Skip to content

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

Standard II(A) Application: Handling MNPI in Practice

Updated 9 October 2026 · Fact-checked

Standard II(A) says you must not act or cause others to act on material nonpublic information. If you receive it, stop, do not trade or tip, and escalate to compliance. Judge whether it is material and nonpublic. If both are true, the Standard applies regardless of how the information was obtained.

Understand Standard II(A) Application: Handling MNPI in Practice

Standard II(A) protects market integrity. Members who possess material nonpublic information (MNPI) must not act on it or cause others to act on it. The aim is a level field: no investor should profit from an informational edge that others cannot legally reach.

Information is material if its disclosure would likely affect the security's price, or if a reasonable investor would want it before deciding. Information is nonpublic until it has been made available to the marketplace. Posting to a few clients, a private call or a closed briefing does not make it public. Public means broadly disseminated, for example a press release or a regulatory filing. Once the market has had time to absorb it, it is public.

II(A) applies to material nonpublic information regardless of how it was obtained. If the source broke the law by passing the information on, Standard I(A) may also be engaged.

In practice, exam cases mostly test what you do next. Typical settings are selective disclosure (a company tells some analysts something first), corporate access (meetings and site visits), expert networks (paid specialists who may hold confidential data), and accidental receipt (a misdirected email or an overheard conversation). The Standard does not ban good research. Analysts may combine public and non-material nonpublic data into a conclusion. That is the mosaic theory. It fails if one piece of the mosaic is itself material and nonpublic.

The member's duty is also tied to the law, but this is a separate point from MNPI handling. The rule that you follow the stricter of law and Code comes from Standard I(A), Knowledge of the Law, not from II(A). Where local law is stricter than the Code, follow the law. Where the Code is stricter, follow the Code.

Compliance is your safety valve. The recommended actions are to encourage a firewall between departments, to use a restricted or watch list, and to report suspected MNPI to compliance rather than decide alone. The member should not act on the information and should consult compliance. As a practical caution, going back to the source to confirm the facts can lead to receiving more MNPI, so let compliance decide how to proceed. Avoid trading, recommending or passing it on while compliance reviews the facts.

Key rules to remember

Core rule
No action or causing others to act on information that is both material AND nonpublic
Both tests must be met for II(A) to apply. If either fails, II(A) is not triggered, though other standards may still apply to the member's conduct. II(A) applies regardless of how the information was obtained. If the source broke the law by passing it on, Standard I(A) may also be engaged. If you are unsure, consult compliance.
Materiality test
Material = likely to affect price, or a reasonable investor would want it before deciding
Source and specificity of the information matter. Vague or speculative information is less likely to be material.
Nonpublic test
Nonpublic = not yet disseminated to the marketplace
Information shared with a select group stays nonpublic. Public once broadly released and the market has had time to absorb it.
Mosaic theory
Public information + non-material nonpublic information = permitted conclusion
Not protected if any piece is itself material and nonpublic.
Recommended compliance response
Stop → do not trade or tip → escalate to compliance → firewall / restricted list
Do not rely on your own judgment when materiality or source is unclear.

How to solve Standard II(A) Application: Handling MNPI in Practice questions

Use the same sequence for any MNPI vignette. It stops you from jumping to a verdict before the facts are tested.

  1. 1Identify the information and its source. Who gave it, and how did they get it?
  2. 2Test materiality. Would it likely move the price or matter to a reasonable investor?
  3. 3Test whether it is nonpublic. Has it been broadly released, or only shared with a few?
  4. 4Note how the information was obtained. II(A) applies regardless. If the source broke the law by passing it on, Standard I(A) may also be engaged.
  5. 5Decide the permitted action. If both tests are met, no trading, no recommending, no tipping. If not, normal research may continue.
  6. 6Name the recommended step. Escalate to compliance, add to a restricted list, and use a firewall.
  7. 7State the answer in the command-word format asked for, with a one-line reason tied to the Standard.

Quickest way: Two-test shortcut: Material? Nonpublic?

When to use it: Use it on any item set question that asks whether the member violated II(A) or what the member should do.

  1. Ask: is it material? If clearly no, II(A) is not engaged, though other standards may still apply to the member's conduct.
  2. Ask: is it nonpublic? If clearly public, II(A) is not engaged, though other standards may still apply.
  3. If both yes, pick the option that stops trading and escalates to compliance.
  4. Reject options that say to trade only a small amount, wait a few days then trade, or act before compliance has reviewed the matter.

Common mistakes in Standard II(A) Application: Handling MNPI in Practice

  • Treating information shared with several analysts as public.

    Wide circulation feels like publication.

    Fix: Public means disseminated to the marketplace, not a select group. A closed call is still nonpublic.

  • Calling any research tip a mosaic theory case.

    Students overapply the mosaic idea.

    Fix: Mosaic only protects pieces that are public or non-material. One material nonpublic piece ruins it.

  • Choosing to confirm the information with the company and then acting on it.

    Verification sounds diligent.

    Fix: The member should not act on the information and should consult compliance. Confirming with the source first is a practical risk, because it may bring more MNPI, so let compliance decide how to proceed.

  • Thinking a small or client-account trade is acceptable.

    Students think size limits harm.

    Fix: The Standard bars acting at all, for yourself or on behalf of others, regardless of size.

  • Assuming a member who did not trade has no problem.

    Focus on trading only.

    Fix: Causing others to act, such as tipping or recommending, also breaches the Standard.

  • Ignoring stricter local law.

    Students recall only the Code.

    Fix: Follow the stricter of law and Code. This rule comes from Standard I(A), Knowledge of the Law, not from II(A).

Worked examples

Example 1

An analyst attends a private session where a company's CFO tells a small group of analysts that quarterly earnings will be well below consensus. The results are not yet public. The analyst's firm holds the stock. What should the analyst do?

Show the solution
  1. Information: a major earnings shortfall from the CFO. This would likely move the price, so it is material.
  2. It was shared only with a small group, so it is nonpublic.
  3. Both tests are met. The analyst must not trade, change recommendations or tell colleagues based on it.
  4. Recommended action: report to compliance, and have the stock placed on a restricted list while the information remains nonpublic.

Answer: The analyst must not act or cause others to act on it. Escalate to compliance and let the firm restrict the stock until the information is public.

Example 2

A portfolio manager uses an expert network. A consultant, a former employee of a supplier, tells the manager that a listed customer of the supplier will cancel a large order next week, not yet announced. The manager believes it is likely true. Is it acceptable to short the customer's stock, and what should the manager do?

Show the solution
  1. Materiality: a large cancelled order would probably affect the price, so it is material.
  2. Nonpublic: the cancellation is not announced, so it is nonpublic.
  3. II(A) applies to material nonpublic information regardless of how it was obtained. If the consultant broke the law by passing it on, Standard I(A) may also be engaged.
  4. Shorting would be acting on MNPI, and is not allowed. Do not tell others to act either.
  5. Stop using the network on this topic, and report to compliance, which may restrict the stock and review the network.

Answer: No. The information is material and nonpublic, so the manager must not short the stock or tell others. Report to compliance.

Exam tips

  • Write both tests by name, material and nonpublic, in constructed response answers. Markers look for them.
  • When asked for a recommended action, name compliance escalation plus a restricted list or firewall.
  • In item sets, wrong options often involve trading small, waiting briefly, or acting before compliance has reviewed. Eliminate them.
  • Watch the mosaic theory setup. Check whether any single piece is material and nonpublic.
  • Show the reasoning in a few short lines. You need the point, not an essay.

Standard II(A) Application: Handling MNPI in Practice: frequently asked questions

What should I do if I receive material nonpublic information by accident?

Do not trade or pass it on. Report it to your compliance department and let them decide on restrictions. Do not go back to the source to check the facts on your own, because that may bring more MNPI. Let compliance decide how to proceed.

Is selective disclosure to analysts a violation by the analyst?

If the information is material and nonpublic, the analyst must not act on it or cause others to act on it. The analyst should go to compliance. The company's own conduct is a separate issue.

Does Standard II(A) ban using expert networks?

No. Experts can give legitimate industry insight. The member must make sure the expert does not pass material nonpublic information or breach a confidentiality duty.

How is the mosaic theory different from insider trading?

Mosaic theory allows combining public information and non-material nonpublic information into a conclusion. It does not allow use of a material nonpublic piece.