Standard II(A) – Material Non-Public Information

II. Integrity of Capital Markets

Standard II discusses sharing of material information qualified as non-public, as well as the intent to manipulate markets. It prohibits CFA members from acting in a way to distort market value through manipulation.

Standard II(A) – Material Non-Public Information

Standard II(A) – Material Non-Public Information indicated that members who possess material, non-public information could unduly impact the markets.  Therefore, they must not act or cause others to act on this information.


It is expected that investment professionals will make recommendations based on publicly available information, incorporating necessary due diligence with regard to market analysis. Trading with the use of material, non-public information is viewed as market manipulation in that it skews market value via manipulation.

The definition of material, non-public information is any knowledge that is not readily available and will clearly have an impact on market value. A non-exhaustive listing of material information includes news of mergers and acquisitions, patent approvals, change in leadership, significant legal action, bankruptcy, or government reports of economic trends.

In addition to specific information used, the source of said information also has an impact on materiality. An inside source close to the information is said to have a greater sense of veracity than, say, a corporate competitor. Likewise, a member of any government agency who’s in the position to approve a new product or patent would be considered material.

Related to the non-public aspect of information, the dissemination of data must be publicly available via the Internet or another easy-to-reach source. Noteworthy is the notion that a partial distribution of information to a limited group of financial analysts does not constitute public information. For example, if an analyst is on a conference call with a client in which non-public, material information may be disclosed, and the analyst fails to secure the area in which information is being exchanged (i.e. other employees may pass through conference room while call is in progress), then the analyst can be considered in violation of Standard II(A) – Material Non-Public Information.

To protect savvy financial analysts, Standard II(A) – Material Non-Public Information clearly states that conclusions which overlap with material, non-public information may be drawn from extensive research of publicly available data.  For example, press releases or government filings are just two types of information that an analyst may utilize as research.  Should these experts draw correct conclusions that mirror material, non-public information it should not be considered misconduct.

With regard to the use of outside investment experts, it is permissible for CFA members to pay for knowledge related to specific industries.  However, it is incumbent upon the member to ensure that the data received is not material, non-public information prior to sharing it with clients.

To achieve compliance with Standard II(A) – Material Non-Public Information, the following are recommended steps to be followed by an investment firm:

  • Adopt compliance procedures to prevent misuse of material, non-public information.
  • Adopt disclosure procedures to ensure that material information is distributed to the marketplace in a thorough manner.
  • Issue press releases prior to analyst meetings to prevent disclosure of material, non-public information.
  • Enact a “firewall” to restrict the flow of proprietary information within a firm. Additionally, monitor trading activity on any stocks for which a firm may hold material, non-public information.
  • Prevent personnel from interacting with more than one departmental area within a firm. For example, investment banking and corporate finance should maintain a self-contained body of employees.
  • Maintain detailed records of communication between various departments within a firm, as well as records with outside agencies.


Any trading based on material non-public information is considered a violation of Standard II(A) – Material Non-Public Information. Although the burden of proof lies with a disciplinary board with regard to the issues of materiality, non-public, and source, suspicion of violation is a serious matter.  Strict adherence to the highest level of Standard II(A) – Material Non-Public Information should be a major concern for all investment firms.


Muriel Gagnon, a CFA member, resides in and manages portfolios in a country where securities laws do not prohibit the sharing of material non-public information. Gagnon has an opportunity to benefit her clients by sharing quarterly financial results for Cote Incorporated two days before they become public. To comply with Standard II(A) – Material Non-Public Information, Gagnon has the following option:

I. Immediately make investment recommendations for each client based upon Cote Industries’ financial results.

II. Ask an analyst from another firm for advice, after discussing the specific investment recommendations that she could share with clients.

III. Make securities trades on behalf of her clients without discussing specifics of Cote Industries quarterly results.


A. I and III, only

B. II only

C. None of the above


The correct answer is C.

Muriel Gagnon must wait for Cote Industries’ quarterly financial results to become public before she can discuss this material, non-public information with anyone. Therefore, none of the options provided would be appropriate.


Reading 3 LOS 3a

demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity

Reading 3 LOS 3b

distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards

Reading 3 LOS 3c

recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct


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