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

Mosaic Theory and Public Information Analysis for CFA Level II

Updated 7 October 2026 · Fact-checked

Mosaic theory says an analyst may combine public information with nonmaterial nonpublic information to reach a conclusion, even if the conclusion would be material. It is allowed under Standard II(A) because no single piece is material nonpublic information. To solve a question, test each piece separately.

Understand Mosaic Theory and Public Information Analysis

Standard II(A) says you must not act or cause others to act on material nonpublic information. Information is material if its disclosure would likely affect a security's price, or if reasonable investors would want it before deciding. It is nonpublic if it has not been made available to the marketplace.

Analysts must still do research. Mosaic theory is the idea that research is like building a picture from many small tiles. You gather public information, such as filings, news, industry data and management presentations. You add nonmaterial nonpublic information, such as an observation from a store visit or a comment from a supplier that would not move the price alone. Then you combine them with your own analysis.

The conclusion you reach may well be material. That is fine. The Standard does not forbid a material conclusion. It forbids trading on a material, nonpublic fact that you received. Your own analysis of permitted inputs is not inside information.

The line is at each tile. If any single tile is both material and nonpublic, the mosaic is broken, and you must not act on it. The same applies if the source breached a duty in giving it to you, for example an insider leaking results. Then you should not trade or recommend, and you should follow your firm's compliance procedures.

The Standard also covers how information reaches you. Selective disclosure by a company to analysts is a risk. Material information given in a private call is not made public by being told to a few analysts. Companies and analysts should rely on public disclosure. Analysts who find that a company has leaked material information should take it to compliance.

Key formulas to remember

Standard II(A) rule
Do not act or cause others to act on material nonpublic information
Applies to trading and to recommending or encouraging others to trade.
Material information
Likely to affect price, or reasonable investors would want it before deciding
Assess the information itself, not the final conclusion.
Mosaic theory test
Public information + nonmaterial nonpublic information + your analysis = permitted, even if the conclusion is material
Each individual nonpublic piece must be nonmaterial, and none may come from a breach of duty.
Action when you hold MNPI
Do not trade or tip; take it to supervisor or compliance
Firewalls and compliance procedures support this.

How to solve Mosaic Theory and Public Information Analysis questions

Use this method for any item set question on mosaic theory or the use of public and nonpublic information.

  1. 1List every piece of information the analyst used, from the vignette.
  2. 2Label each piece as public or nonpublic.
  3. 3For each nonpublic piece, decide if it is material: would it likely move the price or matter to reasonable investors on its own?
  4. 4Check the source. Was the piece given by an insider who breached a duty, or selectively disclosed by the company?
  5. 5If every nonpublic piece is nonmaterial and the sources are clean, mosaic theory applies. Trading or recommending is permitted.
  6. 6If any single piece is both material and nonpublic, the analyst violates II(A) by acting on it. Do not accept that a combined mosaic cures it.
  7. 7Choose the answer that names Standard II(A) and the correct action, such as not trading and consulting compliance.

Quickest way: Piece-by-piece materiality check

When to use it: Use it when the vignette describes an analyst's research on a company with several information sources.

  1. Underline each nonpublic source in the vignette.
  2. Ask: would this one fact alone move the price?
  3. If yes for any piece, it is a violation. If no for all, it is a permitted mosaic.
  4. Ignore how material the final conclusion is.

Common mistakes in Mosaic Theory and Public Information Analysis

  • Saying the analyst violated II(A) because the final conclusion was material.

    Students judge the result instead of the inputs.

    Fix: Judge each input. A material conclusion built from public and nonmaterial pieces is allowed.

  • Thinking all nonpublic information is prohibited.

    The words MNPI get shortened to nonpublic.

    Fix: Only material nonpublic information is restricted. Nonmaterial nonpublic information may be used in the mosaic.

  • Treating information given to a small group of analysts as public.

    Students think any wide sharing equals disclosure.

    Fix: Information is public only when made available to the marketplace. A private call or meeting that reveals material facts does not make them public.

  • Allowing a material tip because the analyst also had lots of public data.

    Students assume a mosaic hides the tip.

    Fix: A single material nonpublic piece taints the decision. The analyst must not act on it.

  • Choosing an answer that says the analyst must publish or disclose the information.

    Confusing the duty with a duty to the market.

    Fix: The standard is to refrain from acting and to use compliance. Do not pick answers inventing a duty to publish.

Worked examples

Example 1

Vignette: Mei Tan, an analyst, studies a global retailer. She reads its annual report and industry sales data. She also visits stores and sees that shelves are emptier than usual, and a supplier's sales manager mentions that orders have been slower. She concludes earnings will fall short and issues a sell recommendation. Question 1: Has Tan violated Standard II(A)? Question 2: Does the answer change if the conclusion is material?

Show the solution
  1. List inputs: annual report and industry data are public. Store observations and the supplier's remark are nonpublic.
  2. Test materiality of each nonpublic piece: empty shelves and a general comment on slower orders would not alone move the price. They are nonmaterial.
  3. Neither source appears to breach a duty. The supplier manager gave general, nonspecific information.
  4. So the mosaic theory applies.
  5. For Question 2: the conclusion, a likely earnings shortfall, may be material. That does not matter, because the standard looks at each input.

Answer: 1: No violation of II(A); she may recommend. 2: No; a material conclusion from public and nonmaterial nonpublic inputs is permitted under mosaic theory.

Example 2

Vignette: Arun Rao covers a listed chemicals company. In a private call, the company's CFO tells Rao that quarterly profit will be well below guidance, ahead of the public release. Rao also has public filings and channel checks that point to mild weakness. He plans to cut his rating before the release. Question 1: Is this permitted? Question 2: What should Rao do?

Show the solution
  1. List inputs: filings are public. Channel checks are nonpublic but nonmaterial. The CFO's statement is nonpublic.
  2. Test the CFO's statement: profit well below guidance would likely move the price. It is material and nonpublic.
  3. The source is an insider disclosing selectively, so the information is MNPI.
  4. Mosaic theory does not rescue the decision, because one piece is material and nonpublic.
  5. Rao must not act or cause others to act on it. He should report to his supervisor or compliance and wait for public release.

Answer: 1: Not permitted; it violates Standard II(A). 2: Refrain from trading or changing the rating based on the CFO's statement, and consult compliance.

Exam tips

  • Always test each nonpublic piece alone. The vignette is usually built so that one piece is clearly material or clearly not.
  • Look for signals of materiality such as specific figures, pending deals or earnings versus guidance. General color is usually nonmaterial.
  • Watch for who gave the information. An insider's private disclosure is a red flag.
  • Pick the answer that names Standard II(A) and a concrete action, such as not acting and going to compliance.
  • Do not be misled by answers that call the work prohibited just because the analyst used nonpublic observations.

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 the CFA Level II ethics syllabus?

It is the idea that an analyst may combine public information and nonmaterial nonpublic information with their own analysis to reach a conclusion. It is allowed under Standard II(A) even if the conclusion is material. The rule is tested piece by piece.

What is the difference between mosaic theory and material nonpublic information?

Mosaic theory is about building a view from permitted pieces. Material nonpublic information is a single fact that would likely affect price and is not public. You may use the first approach, but you must not act on the second.

Can analysts use nonmaterial nonpublic information?

Yes. Under the Code and Standards, nonmaterial nonpublic information may be used in research. The test is whether that piece alone would likely affect the price or matter to reasonable investors.

Does a material conclusion mean the analyst broke Standard II(A)?

No. A conclusion can be material when it comes from public and nonmaterial inputs. The violation occurs only when the analyst acts on a piece of information that is itself material and nonpublic.