Standard II (A) - Material Non-public Information

The second standard, integrity, has two sub-parts:

  • Material Non-public Information
  • Market Manipulation

II (A) Material Non-public Information

As per this standard, the 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.

The main purpose of this standard is to restrict members from indulging in insider trading. People with inside information can take advantage of the information and make gains, which would not be possible otherwise, and getting involved in any such activity is against the CFA Code.

There are two things that need clarity here. One is what constitutes “material” information, and the other is what is ‘non-public information’.

A piece of information can be classified as material if the knowledge of it would impact the price of the security, or if it is something that investors would want to know before investing in a particular security. For example, information about earnings, merger, acquisition, change in assets, acquiring new patents, new customers, change in management, or any legal disputes, is all material information.

A piece of information is considered nonpublic until the time it is available to public in general. For example, the information about earnings, which has been officially released by the company, is considered public information. On the other hand, there is certain information that is selectively released to a small group on analysts, or is not disclosed to anyone outside the company.  An example could be a possible loss of a large customer, or talks about acquiring another firm. Till such time this kind of information is not made available to everyone, it is considered nonpublic and the CFA members and candidates should not make use of such information for their benefit or for the benefit of their clients.

Rules of thumb:

  • You must not act on the material nonpublic information
  • You must take reasonable care to protect the nonpublic information that you have access to.
  • Before acting on any information, you must make sure whether the information has been made selectively available to you or is it available to the public. 
  • Mosaic Theory: There is no violation when an analyst makes an investment decision about a corporate action or event through analysis of public information, together with non-material nonpublic information.


Tony Smith works with a mutual fund company as an automobile industry analyst. His research an analysis suggests that industry is going to see some big mergers. His research also suggests that a merger target will experience significant price hike. He observes the CEOs of two large automobile companies having dinner together in an expensive place. Next day he conducts some additional analysis and then adds the stock of one of these companies into his portfolio.

This is not a violation of the Code and Standards because it reflects the Mosaic theory.

On the other hand, if Tony had not done his own analysis, and instead the CEO of the automobile company had called Tony and informed him about the upcoming merger, and then Tony had added this stock to his portfolio based on this insider information, then he would be in violation of the Standard.

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