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Information Edge Ethics: How to Separate Material Nonpublic Information, Mosaic Theory, and Soft Dollars

AcadiFi Editorial·2026-05-20·16 min read

Why candidates miss this topic

Ethics questions around information often feel slippery because the exam hides several judgments inside one vignette. A candidate sees an analyst with an edge and starts asking the wrong first question:

  • "Is this fair?"
  • "Would this move the market?"
  • "Did someone trade?"

Those are relevant eventually, but they are not the best sequence.

For CFA exam purposes, you usually need to answer four questions in order:

  1. Was the information obtained legitimately?
  2. Is the information public or nonpublic?
  3. Is the information material to a reasonable investor?
  4. If a commission-funded benefit is involved, does the client paying the commission receive a related benefit?

Once you slow the problem down, the answer choices become less ambiguous.

flowchart TD A["Start with the information edge"] --> B{"Was it obtained through a duty breach or improper tip?"} B -->|Yes| C["Treat as unethical and stop"] B -->|No| D{"Is the information broadly available on fair terms?"} D -->|Yes| E["Public information"] D -->|No| F["Nonpublic information"] E --> G{"Would a reasonable investor view it as important?"} F --> G G -->|Yes + Nonpublic| H["Material nonpublic information: do not act or cause others to act"] G -->|No + Nonpublic| I["Immaterial nonpublic detail may be usable inside a mosaic"] G -->|Yes + Public| J["Material public information can be used"] A --> K{"Is a commission-funded research benefit involved?"} K -->|Yes| L["Test client benefit, investment relevance, and disclosure"]

Public and material are not opposites

The biggest mental error is assuming that if information is material, it cannot be public. That is wrong.

A research report released to the entire market before trading starts can be highly material. It may change valuations, trigger recommendation changes, and move prices. It is still public if it has been broadly disseminated.

Likewise, a detail can be nonpublic but not material. Suppose analyst Erin Vale hears from a distributor that a manufacturer delayed one small regional shipment by two days because of weather. That fact may be nonpublic, but by itself it might not matter to a reasonable investor.

The exam separates these dimensions:

  • `Public versus nonpublic` asks how the information is available.
  • `Material versus immaterial` asks how much the information matters.

Do not merge them into one label.

Materiality: use the reasonable-investor test

Materiality is not based on whether the market has already reacted. It is based on whether a reasonable investor would likely consider the information important when making an investment decision.

That means hindsight is a poor test. If the stock did not move after release, the information could still have been material. If the stock moved sharply on rumors, the rumors may still have lacked a sound public basis.

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