CFA Level I Exam · Code of Ethics and Standards of Professional Conduct

Integrity of Capital Markets: Standards II(A) and II(B)

Updated 7 October 2026 · Fact-checked

Standard II(A) bars you from acting or causing others to act on material nonpublic information. Standard II(B) bars practices that distort prices or artificially inflate trading volume to mislead market participants. To solve questions, test whether information is material and nonpublic, or whether an action intends to mislead the market.

Understand Integrity of Capital Markets: Standards II(A) and II(B)

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. Two tests decide whether it applies. Information is material if its disclosure would probably affect the price of a security, or if reasonable investors would want to know it before investing. Information is nonpublic if it has not been disseminated to the marketplace in general, for example through a news release or a regulatory filing.

Think of it as a gate with two locks. If the information fails either test, II(A) does not block you. A specific, reliable takeover tip from a source with inside knowledge can be material and nonpublic. A vague, unsubstantiated rumour may not be, so judge it by its source and how specific it is. A well-known fact in a published annual report is public, so you may use it. Selective disclosure by a company to a few analysts does not make the information public.

The mosaic theory is the safe path for analysts. You may combine public information with nonmaterial nonpublic information to reach a conclusion. The result can be material, and that is allowed. Skill in analysis is not a breach. The line is crossed only when a single piece of the puzzle is itself material and nonpublic.

When you hold material nonpublic information, the guidance points to two steps. First, make reasonable efforts to achieve public dissemination, if that is possible. Second, if it cannot be made public, do not act on it, and do not cause others to act. Firms support this with firewalls (information barriers) between departments, restricted and watch lists, and limits on personal trading. The Standard also covers information obtained from insiders, but it is not limited to corporate insiders.

Standard II(B), Market Manipulation: Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants. Two broad types exist. Information-based manipulation includes spreading false rumours to induce trading. Transaction-based manipulation includes transactions that give a false impression of activity or price, such as artificially inflating volume or pushing a price. Intent matters. Legitimate trades, including large ones, are not manipulation if they are not meant to mislead. Also, a market view that you honestly hold and share is not manipulation.

Key formulas to remember

Standard II(A) test: Material + Nonpublic → do not act or cause others to act; If either element is missing, II(A) is not violated. Both must be present.
Material information: Disclosure would probably affect the security's price, or reasonable investors would want to know it; Judge by effect on price or investor interest, not by how the information was obtained.
Nonpublic information: Not yet disseminated to the marketplace in general; Selective disclosure to a few analysts does not make information public.
Mosaic theory: Public information + nonmaterial nonpublic information → permitted conclusion; Permitted even if the conclusion is material. A single material nonpublic piece is not allowed.
Standard II(B) test: Practice that distorts prices or artificially inflates volume + intent to mislead → violation; Covers information-based and transaction-based manipulation. Without intent to mislead, ordinary trading is fine.

How to solve Integrity of Capital Markets: Standards II(A) and II(B) questions

Use this sequence for any II(A) or II(B) vignette. It forces you to name the exact element the question is testing.

1Read the last line first to see what is asked: is there a violation, what should the analyst do, or which action is permitted?
2Identify the information or action. Is it a piece of information, or a trade or statement meant to move prices?
3For information, test materiality: would it probably affect price, or would reasonable investors want it?
4Test whether it is nonpublic: has it been broadly disseminated, or only shared selectively or privately?
5If only nonmaterial pieces are combined with public data, apply the mosaic theory and conclude the analyst has not violated II(A).
6For actions, ask whether the person intends to mislead through false information or artificial price or volume. Look for intent.
7Choose the answer that names the correct duty: do not act, seek public dissemination if possible, or escalate to compliance. Eliminate the two options that break the rule.

Quickest way: Two-lock gate for II(A), intent check for II(B)

When to use it: Use it on any short vignette where you have about 90 seconds.

II(A): ask two yes/no questions: material? nonpublic? Two yeses means do not trade or tip.
If one answer is no, or the analyst built conclusions from public and nonmaterial data, there is no violation.
II(B): ask whether the act is meant to mislead by false information or artificial price or volume.
Eliminate options that allow trading on material nonpublic information, and options that treat honest large trades as manipulation.

Common mistakes in Integrity of Capital Markets: Standards II(A) and II(B)

Thinking the mosaic theory bans any conclusion that turns out to be material
Students see the word material and stop reading.
Fix: The mosaic theory allows public plus nonmaterial nonpublic inputs, even when the conclusion is material. Check the inputs, not the conclusion.
Treating selective disclosure to analysts as public information
Because several analysts heard it, it feels widely known.
Fix: Information is public only when disseminated to the marketplace in general. A private call or briefing for a few does not count.
Applying II(A) only to corporate insiders
The phrase insider trading suggests only executives.
Fix: The Standard applies to anyone holding material nonpublic information, whatever the source, as long as the information is material and nonpublic.
Calling every large or aggressive trade manipulation
Students link size or price impact with wrongdoing.
Fix: II(B) needs a practice that distorts prices or inflates volume with intent to mislead. Look for false rumours or trades meant to create a false impression.
Choosing 'trade but disclose to the client' as the remedy for material nonpublic information
Disclosure is the fix for many conflict questions in other Standards.
Fix: Under II(A) the remedy is not to act or cause others to act, and to seek public dissemination where possible. Disclosing the tip does not make trading allowed.
Ignoring intent in market manipulation questions
Students focus on the price effect only.
Fix: Ask why the person acted. Accurate research that moves prices is not manipulation; spreading a false rumour to move prices is.

Worked examples

Example 1

An analyst at an asset manager is researching a listed retailer. From public filings and store visits she estimates weaker sales. A supplier's staff member mentions in passing that the retailer's delivery schedule has slowed, a nonmaterial remark that is not public. She concludes earnings will miss and recommends selling the stock. Has she violated Standard II(A)? A. Yes, because her conclusion is material. B. Yes, because the supplier remark is nonpublic. C. No, because the mosaic theory permits it.

Show the solution

Identify the inputs: public filings, store visits and one nonpublic remark.
Test the remark: the case states it is nonmaterial, so it fails the materiality lock.
Apply the mosaic theory: public information plus nonmaterial nonpublic information may be combined into a conclusion.
Check the conclusion: it may be material, but that does not make the analysis a breach.
Eliminate A, because materiality of the conclusion is irrelevant. Eliminate B, because nonpublic but nonmaterial information is allowed.

Answer: C. She has not violated II(A) because the mosaic theory permits combining public and nonmaterial nonpublic information.

Example 2

A portfolio manager buys a thinly traded small-cap stock in many small trades near the close for several days. He then posts on a forum that the company is about to win a large contract, which he has no basis for. He sells at a higher price. Which Standard is most clearly violated? A. Standard II(A), since he acted on material nonpublic information. B. Standard II(B), since he distorted the price with false information. C. No Standard, because each trade was individually permitted.

Show the solution

Check II(A): he did not receive material nonpublic information; he invented a claim. So A does not fit.
Check II(B): he spread a false rumour, which is information-based manipulation.
Also note the close-of-day buying meant to lift the price, which is transaction-based manipulation.
Intent is clear: he profits by misleading other participants about the contract.
Eliminate C, because each trade being permitted on its own does not excuse a scheme to mislead.

Answer: B. Standard II(B) is violated because he used false information and trading to distort the price with intent to mislead.

Exam tips

Lead with the two locks for II(A). Most vignettes hinge on whether information is truly material, truly nonpublic, or neither.
When the case says the information is nonmaterial, expect mosaic theory to be the answer.
For II(B), look for words like false rumour, artificially, create the appearance of activity, or pump up volume. These signal intent to mislead.
Remedy questions: pick do not act or cause others to act, and seek public dissemination if possible. Avoid options that allow trading after disclosure.
Use the three-option format: you can usually remove one option that allows trading and one that confuses size with manipulation.

Practice questions from Code of Ethics and Standards of Professional Conduct

Integrity of Capital Markets: Standards II(A) and II(B) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Integrity of Capital Markets: Standards II(A) and II(B): frequently asked questions

What makes information material under Standard II(A)?

Information is material if its disclosure would probably affect the price of a security, or if reasonable investors would want to know it before making an investment decision. Information can be material and still be allowed to be used if it is public.

What is the mosaic theory in CFA Level I?

It says an analyst may combine public information with nonmaterial nonpublic information to reach a conclusion, even if that conclusion is material. It protects normal research. It does not allow using a piece of information that is itself material and nonpublic.

How do I identify market manipulation under Standard II(B)?

Look for practices that distort prices or artificially inflate trading volume with intent to mislead market participants. Typical forms are spreading false rumours and transactions that create a false impression of price or activity. Without intent to mislead, ordinary trading is not manipulation.

What should I do if I receive material nonpublic information?

Do not act on it or cause others to act. If possible, make reasonable efforts to have it publicly disseminated. Firms also use firewalls and restricted lists, and you should follow your compliance procedures.