Level III Core · Code of Ethics and Standards of Professional Conduct

Integrity of Capital Markets: CFA Standard II Explained

Updated 8 October 2026 · Fact-checked

Standard II protects the integrity of capital markets. II(A) bars you from acting or causing others to act on material nonpublic information. II(B) bars you from distorting prices or artificially inflating trading volume to mislead market participants. To solve questions, test materiality, public status and intent to mislead.

Understand Integrity of Capital Markets (Standard II)

Standard II has two parts. II(A) is Material Nonpublic Information. II(B) is Market Manipulation. Both protect trust in markets. If investors believe some people trade on secret facts or rig prices, they stop participating, and capital markets work less well.

Information is material if its disclosure would probably affect a security's price, or if a reasonable investor would likely consider it important in making an investment decision. Information is nonpublic until it has been made available to the marketplace. Selective disclosure to a few analysts does not make it public. Once you hold information that is both material and nonpublic, you must not act on it or cause others to act on it. Acting includes trading and recommending trades. A typical example is advance knowledge of a takeover bid or an earnings surprise.

The mosaic theory is the safe route for analysts. You may combine public information with nonmaterial nonpublic information to reach a conclusion, even if that conclusion would be material when viewed alone. Skilled analysis is not a violation. The risk is when one piece of the mosaic is itself material and nonpublic, for example a company insider hinting at results.

If you do come to hold MNPI, the usual response is to stop acting on it and encourage the company to make it public. Often you must also inform your compliance department. Firms use firewalls (information barriers) to stop MNPI moving between departments, plus restricted and watch lists, and limits on who can access sensitive files. A firewall is the preferred approach, and it is better than simply relying on staff to be careful. Where a firm has no firewall, you should lean on compliance and restrict trading.

II(B) covers market manipulation. This includes information-based manipulation, such as spreading false rumors to move a price. It also includes transaction-based manipulation, such as trading to create an artificial price or false appearance of volume, or to gain a dominant position that forces up price. The key element is intent to mislead market participants. Legitimate trading that moves prices, such as a large block trade made for a genuine investment reason, is not manipulation.

Key rules to remember

Standard II(A): Members who possess MNPI must not act or cause others to act on it; Test two things: is it material, and is it nonpublic? Both must be true.
Materiality test: Material = likely to affect price OR important to a reasonable investor's decision; Source and reliability also matter. Be careful with information that is specific and from a credible source.
Mosaic theory: Public information + nonmaterial nonpublic information = permitted conclusion; Allowed even if the conclusion is material. Not allowed if any piece is itself material and nonpublic.
Standard II(B): Members must not engage in practices that distort prices or artificially inflate trading volume with intent to mislead; Covers information-based and transaction-based manipulation. Intent to mislead is central.
Recommended compliance steps: Firewall + restricted/watch lists + compliance review + no trading on MNPI; A firewall is preferred over relying on individual discretion.

How to solve Integrity of Capital Markets (Standard II) questions

Use the same sequence for any item set or essay question on Standard II. Write short answers and name the standard.

1Identify which part applies: II(A) for information, or II(B) for price or volume distortion.
2For II(A), judge whether the information is material. Ask if it would likely move the price or matter to a reasonable investor.
3Judge whether it is nonpublic. Selective disclosure to a few people does not make it public.
4If both apply, decide whether the member acted, recommended or caused others to act. If so, state a violation.
5If the information came from analysis, apply the mosaic theory. Check that no single input is material and nonpublic.
6For II(B), look for false information or trades meant to create a misleading price or volume. Check intent.
7State the required action: stop acting, inform compliance, encourage public disclosure, and use firewalls or restricted lists.
8Answer the command word. If asked to justify, give the standard name and one reason.

Quickest way: Two-gate check for MNPI and a one-line check for manipulation

When to use it: Use when you have about two minutes for a multiple-choice question and the options include trading, disclosing or doing nothing.

Gate 1: is it material? If no, analysis is generally fine.
Gate 2: is it nonpublic? If no, it is fine to act.
If both gates are yes, eliminate any option that trades, recommends or tips. The right answer is usually to refrain, consult compliance and push for public release.
For manipulation, ask whether the action tries to mislead others about price or volume. If yes, it is a II(B) violation.
Prefer answers that mention firewalls or compliance over answers that rely on personal judgment.

Common mistakes in Integrity of Capital Markets (Standard II)

Treating any conclusion that is material as a violation of the mosaic theory.
Candidates focus on the word material and ignore how the conclusion was built.
Fix: Check the inputs. If every input is public or nonmaterial nonpublic, the material conclusion is allowed.
Assuming information is public because many analysts heard it on a private call.
It feels widely known, so candidates assume it is public.
Fix: Information is public only when disseminated to the marketplace. Selective disclosure to a group is still nonpublic.
Saying the member only violates if they trade personally.
Candidates forget the words cause others to act.
Fix: Tipping a client, colleague or relative, or recommending a trade, is also a violation.
Calling every large trade that moves the price manipulation.
Candidates equate price impact with intent to mislead.
Fix: Manipulation needs intent to mislead or distort. A genuine large investment trade is not II(B).
Recommending that the member simply avoid the information and do nothing else.
It seems cautious.
Fix: Add the expected steps: do not act, inform compliance, and encourage the company to disclose where appropriate.
Confusing a firewall with a policy statement alone.
Both sound like controls.
Fix: A firewall is a physical and procedural barrier, with restricted lists and access limits. It is the preferred control for preventing MNPI flow.

Worked examples

Example 1

An analyst covers a listed packaging company. She builds a model from public filings and industry data. She also visits two of its distributors, who say orders are slowing. She concludes the company will miss earnings consensus and downgrades the stock. Has she violated Standard II(A)?

Show the solution

Identify the standard: II(A), because the question is about information used in a recommendation.
List the inputs: public filings, public industry data, and distributor comments.
Classify the distributor comments. They are general observations from third parties, not confidential company results, so they are nonmaterial nonpublic information on their own.
Apply the mosaic theory. Public information plus nonmaterial nonpublic information may be combined into a conclusion.
Note that the conclusion, a likely earnings miss, may be material, but this does not matter under the mosaic theory because no single input is material and nonpublic.

Answer: No violation. She used the mosaic theory. Her conclusion may be material, but every input was public or nonmaterial nonpublic.

Example 2

A portfolio manager buys a thinly traded small-cap stock in large lots in the last minutes of each month-end. The purchases are meant to lift the closing price so the fund's reported month-end value looks better. There is no investment reason for the trades. Which standard is violated, and why?

Show the solution

Identify the standard: the trades concern price, not information, so II(B) applies.
Describe the practice: repeated purchases at close in an illiquid stock push up the closing price.
Test intent: the stated purpose is to make fund value look better, not to invest. This shows intent to mislead.
Test effect: the price is artificially affected and reported values mislead clients and others.
State the remedy: stop the practice and have compliance review the trades.

Answer: This violates Standard II(B) Market Manipulation. It is transaction-based manipulation, since the trades distort price with intent to mislead and have no genuine investment purpose.

Exam tips

Write the standard name first, then the reason. For a 12-point essay set, short labeled answers earn points faster than long prose.
When a command word says justify, state the test you applied: material, nonpublic, or intent to mislead.
In item sets, look for words like selective disclosure, private call, or tip. They signal nonpublic information.
Look for the cue of a genuine investment reason. It usually points away from II(B) manipulation.
Prefer answers that include compliance, firewalls and refraining from trading over answers that rely on personal judgment.

Integrity of Capital Markets (Standard II) 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 (Standard II): frequently asked questions

What is the mosaic theory under the CFA Standards?

It lets an analyst combine public information with nonmaterial nonpublic information to reach a conclusion. The conclusion may be material, and this is still allowed. It fails if any single input is both material and nonpublic.

What should I do if I receive MNPI?

Do not trade or recommend trades on it, and do not pass it on. Tell your compliance department and, where appropriate, encourage the company to make the information public. Rely on firewalls and restricted lists to contain it.

What counts as market manipulation under Standard II(B)?

It covers spreading false information to move prices and trading to create a false price or the appearance of volume. Intent to mislead is central. A genuine trade that moves a price is not manipulation.

Is information public once it is sent to a few analysts?

No. Information is public only after it has been disseminated to the marketplace. Selective disclosure to a group of analysts leaves it nonpublic.