Standard II (A) – Material Nonpublic Information

Standard II (A) – Material Nonpublic Information

Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.


Trading or causing others to trade on material nonpublic information impairs market participants’ confidence in the integrity of capital markets. If investors believe that those with inside information have greater access to information, they will avoid capital markets altogether. When investors avoid participating in capital markets, the efficiency of markets and capital allocation is diminished. Any trading action informed by insider information is a violation of Standard II(A) – Material Nonpublic Information.

Material Information

Information is considered material if its disclosure would impact the investment decisions taken by a reasonable investor or if the information would have an impact on the price of a security.

Material information may include but is not limited to(1) information on:

  • Earnings.
  • Mergers, acquisitions, tender offers, or joint ventures.
  • Changes in assets or asset quality.
  • Innovative products, processes, or discoveries (e.g., new product trials or research efforts).
  • New licenses, patents, registered trademarks, or regulatory approval/rejection of a product.
  • Developments regarding customers or suppliers (e.g., the acquisition or loss of a contract).
  • Changes in management.
  • Change in auditor notification or the fact that the issuer may no longer rely on an auditor’s report or qualified opinion.
  • Events regarding the issuer’s securities (e.g., defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits, changes in dividends, changes to the rights of security holders, and public or private sales of additional securities).
  • Bankruptcies.
  • Significant legal disputes.
  • Government reports of economic trends (employment, housing starts, currency information, etc.)
  • Orders for large trades before they are executed.
  • New or changing equity or debt ratings issued by a third party (e.g., sell-side recommendations and credit ratings).

(1) The list is taken verbatim from the CFA curriculum.

The reliability and source may determine the materiality of the information. The more reliable the source, the more likely the information is considered material. For example, an executive of a TheroPharma sharing information about a successful drug trial is likely to be material, whereas rumors shared by TheroPharma’s competitors about TheroPharma’s drug trial would be considered less reliable and, therefore, not material.

The more unclear the impact of the information has on the price of a security, the less material the information is considered. Additionally, as time elapses, the materiality of the information may diminish.

Nonpublic Information

Information is considered nonpublic until it has been disseminated to the general public. For example, a company sharing its earnings reports through a press release or website has disseminated the information adequately – the information is considered public. However, there may be instances that Members may receive disclosures by companies before the public. Members and Candidates should handle nonpublic information with care since any disclosure could lead to potential insider trading activities.

Members and Candidates are allowed to use nonpublic information provided by a company to perform due diligence for activities including mergers, loan underwriting, credit ratings, etc. However, the use of this inside information to trade or to cause others to trade conflicts with Standard II(A) – Material Nonpublic Information.

Mosaic Theory

Analysts are permitted to use a combination of public and nonmaterial nonpublic information to arrive at their investment recommendations and decisions. The use of the combination of public and nonmaterial nonpublic information may lead to an analyst making conclusions that would be considered material. However, this would not be considered a violation of Standard II(A) – Material Nonpublic Information.

Social Media

Members and Candidates should verify that material information obtained from private groups and tiered membership subscription services can also be found on public sources before using this information.

Additionally, Members and Candidates are permitted to communicate with clients and potential investors through social media platforms without violating the Standard. However, they must ensure that the information disseminated through social media platforms is comparable with traditional forms of communication, e. g., email, telephone calls, press releases, etc.

Using Industry Experts

There has been an increasing demand for industry expertise and knowledge as investors and firms seek to get deeper insights into specific industry’s or sectors.

Members and Candidates are allowed to compensate industry experts for their specialized knowledge. However, they must ensure that they do not request or act on confidential information provided. If an expert provides material nonpublic information, members would not be allowed to take any investment action until the information was in public knowledge.

Investment Research Reports

Well-known securities analysts may have the ability to affect the stock price when they change their investment recommendations. According to Standard II(A) – Material Nonpublic Information, this would be considered material. To comply with Standard II(A), the analyst would need to make his research report publicly available.

However, the analyst may use a combination of public and nonmaterial nonpublic information to arrive at their investment recommendations (Mosaic theory) to arrive at his conclusions. Under Standard II(A) – Material Nonpublic Information, analysts do not need to make their research reports public despite the perceived materiality by the investing public.

Compliance Recommendations

Achieve Public Dissemination: Members or Candidates should make reasonable efforts to disseminate material information. Members should encourage issuing companies to share material information to the public. If the information cannot be shared publicly, members or candidates should only share the information with approved supervisors and compliance staff within the firm. Members and Candidates should not knowingly participate in conduct that causes a firm’s employees to disclose material information privately.

Adopt Compliance Procedures: Members and Candidates should encourage their firms to develop compliance procedures regarding the use of material nonpublic information. Additionally, members are encouraged to report any suspected use of material information to the supervisory or compliance department of their firm.

Adopt Disclosure Procedures: Members and Candidates should encourage firms to adopt disclosure procedures to ensure that information is disseminated fairly. For example, small firms should receive the same information as larger firms, sell-side analysts should obtain the same information as buy-side analysts. In addition, Members and Candidates should encourage firms to develop procedures for sharing new and updated recommendations. Changes in recommendations may be material; therefore, this information must be shared equitably among clients.

Issue Press Releases: Firms are encouraged to issue press releases before conference calls and analyst meetings. If material information is released during a call or meeting, the firm should issue a press release immediately after the meeting.

Firewalls: Firms should restrict the flow of material nonpublic information to only those who need to know the information to carry out their jobs.

The elements of a firewall include but are not limited to:

  • Periodic review of employee trading through the maintenance of “restricted” lists.
  • Stringent reviews of trading practices of the firm while in the knowledge of nonpublic material information.
  • Implementing controls over interdepartmental communications.

Interdepartmental Communication: Firms should implement procedures concerning interdepartmental communications, trading reviews, and how to address possible violations.

Physical Separation of Departments: Firms should attempt to physically separate departments that may have conflicting investment actions or recommendations when in possession of material nonpublic information. For example, the corporate finance department should be separated from the research department of a firm.

Prevention of Personnel Overlap: Firms may have employees that work between several departments. Implementing firewalls is encouraged to limit the flow of information between departments. Firms should ensure that there is no overlap of personnel between corporate finance departments and research departments. For a firewall to be successful, an employee should only be on one side of the firewall at any given time.

Reporting Systems: An effective firewall should have a reporting system in which authorized personnel conducts reviews and approves interdepartmental communication. A designated compliance officer should be responsible for approving shared information between departments, materiality, public nature of the information, and ensuring any shared information is used appropriately.

Personal Trading Limitations: Firms should consider implementing restrictions on personal and proprietary trading by employees. Securities should be placed on a restricted list when a firm has material nonpublic information. The dissemination of a restricted list may induce individuals to take investment actions. As a result, a watch list should be shared among a limited number of compliance department employees to monitor the transactions of restricted stocks.

Record Maintenance: Firms that offer multiple services should keep records of all interdepartmental communications.

Proprietary Trading Procedures: Prohibition on all proprietary trading while a firm possesses material nonpublic information may not always be appropriate. For example, if a firm is a market maker of a particular stock, prohibiting trading activity may adversely affect market liquidity or confidentiality. The prohibitive measures put in place will vary depending on the type of proprietary trading the firm engages in.

Communication to All Employees: Members and Candidates should encourage their employers to distribute the firm’s written compliance policies. Firms should implement training programs in combination with compliance policies to assist employees in identifying material nonpublic information.

Application 1: Disclosure of Material Information

Anne Feinstein is an equity analyst based in Sydney and covers the Korean manufacturing sector. She is on a conference call with five leading analysts and the CFO of a major fashion retail company. In the call, the CFO discloses that the majority of the firm’s workforce is set to go on strike indefinitely. This would cripple production and productivity, so the CFO informs the analyst that the firm is expected to miss its expected earnings expectations for the next two quarters. Feinstein goes on to update her recommendation to a “Sell.”

Has Feinstein violated Standard II(A) – Material Nonpublic Information?

     A. Yes, she is not allowed to take any investment actions on nonpublic information.

     B. No, the information is considered public because the conference call included several other analysts – therefore, the information is public.

     C. Yes, Feinstein is not permitted to talk to management. She is not allowed to get insider information.


The correct answer is A. 

She has violated Standard II(A) – Material Nonpublic Information because she changed her investment recommendation. Feinstein needs to determine whether the material information she received is publicly known. The information would be considered nonpublic – it has not been disseminated to the broader public. As a result, Feinstein is not allowed to act on the information.

Application 2: Using Expert Networks

Jamal Saadiq is a portfolio manager at Sanford Asset Managers. She specializes in technology stocks and is looking to get deeper insights into the sector. Saadiq hires and industry expert and compensates him for his time. Saadiq leaves their session better informed and able to enhance her research reports and conclusions.

Would Saadiq’s actions violate Standard II(A) – Material Nonpublic Information?

       A. Yes, because she is using the knowledge of the expert to enhance her research.

       B. No, because she is allowed to hire industry experts to enhance her knowledge.

       C. Yes, because she compensated the industry expert for insider information.


The correct answer is A. 

Saadiq has not violated Standard II(A) – Material Nonpublic Information. She has not received any information that could be considered material and nonpublic. Saadiq is permitted to seek advice from industry experts to enhance her research.

Application 3: Mosaic Theory

Alison Kaitu is an equity analyst that covers the Chinese consumer discretionary sector. She is working on a research report on Zang Corporation. Zang Corporation is listed on the NYSE and has quickly become a “hot” stock. In a very competitive Chinese manufacturing industry, Zang continues to beat analyst earnings expectations over three successive quarters. Kaitu, however, is suspicious of Zang’s extraordinary growth and performance published in its filings. She decides to visit Zang’s manufacturing plants in China and observes that many of the factories have been closed or have limited production activity. Kaitu issues a “sell” recommendation based on the combination of her fundamental analysis and the observations she gained on her visit.

Has Kaitu violated Standard II(A) – Material Nonpublic Information?

       A. Yes, she used material information to arrive at her recommendation.

       B. No, she is allowed to use a combination of public information and nonmaterial nonpublic information to arrive at her conclusions.

       C. Yes, her knowledge of Zang’s manufacturing activities would be considered insider information.


The correct answer is B. 

Kaitu is permitted to use a combination of public information (Zang’s fillings) and nonmaterial nonpublic information (her observations in China). Before issuing her recommendation, she needed to determine the materiality of her observations in China. In this case, her observations were taken independently. Additionally, any other investor or analyst could potentially make the same observations if they went deeper into their investigations of Zang. Her observations alone would not be considered material. Under the mosaic theory, Kaitu has not violated Standard II(A) – Material Nonpublic Information.

Application 4: Determining Materiality

Edwin McVey, a level II candidate, recently had a conversation with his personal trainer about Albright Telco. His trainer, an avid investor, tells him that he believes Albright will be acquired by a bigger telecommunications company. McVey aggressively purchases Albright Telco stock.

Would McVey’s purchase of Albright stock be a violation of Standard II(A) – Material Nonpublic Information?

      A. Yes, because knowledge of the acquisition is not public.

      B. Yes, because McVey does not personally perform any analysis on Albright Telco and goes on to purchase the stock.

      C. No, because the trainer has no inside information on Albright Telco.


The correct answer is C.

McVey has not violated Standard II(A) – Material Nonpublic Information. He has no reason to believe that his trainer has inside information on Albright Telco. McVey is allowed to make investment action based on conjecture or speculation.

Application 5: Acting on Nonpublic Information

Sara Thogori and Wendy Fisher have significant personal holdings in banking stocks. Thogori is a branch manager at Equity Bank and Fisher is a corporate finance analyst at Family Ventures. Over their discussions, Thogori mentions to Fisher that Equity is about to announce their best quarterly results in two years. Fisher is aware that disclosing such information would be against the law. However, she goes on to triple her position in Equity Bank. Equity proceeds to post fantastic results but discloses that it will substantially increase its loan loss provision over the next few quarters due to an expected increase in non-performing loans. The market reacts negatively to this news and the stock price falls by almost fifty percent.

Has there been a violation of Standard II(A) – Material Nonpublic Information?

      A. No, because she did not share the material information disclosed by Thogori.

      B. No, because Fisher’s purchase was negatively affected by the earnings results and disclosures.

      C. Yes, because she made investment decisions based on material nonpublic information.


The correct answer is C. 

Despite Fisher’s portfolio being negatively affected by the earnings results and disclosures, she has still violated Standard II(A) – Material Nonpublic Information. Fisher is not allowed to act on material nonpublic information. Although she never disclosed the material information shared by Thogori her actions alone conflict with Standard II(A).

Application 6: Analyst Recommendations and Material Nonpublic Information

Mia Englewood is a well-known utility sector analyst. She is about to take part in an interview on Finance Speak – a popular finance podcast. Before the interview, she discloses to Finance Speak that she is due to change her investment recommendation on KenPower Lighting to a “sell” and shares a summary of her conclusions. Englewood and Finance Speak have both signed a confidentiality agreement. The interviewer, Joseph Peterson, CFA, informs his father-in-law of the upcoming change in recommendation. His father-in-law sells a small percentage of his holdings in KenPower Lighting.

Have Englewood and Peterson violated Standard II(A) – Material Nonpublic Information?

      A. Only Peterson.

      B. Both Englewood and Peterson.

      C. Neither Englewood or Peterson.


The correct answer is A. 

Peterson has violated Standard II(A) – Material Nonpublic Information because he shared material nonpublic information to his father-in-law.

On the other hand, Englewood has not violated Standard II(A) – Material Nonpublic Information because she did not knowingly share material information to cause others to take investment actions. She made a reasonable attempt – through the confidentiality agreement, to discourage the dissemination of her recommendation.

Reading 48: Guidance for The Standards of Professional Conduct (I-VII)

LOS 48 (a) Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations.

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