standard II(A) permits the mosaic: public information combined with nonmaterial nonpublic detail. Diligence is not what the Standard restricts.
The hardest tier
A member compiles industry data, none of it material on its own, and reaches a conclusion the market has missed. The member may:
- not act, since the conclusion is non-publicWhy not: Every original conclusion is nonpublic until published; the restriction is on material nonpublic information received.
- act only after informing the companiesWhy not: No such step is required, and giving the issuer the analysis first would disadvantage the member's own clients.
- act on and publish it under the mosaic theory — correct
This is the mosaic theory, expressly permitted by Standard II(A). Assembling immaterial pieces into a material conclusion is what research is for.
In the app: 18 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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