CFA Level I Exam · Guidance for Standard II: Integrity of Capital Markets

Mosaic Theory and Public Information Analysis in CFA Ethics

Updated 7 October 2026 · Fact-checked

Mosaic theory says an analyst may reach a conclusion by combining public information with nonmaterial nonpublic information, even if the conclusion is material. Standard II(A) is not breached because no single piece used is material nonpublic information. To solve questions, test each piece: is it material, and is it nonpublic?

Understand Mosaic Theory and Public Information Analysis

Standard II(A) Material Nonpublic Information says 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. So you need to know what counts as material and what counts as nonpublic.

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 made available to the marketplace. Analysts must also think about the source and how reliable it is. Both conditions must hold before the Standard blocks you.

The mosaic theory is the practical result. An analyst does research. They read filings, talk to suppliers and customers, visit stores, count trucks, and study industry data. Each piece alone is public or nonmaterial. Put together, the pieces can give a conclusion that is significant. The Standard does not forbid this. It says that a conclusion built from public and nonmaterial nonpublic information is not itself material nonpublic information. Skilled analysis is what the market is meant to reward.

The line is crossed when one piece in the mosaic is itself material and nonpublic. Examples are a company executive hinting at an unannounced earnings miss, or a board member leaking a pending merger. Then the analyst holds MNPI, and the mosaic does not clean it. The analyst must not trade or recommend on it, and should usually take it to the compliance department.

Also remember that an analyst's own report is not MNPI just because it is new. A conclusion from legitimate mosaic research is not MNPI. But the firm must still follow its fair-dealing and dissemination policies when it acts on the conclusion or distributes it. The analyst should also document the sources, so it is clear that no MNPI was used. Another caution: if a company selectively shares material details with only some analysts, the information is still material and nonpublic for the others. Do not treat it as fair game.

Key formulas to remember

Standard II(A) core rule: Material + Nonpublic = do not act or cause others to act; Both conditions must be met. If either is missing, the information is not MNPI under this Standard.
Materiality test: Material if disclosure would likely move the price, or reasonable investors would want it before investing; Source and reliability of the information also matter. Rumours from a doubtful source are weaker than firm facts.
Nonpublic test: Nonpublic = not yet disseminated to the marketplace; Information given only to selected analysts or to a small group is still nonpublic.
Mosaic theory: Public information + nonmaterial nonpublic information → conclusion permitted; Allowed only if no single input is material and nonpublic. A material nonpublic input breaks the mosaic.

How to solve Mosaic Theory and Public Information Analysis questions

Use the same test on every mosaic theory question. Break the analyst's work into separate pieces and check each one.

1List each piece of information the analyst used and where it came from.
2For each piece, ask: is it public? Public filings, press releases, industry reports and published data are public.
3For nonpublic pieces, ask: is it material? Would it probably move the price, or would investors want it before investing?
4If any piece is both material and nonpublic, the analyst holds MNPI. Do not act or cause others to act on it. The usual proper step is to go to compliance.
5If every piece is public or nonmaterial, the mosaic theory applies. The conclusion may be used, even if the conclusion is significant.
6Check the source. Did an insider breach a duty by passing the information? If so, treat it with great caution.
7Choose the option that matches: act on the research, or refrain and escalate.

Quickest way: Two-question filter

When to use it: Use it when a vignette lists several data points and you have about 90 seconds.

Underline the single piece that sounds like inside information, such as a statement from an executive about unannounced results.
Ask: is that piece material AND nonpublic? If yes, the answer is to not act on it and to go to compliance.
If every piece is public or minor, pick the option that allows the analysis.
Eliminate the option that says the conclusion itself is MNPI because it is significant. That is the classic trap.

Common mistakes in Mosaic Theory and Public Information Analysis

Thinking a significant conclusion is MNPI
Students link materiality to the result, not to the inputs.
Fix: Test the inputs. A material conclusion built only from public and nonmaterial pieces is allowed under mosaic theory.
Treating all nonpublic information as forbidden
The word nonpublic sounds like a ban on its own.
Fix: The Standard needs both material and nonpublic. Nonmaterial nonpublic information may be used in the mosaic.
Letting a single material tip pass because many other sources were used
Students think a large pile of public data dilutes one inside tip.
Fix: One material nonpublic piece is enough to create MNPI. The other work does not clean it.
Assuming information given to some analysts is public
The company shared it with several people, so it feels widely known.
Fix: It is public only when disseminated to the marketplace. Selective disclosure keeps it nonpublic.
Ignoring the source of the information
Students focus on content, not on how it was obtained.
Fix: Ask whether an insider breached a duty to pass it on. A doubtful or tainted source raises the chance it is MNPI.
Choosing to trade first and ask compliance later
Time pressure makes action seem urgent.
Fix: When MNPI may be present, stop trading, do not pass it on, and consult compliance before any action.

Worked examples

Example 1

An analyst covering a global retailer reads its published annual report, counts customers at ten stores over two weeks, and interviews a supplier who says orders are slightly higher than last year. She concludes that quarterly sales will beat consensus and issues a Buy recommendation. Under Standard II(A), her actions are most likely:
A. a violation, because the conclusion is material
B. a violation, because the store counts are nonpublic
C. not a violation, because she used public and nonmaterial nonpublic information

Show the solution

List the inputs: annual report (public), store counts (her own observation, nonmaterial), supplier comment on slightly higher orders (nonpublic but not material on its own).
Test for any input that is both material and nonpublic. None qualifies.
Apply mosaic theory: a conclusion built from public and nonmaterial inputs is allowed, even if the conclusion is significant.
Eliminate A: materiality of the conclusion is not the test. Eliminate B: nonpublic alone is not enough.

Answer: C. No violation, because every input was public or nonmaterial nonpublic.

Example 2

An analyst follows a listed chemicals company. She uses published filings and industry price data. At a lunch, the company's finance director tells her, privately, that next week's results will be far below market expectations and have not been released. She then lowers her earnings forecast and tells her clients to sell. Under Standard II(A), she should have:
A. published the forecast change after confirming it with other public data
B. refrained from acting on the information and consulted compliance
C. told only her largest clients so that they could sell first

Show the solution

Identify the suspect input: the finance director's statement about unreleased results.
Test it: a large earnings miss would likely move the price, so it is material. It has not been released, so it is nonpublic.
Because one input is material and nonpublic, the analyst holds MNPI. The rest of her public research does not clean it.
She must not act or cause others to act. The right step is to stop and go to compliance.
Option A tries to launder the tip with other data. Option C is selective tipping and worse.

Answer: B. She should have refrained from acting on the information and consulted compliance.

Exam tips

Hunt for the one input that is both material and nonpublic. Most questions turn on whether such a piece exists.
If every input is public or nonmaterial, expect the answer to permit the research. Do not be pulled by the word nonpublic.
Reject options that call a conclusion MNPI simply because it is important or because it took effort to reach.
When MNPI is present, the safe answer is to not act, not tip, and go to compliance.
With no penalty for wrong answers, always answer. Remove the option that breaks the two-part test, then choose between the other two.

Practice questions from Guidance for Standard II: Integrity of Capital Markets

Mosaic Theory and Public Information Analysis in other exams

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

Mosaic Theory and Public Information Analysis: frequently asked questions

What is mosaic theory in CFA Level I?

Mosaic theory lets an analyst combine public information and nonmaterial nonpublic information to reach a conclusion. Even if the conclusion is material, no single input is material and nonpublic. So Standard II(A) is not violated.

How is mosaic theory different from material nonpublic information?

MNPI is a single piece of information that is both material and nonpublic. Mosaic theory is a research method that uses only public and nonmaterial pieces. If one piece becomes MNPI, the mosaic protection no longer applies.

Can an analyst act on a material conclusion under Standard II(A)?

Yes, if the conclusion came from public and nonmaterial nonpublic inputs. The Standard looks at the inputs, not at how important the final view is. The analyst should keep records of the sources, and the firm must still follow its fair-dealing and dissemination policies.

What should I do if I think I received MNPI?

Do not trade, do not recommend, and do not pass it on. Take the matter to your compliance department. They decide how to proceed, which may include placing the security on a restricted list.