Level III Core · Guidance for Standard II: Integrity of Capital Markets

Mosaic Theory and Public Information Analysis for CFA Level III

Updated 8 October 2026 · Fact-checked

Mosaic theory says an analyst may combine public information with nonmaterial nonpublic information to reach a conclusion, even if that conclusion would be material. No single piece may be material nonpublic information. Under Standard II(A), you test each piece, then the conclusion, and then ask where the information came from.

Understand Mosaic Theory and Public Information Analysis

Standard II(A) bars you from acting or causing others to act on material nonpublic information (MNPI). 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. The mosaic theory is the Code's way of allowing that. You collect many small pieces: public filings, industry data, channel checks, conversations with suppliers or customers, and your own models. Each piece alone is either public or nonmaterial. Together they form a picture.

The key point is that the finished picture can be material. That is allowed. The Standard does not ask whether your conclusion moves the price. It asks whether any single input was MNPI. An analyst who builds a view of a company's earnings from public and nonmaterial inputs has done skilled work, not an ethics breach.

The protection ends when one piece is MNPI. A company executive who privately says earnings will miss guidance gives you material, nonpublic information. Putting it in your mosaic does not clean it. Source matters too. Information from an insider who breaches a duty by sharing it is a red flag, even if it looks small.

An analyst may act on his or her own reasoned interpretation of public information, even if that interpretation moves the market. An analyst's own view of public data, such as an earnings call, is not MNPI. A recommendation change based on public and nonmaterial information is not MNPI either. A recommendation change driven by MNPI remains prohibited. Selective disclosure by a company to a few analysts, though, creates MNPI risk.

Key rules to remember

Mosaic theory test: Public information + nonmaterial nonpublic information → conclusion (allowed, even if the conclusion is material); Every individual input must be public or nonmaterial. The conclusion itself is not tested for materiality.
MNPI test: MNPI = material AND nonpublic; Both conditions must hold. If information is public, or if it is not material, Standard II(A) is not triggered by that piece.
Materiality test: Material if disclosure would likely affect price OR reasonable investors would want it before deciding; Source reliability and how specific the information is affect materiality.
Required action on MNPI: Do not act and do not cause others to act; encourage the issuer to make the information public; make the compliance or supervisory function aware under firm policy; If you hold MNPI, you also should not trade on it for clients or yourself. Where your firm has compliance procedures, follow them.

How to solve Mosaic Theory and Public Information Analysis questions

Use this order for any question on mosaic theory. It works for item sets and for constructed response questions asking whether the analyst violated Standard II(A).

1List each separate piece of information the analyst used.
2Label each piece as public or nonpublic.
3For each nonpublic piece, decide if it is material: would it likely move the price or matter to reasonable investors?
4Check the source. Did an insider share it in breach of a duty, or did the company selectively disclose it?
5If any single piece is both material and nonpublic, there is a problem. The analyst should not act on it or cause others to act.
6If every piece is public or nonmaterial, the analyst may combine them. State that the mosaic theory applies, even if the final conclusion is material.
7Answer the command word. Name the Standard, give the verdict, and give the reason in one sentence.

Quickest way: Piece-by-piece check

When to use it: Use it when a vignette lists several tidbits from different sources and asks if the analyst violated Standard II(A).

Ignore the conclusion. Do not ask if it is material.
Go through each tidbit and ask two questions: public? material?
Spot any tidbit that is both nonpublic and material, usually a specific private figure from an insider.
If none, answer: no violation, mosaic theory applies.
If one, answer: violation if the analyst acts or causes others to act on it.

Common mistakes in Mosaic Theory and Public Information Analysis

Saying the analyst violated the Standard because the final conclusion was material.
Students apply the materiality test to the finished view instead of the inputs.
Fix: Test each input. A material conclusion built from public and nonmaterial pieces is permitted under the mosaic theory.
Treating all nonpublic information as prohibited.
Students remember 'nonpublic' and forget that it must also be material.
Fix: Write MNPI = material AND nonpublic. Nonmaterial nonpublic information may be used.
Thinking a mosaic can launder MNPI.
Students over-extend the theory after learning it protects combined research.
Fix: If one piece is MNPI, the analyst cannot use it, however many public pieces surround it.
Ignoring the source of the information.
Students focus on content and miss that an insider may be breaching a duty or a company may be selectively disclosing.
Fix: Always ask who gave the information and whether that person was entitled to share it.
Assuming a change in a recommendation after analysis is itself a violation.
Students confuse a price-moving opinion with MNPI.
Fix: An analyst's own opinion based on public and nonmaterial information is not MNPI. Only the inputs are tested.

Worked examples

Example 1

An analyst covering a retailer reads its public annual report, counts cars in store car parks over several weeks, and talks to a supplier who says the retailer's orders seem slightly lower than last year. She concludes that sales will fall short of consensus and lowers her rating. Has she violated Standard II(A)?

Show the solution

List the pieces: the annual report, the car park counts, the supplier comment.
The annual report is public. The car park counts come from her own observation of public places, so they are public or nonmaterial.
The supplier comment is nonpublic but vague and only 'slightly lower'. It is unlikely to be material by itself.
No piece is both material and nonpublic.
Her conclusion may be material, but the mosaic theory allows that.

Answer: No violation. Each input is public or nonmaterial, so she may combine them and change her rating under the mosaic theory.

Example 2

An analyst meets the CFO of a listed company. The CFO says in confidence that quarterly earnings will be well below published guidance, which has not been announced. The analyst also has public sector data and her own model. She plans to cut her recommendation and tell clients to sell. What should she do under Standard II(A)?

Show the solution

Identify the CFO's statement: a specific figure on earnings, well below guidance, not yet public.
It is nonpublic. It would likely move the price, so it is material.
It is therefore MNPI, and the mosaic theory does not apply to it.
Her public data and model are fine, but she cannot let the MNPI drive her recommendation.
She should not act or cause others to act on it. She should encourage the issuer to make the information public, and she should make her firm's compliance or supervisory function aware under firm policy.

Answer: She must not cut the recommendation or advise clients to sell on the basis of the CFO's statement. It is MNPI, and combining it with public data does not make it permissible. She should encourage the issuer to disclose it and make compliance or her supervisor aware under firm policy.

Exam tips

In a vignette, label each tidbit public, nonmaterial or MNPI before choosing an answer.
The trap answer says the analyst violated the Standard because the conclusion was material. Reject it if all inputs are public or nonmaterial.
Watch for words like 'specific', 'confidential', 'before announcement' and 'insider'. They signal MNPI.
In essay sets, name the Standard, give the verdict, and give one reason. Do not write a long essay.
Expect the topic to appear with firewalls and compliance procedures, so link your answer to the next step the analyst should take.

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 the mosaic theory in CFA Level III?

It says an analyst may combine public information and nonmaterial nonpublic information to reach a conclusion. The conclusion may be material without breaking Standard II(A). No single input may be MNPI.

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

MNPI is a single piece of information that is both material and nonpublic, and it cannot be acted on. The mosaic theory describes legitimate research that combines permitted pieces. The first is prohibited input. The second is permitted method.

Can analysts use mosaic theory under Standard II(A)?

Yes. Standard II(A) permits it as long as each piece is public or nonmaterial. Once any piece is MNPI, the analyst must not act or cause others to act on it.

Does the source of information matter?

Yes. If an insider shares information in breach of a duty, or a company selectively discloses it, treat it with caution. Look at what the information is and who gave it.