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

Standard II(A): Material Nonpublic Information Explained

Updated 7 October 2026 · Fact-checked

Standard II(A) says members and candidates who possess material nonpublic information that could affect an investment's value must not act or cause others to act on it. Information is material if it would affect price or a reasonable investor's decision, and nonpublic if it is not yet available to the marketplace. You must pass both tests.

Understand Standard II(A): Material Nonpublic Information

Standard II(A) protects the integrity of capital markets. Its official wording is: "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 aim is fair markets. If insiders trade on secrets, ordinary investors lose trust and stop participating.

The standard has two tests. Information is material if its disclosure would probably affect the price of a security, or if reasonable investors would want it before making an investment decision. Information is nonpublic if it has not been made available to the marketplace. Only information that is both material and nonpublic triggers the duty.

Materiality depends on the source and the content. Examples that are often material: a pending merger or takeover bid, an earnings surprise, a major lawsuit outcome, a regulatory decision, a large new contract, or a change in dividend policy. Speculative or vague information is less likely to be material. Information from a reliable, specific source is more likely to be material. Size matters too: a small effect may not count.

Information becomes public when it has been disseminated to the marketplace, for example through a press release, a regulatory filing or a widely distributed news service. A selective disclosure to a few analysts is not public. A rumour is not public either.

The standard does not stop you doing real research. Under the mosaic theory, an analyst may combine public information with nonmaterial nonpublic information to reach a conclusion that is material, and this is not a violation. This applies only when no individual piece is material nonpublic information, and only when the information was not obtained through a breach of duty. What you cannot do is trade or tip using a material nonpublic piece. If you receive such information, the usual response is to stop trading, escalate to compliance, and encourage the firm to put the security on a restricted or watch list. If local law is less strict than the Standards, follow the Standards.

Key formulas to remember

Standard II(A) wording: 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.; Applies to trading and to tipping others. Both are prohibited.
Test for a violation: Material AND nonpublic → do not act or cause others to act; If either test fails, Standard II(A) is not triggered by that information.
Materiality test: Material if it would likely affect the security's price OR reasonable investors would want it before deciding; Consider source reliability, specificity and impact on value.
Nonpublic test: Nonpublic = not yet disseminated to the marketplace; A selective disclosure to a few people does not make it public.
Mosaic theory: Public information + nonmaterial nonpublic information = permitted conclusion; Allowed even if the final conclusion is material, but only if no single piece is material nonpublic information and none was obtained through a breach of duty. It does not allow use of a material nonpublic piece.

How to solve Standard II(A): Material Nonpublic Information questions

Use this sequence for any II(A) question. It keeps you from jumping to a verdict before checking both tests.

1Identify the piece of information and where it came from.
2Test materiality: would it likely move the price, or would a reasonable investor want it before deciding? Specific, reliable and large effects point to material.
3Test nonpublic status: has it been disseminated to the marketplace, such as a press release or filing? Selective tips and rumours are still nonpublic.
4If both tests are met, the member must not trade on it or cause others to trade, including tipping clients, colleagues or family.
5Check for mosaic theory: if the analyst built a view from public data and nonmaterial pieces, there is no violation.
6Pick the action that fits: stop trading, do not pass it on, escalate to compliance, and encourage a restricted list. Choose the option that follows the stricter of law and Standard.

Quickest way: Two-gate check

When to use it: Use when you have about 90 seconds and the stem describes a tip, a leak or an analyst's research.

Gate 1: is it material? Look for words like merger, earnings, lawsuit, regulator, contract.
Gate 2: is it nonpublic? Look for words like confidential, overheard, leaked, selective briefing.
If both gates pass, eliminate any option that trades, tips or does nothing. Keep the option that stops trading and goes to compliance.
If a gate fails, look for public data or mosaic research and keep the option that says there is no violation.
Between the two remaining options, prefer the one that follows the stricter of law and Standard.

Common mistakes in Standard II(A): Material Nonpublic Information

Treating all nonpublic information as prohibited.
The word nonpublic feels like the whole rule.
Fix: Check materiality too. Nonmaterial nonpublic information can be used, including in mosaic research.
Thinking only trading is a violation.
Students link the rule to insider trading alone.
Fix: The standard says act or cause others to act. Tipping a client or friend is also a violation.
Assuming information is public once a few analysts have heard it.
It seems widely known inside the industry.
Fix: Public means disseminated to the marketplace. A private briefing or rumour is still nonpublic.
Calling mosaic research a violation.
The final conclusion is material, so it looks like inside information.
Fix: If it is built from public data and nonmaterial nonpublic pieces, it is allowed.
Ignoring the stricter of law and Standard.
A local law seems to permit the trade.
Fix: Members follow the stricter rule. If the Standard is stricter than local law, follow the Standard.
Choosing 'do nothing' after receiving material nonpublic information.
Doing nothing seems safe.
Fix: Escalate to compliance, avoid trading, and encourage a restricted or watch list to prevent leaks.

Worked examples

Example 1

An analyst at an asset manager hears from a friend in the legal department of a listed company that a regulator will announce a large fine next week. The fine has not been disclosed and would likely cut the company's share price. What should the analyst do? A. Sell the shares in client accounts before the announcement. B. Tell clients about the fine so they can decide whether to trade. C. Not trade on it, and inform the compliance department.

Show the solution

Materiality: a large regulatory fine would likely move the price, so the information is material.
Nonpublic: it has not been announced, so it is nonpublic.
Both tests are met, so Standard II(A) applies and the analyst must not act or cause others to act.
Option A trades on the information, so it is a violation.
Option B is tipping. Telling clients so they can decide whether to trade causes others to act on material nonpublic information, so it is a violation too. The information also came from a legal-department insider, so passing it on would involve a breach of confidentiality.
Option C is best: the analyst avoids acting on the information and escalates to compliance, which can restrict the security and stop others from acting on it.

Answer: C

Example 2

An analyst visits a manufacturer, interviews managers, reads filings and talks with its suppliers. From this and other public data she concludes that quarterly earnings will beat expectations, and she recommends buying. None of the individual pieces she gathered was material and nonpublic, and no one breached a duty by speaking with her. Which statement is most accurate? A. She violated Standard II(A) because her conclusion is material. B. She did not violate Standard II(A), because mosaic theory allows it. C. She violated Standard II(A) because she obtained information not available to the public.

Show the solution

Check each input: public data plus pieces that are nonmaterial.
Mosaic theory permits combining these, even if the conclusion is material, provided no single piece is material nonpublic information and none was obtained through a breach of duty.
The stem says no piece was material and nonpublic, and no one breached a duty, so the conditions are met.
Her conclusion is her own analysis, not a leaked material fact.
Option A wrongly tests the conclusion rather than the inputs. Option C wrongly says any nonpublic input is prohibited.
Option B correctly applies mosaic theory.

Answer: B

Exam tips

Always name both tests, material and nonpublic. Wrong options often drop one of them.
Watch for tipping. Passing material nonpublic information to a friend or colleague who trades is a violation even if the member does not trade.
Mosaic scenarios usually have an analyst building a view from public data. The usual answer is no violation.
When the member has already received a leak, the best action is usually to stop trading and escalate to compliance, not to ignore or share it.
Link II(A) with firewalls and restricted lists, which are the usual compliance controls tested alongside it.

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

Standard II(A): Material Nonpublic Information in other exams

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

Standard II(A): Material Nonpublic Information: frequently asked questions

What is the difference between material and nonpublic information in CFA ethics?

Material means the information would likely affect the security's price or a reasonable investor's decision. Nonpublic means it has not been made available to the marketplace. Standard II(A) applies only when information is both.

When does information become public?

It becomes public when it has been disseminated to the marketplace, such as through a press release, a regulatory filing or widely distributed news. A rumour or a briefing to a few analysts does not make it public.

Is the mosaic theory a violation of Standard II(A)?

No. An analyst may combine public information and nonmaterial nonpublic information to reach a conclusion, even a material one. The violation arises only when a material nonpublic piece is used to trade or tip.

What should I do if I receive material nonpublic information?

Do not trade or pass it on. Escalate to your compliance department and encourage the firm to place the security on a restricted or watch list. Follow the stricter of the law and the Standards.