What qualifies as material nonpublic information (MNPI) for insider trading under Standard II(A)?

Question

AcadiFi · Accepted Answer

**Standard II(A) — Material Nonpublic Information** prohibits members from acting on or causing others to act on information that is both **material** and **nonpublic**. Both conditions must be met simultaneously.

**What Makes Information 'Material'?**
Information is material if a reasonable investor would consider it important in making an investment decision, or if it would significantly alter the price of a security. Common examples:

- Upcoming earnings surprises (positive or negative)
- Pending mergers, acquisitions, or divestitures
- Changes in dividends or share buyback programs
- Major contract wins or losses
- Regulatory actions (FDA approvals, SEC investigations)
- Changes in senior management

**What Makes Information 'Nonpublic'?**
Information is nonpublic if it has not been disseminated to the marketplace through recognized channels (press releases, SEC filings, major news services). Simply telling a few people at a dinner party does not make it public.

**The Restaurant Scenario:**
Yes, overhearing executives discuss upcoming earnings at a restaurant likely qualifies as MNPI if the information is specific enough to be material. The key question is whether the information you heard would cause a reasonable investor to change their investment decision.

```mermaid
flowchart TD
    A["You receive information"] --> B{"Is it material?"}
    B -->|"Would a reasonable investor care?"| C{"Is it nonpublic?"}
    B -->|"Vague or immaterial"| D["OK to trade"]
    C -->|"Not yet disseminated"| E["DO NOT TRADE - MNPI"]
    C -->|"Already public"| F["OK to trade"]
    E --> G["Report to compliance"]
    E --> H["Place on restricted list"]
```

**Vague vs. Specific:**
If the executive said 'next quarter looks great,' this is arguably too vague to be material — it's essentially optimism without specifics. But if they said 'we're beating consensus by 40% and announcing a special dividend,' that's clearly material because it's specific and price-sensitive.

**The Mosaic Theory:**
Analysts can piece together nonmaterial public information with nonmaterial nonpublic information to reach investment conclusions. For example, combining publicly available industry data with a management's general tone (nonmaterial, nonpublic) is permissible. But if any single piece of the mosaic is both material AND nonpublic, you cannot trade on the assembled conclusion.

**What to Do if You Receive MNPI:**
1. Do not trade or recommend the security
2. Do not share the information with others
3. Report to your compliance department
4. Place the security on the firm's restricted list

Practice more MNPI scenarios in our CFA Level I Ethics question bank on AcadiFi.

What qualifies as material nonpublic information (MNPI) for insider trading under Standard II(A)?

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