Put the Material Nonpublic Information standard, II(A), into practice
The idea
Members who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on it. Information is material if a reasonable investor would want it in making a decision, or if its release would move the price; it is nonpublic until it has been disseminated to the marketplace generally. The mosaic theory permits reaching a material conclusion by combining public information with nonmaterial nonpublic information, which is the legitimate core of analysis. Members should also make reasonable efforts to have the information made public rather than simply declining to trade in silence, and if that is not possible must communicate it only to designated supervisory and compliance personnel.
A practice question
When does information cease to be nonpublic?
- When several analysts know itWhy not: A wider circle of insiders is still a circle of insiders. The test is general dissemination, not headcount.
- When disseminated to the market generally — correct
- When the company confirms it privatelyWhy not: A private confirmation is selective disclosure, which is the conduct the Standard is aimed at rather than a cure for it.
Standard II(A) Material Nonpublic Information treats information as public only once it has been disseminated to the marketplace generally. Telling some investors first does not start the clock for anyone.
A harder one
Which test determines whether a piece of information is material?
- Whether it originated inside the companyWhy not: Origin decides whether information is nonpublic, not whether it is material. The two conditions are separate and both are required.
- Whether it concerns earnings rather than operationsWhy not: Material information takes many forms, including litigation, management changes and the loss of a major customer.
- Whether a reasonable investor would want it — correct
Standard II(A) makes materiality turn on effect: whether a reasonable investor would want the information, or whether its release would move the price. The source and the subject do not decide it.
The hardest tier
An analyst is inadvertently given material nonpublic information by a company executive. What does the Standard require beyond refraining from trading?
- Reasonable efforts to have the issuer disclose it — correct
- Immediate resignation from covering the companyWhy not: Dropping coverage removes the analyst's voice and leaves the market no better informed than before.
- Notification of every client that information is being withheldWhy not: Announcing that something is being withheld signals its existence and can itself move a price.
Standard II(A) asks the member to make reasonable efforts to encourage the issuer to disclose publicly. Silence preserves the asymmetry; only if the company refuses does the member simply refrain.
In the app: 12 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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