Lesson 8 of 34 · All lessons in this module
- Standard I: ProfessionalismVideo lesson
- Standard I cases: knowledge of the law and dissociation
- Standard I cases: pressure on analysts and performance staff
- Standard I cases: gifts, travel, manager selection and paid research
- Standard I cases: misrepresenting services, products and results
- Standard I cases: plagiarism, third-party material and online content
- Standard I cases: misconduct and competence
- Standard II: Integrity of Capital MarketsVideo lesson
- Standard II(A) cases: material, nonpublic or mosaic?
- Standard II(A) cases: tipping, experts and firm controls
- Standard II(B) cases: rumours, trades and intent
- Standard II cases: extra 2026 examples and procedures
- Standard III(A)–(B): Loyalty, Prudence, Care and Fair DealingVideo lesson
- Standard III(A) cases: client identity, loyalty and brokerage
- Standard III(B) cases: dissemination, allocation and priority
- Standard III(C)–(E): Suitability, Performance Presentation and ConfidentialityVideo lesson
- Standard III(C) cases: IPS, total portfolio and mandates
- Standard III(D) cases: fair, accurate and complete performance
- Standard III(E) cases: exceptions, channels and firm limits
- Standard IV: Duties to EmployersVideo lesson
- Standard IV(A) cases: loyalty, outside work and leaving
- Standard IV(B) and IV(C) cases: outside pay and supervision
- Standard V: Investment Analysis, Recommendations, and ActionsVideo lesson
- Standard V(A) cases: reasonable basis and outside research
- Standard V(A) cases: models, advisers and providers
- Standard V(B) cases: services, costs and process changes
- Standard V(B) cases: risks, limitations, facts and opinions
- Standard V(C) cases: records and retention
- Standard VI: Conflicts of InterestVideo lesson
- Standard VI(A) cases: avoiding and disclosing conflicts
- Standard VI(B) and VI(C) cases: who trades first and who gets paid
- Standard VII: Responsibilities as a CFA Institute Member or CFA CandidateVideo lesson
- Standard VII(A) cases: exams, confidentiality and volunteering
- Standard VII(B) cases: using the designation, membership and candidacy
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Lesson 8 of 34 · 15 min
Standard II: Integrity of Capital Markets
Markets only work if no one trades on secrets or fakes prices: never act on material nonpublic information, and never distort prices or volume to mislead.
In short
- II(A) Material Nonpublic Information: if you hold information that is both material and nonpublic, you must not trade on it or cause anyone else to trade (tipping counts, even if the person never trades).
- Material: would likely move the price, or a reasonable investor would want it. Reliability of the source and clarity of the price effect matter.
- Nonpublic: not yet disseminated to the market in general. Telling a room of analysts does not make it public.
- Mosaic theory: conclusions built from public information plus nonmaterial nonpublic pieces may be acted on, even if they would be material had the company said them outright.
- II(B) Market Manipulation: no false information and no transactions intended to mislead about price or volume. Intent decides; legitimate strategies are fine.
II(A): what makes information material and nonpublic
Information is material if its release would probably affect the price of a security, or if a reasonable investor would want to know it before deciding. Typical examples: earnings, mergers and tender offers, new products or regulatory approvals, winning or losing a big contract, management or auditor changes, dividend changes, defaults, bankruptcy, major litigation, large pending trade orders, and new or changed ratings or analyst recommendations.
Judge materiality by how specific the information is, how far it differs from what is public, its nature and its reliability. A fact from a company insider is likely material; a guess by a competitor or a tip from someone with no connection to the company usually is not. The more uncertain the price effect, the less material the information. Old news can lose its materiality.
Information is nonpublic until it has been made available to the market in general, for example through a press release or regulatory filing. You need a reasonable expectation that investors have received it, but you need not wait for the slowest delivery channel. Information given to a select group (a conference call, a meeting with the ten largest shareholders, a members-only online group) stays nonpublic until it reaches everyone.
The ban covers every instrument whose value the information affects: shares, bonds, options, swaps, funds that hold the stock. There is one carve-out: insider information that a company provides for a legitimate business purpose, such as due diligence for an underwriting, merger or credit rating, may be used for that purpose, but never for trading.
| Likely material | Likely not material |
|---|---|
| CFO tells you next quarter's sales are 15% above guidance | A competitor speculates the company may win a contract |
| Scientist running a drug trial hints the results are poor | A doctor not involved in the trial guesses the drug will fail |
| A star analyst's unpublished downgrade | A rumour in a trading chat with no known source |
| Notice of a large client order about to be executed | Information whose effect on price is unclear |
Mosaic theory, experts, social media and research reports
Analysts are supposed to find things the market has missed. Under the mosaic theory, an analyst may combine public information with nonmaterial nonpublic information (talks with suppliers, store visits, industry experts) and act on the resulting conclusion, even if that conclusion would have been material inside information had the company stated it directly. Keep records of the research (Standard V(C)) to show how you got there.
Expert networks are allowed and you may pay experts for their insight, but you remain responsible for not requesting or using confidential information. If an expert lets slip material nonpublic information, you may not act on it until it is public, even if the expert signed an agreement promising not to share such information.
Social media: information in a closed, membership-only group may not be public. Verify that it is also available through a public source before acting. Using social media to communicate with clients is fine if the information reaches all clients or the public.
A respected analyst's new recommendation can move prices, but the analyst is not an insider and built it from public information and expertise. Clients pay for that work, so the report need not be made public. Someone who gets the report early without being a client (a journalist, say) and trades on it does violate II(A).
Mosaic test in one line: every single piece you used was either public or not material on its own. If any one piece was material and nonpublic, the mosaic defence fails.
Preventing misuse: what to do and what firms should build
If you come across material nonpublic information, the first step is to try to get it publicly disseminated, usually by encouraging the company to announce it. If that is not possible, tell only your firm's designated compliance or supervisory staff, do not trade, and do not change your recommendations. Never act in ways that encourage insiders to leak.
The main tool inside a firm is a firewall (information barrier) between departments that receive inside information, such as investment banking or commercial lending, and departments that trade or publish research. Minimum elements: control of interdepartmental communication through a clearance area in compliance or legal; watch, restricted and rumour lists to review employee trading; documentation of procedures and enforcement; and heightened review or restriction of proprietary trading while the firm holds inside information.
Supporting measures: physical separation of departments; no overlap of staff (an analyst who helps the bankers on a deal stays on the banking side until the information is public); one compliance officer who decides what is material and when it is public; personal trading limits with periodic reports; written records of communications; training for all staff; and company disclosure policies such as issuing a press release before analyst meetings.
A blanket ban on proprietary trading is not required. A firm that makes a market in the stock should keep doing so but stay passive, taking only the other side of unsolicited client orders, because withdrawing would itself tip off the market. Risk arbitrage is different: the prudent course is to suspend it while the security is on the watch list.
| Restricted list | Watch list | |
|---|---|---|
| Who sees it | Distributed widely within the firm | Only a few compliance staff |
| What it does | Limits or bans trading and recommendations | Lets compliance monitor trading quietly |
| Drawback | Its circulation can itself signal that something is going on | None of that signalling, so it is often used together with the restricted list |
II(B) Market Manipulation
Manipulation is any practice that distorts prices or artificially inflates trading volume with the intent to mislead market participants. It erodes trust, raises risk premiums and pushes investors away from markets.
Information-based manipulation spreads false or misleading information: starting rumours online, publishing exaggerated forecasts to move a price, or the classic pump and dump (hype a stock you own, then sell into the rise). Deliberately skewing model inputs to win a better rating also counts.
Transaction-based manipulation uses trades to create a false picture: trading back and forth between your own accounts to fake volume, trades designed to push a price, or building a dominant position in an asset to squeeze the price of a related derivative (or the reverse).
Intent separates manipulation from legitimate trading. Exploiting a perceived mispricing, or selling a large block carefully, is not manipulation. A temporary liquidity-boosting programme on a new contract is acceptable if it is fully disclosed. Personal profit is not required for a violation: spreading a false merger rumour to cause trouble for someone else still manipulates the market.
Worked examples
Example 1 Building a mosaic
Amara Okafor, a buy-side analyst in Lagos, studies a cement maker's filings, visits building sites, and interviews distributors who say orders have slowed. She concludes next quarter's earnings will miss and issues a sell. Has she violated II(A)?
Example 2 A dinner-table tip
At a dinner, the CFO of a listed shipping company tells Henrik Dahl, a portfolio manager in Oslo, that the company will announce a large new government contract next week. Henrik's sister holds the stock. What may Henrik do?
Example 3 Spoofing a thin bond
A trader places large buy orders in an illiquid corporate bond, cancels them seconds later, and repeats this to make other dealers believe demand is rising, so he can sell his own holding at a better price. Does this violate II(B)?
On the exam
Most items ask whether information is material and nonpublic (watch the source's reliability and selective disclosure), whether the mosaic theory applies, and what the best compliance procedure is (firewalls, restricted and watch lists). II(B) items hinge on intent.
- Disclosure to a group of analysts or large shareholders does not make information public.
- Tipping is a violation even if the recipient never trades, and passing information to family is no exception.
- Trading a fund or ETF that holds the company, or options on it, does not get around II(A).
- An expert's signed confidentiality agreement does not protect you if what they told you is material and nonpublic.
- A firm in possession of inside information should not simply stop market making; it should stay passive.
Check yourself
Q1A portfolio manager's dentist, who casually follows markets, says a mid-cap miner will soon be taken over. The manager checks industry trends and buys more shares. Under Standard II(A), the manager:
Q2A finance director tells the ten largest shareholders at a private meeting that a strike will halt production next week. Can an analyst present use this to downgrade the stock?
Q3Under the mosaic theory, an analyst may act on a conclusion drawn from:
Q4A broker-dealer that makes a market in a small company's stock learns material nonpublic information through its banking department. The most appropriate response for its market-making desk is to:
Q5Which of the following is least likely to be market manipulation under Standard II(B)?
Q6To prevent misuse of material nonpublic information in a multiservice firm, the best primary control is to:
Answer the 6 questions: +10 XP for each one you get right first time.
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