An analyst sits in a room with ten other analysts while a finance director describes a strike scheduled for next Friday. Nothing was published. Nothing was filed. The room is full, and the information is still nonpublic.
Standard II protects the fairness of the price-setting mechanism itself. It has two parts: II(A) Material Nonpublic Information and II(B) Market Manipulation.
The rule: if you possess material nonpublic information that could affect an investment's value, you must not act on it or cause others to act on it. "Act" covers derivatives, mutual funds, and alternative investments, not just the underlying security. Tipping counts even if the tippee never trades.
Both conditions must hold. Information that is material but public is fine. Information that is nonpublic but immaterial is fine. Only the intersection is prohibited.
Materiality. Information is material if its disclosure would likely move the security's price, or if reasonable investors would want it before deciding. Judge it on four dimensions: specificity, difference from what is already public, nature, and reliability of the source.
Common mistakes
- Treating a full analyst room as public. A briefing to ten large shareholders or a room of analysts is selective disclosure. Wait for the press release or filing.
- Assuming a reliable-sounding tipper legalizes the trade. Believing a senior executive friend would not break the law does not excuse you. Losing money on the trade does not excuse you either.
- Confusing market noise with inside information. A rival trader's texted guess about strong earnings, with no known business relationship to the issuer, is unreliable rumor, not material information. Blocking a client order over it is the wrong call.
Bottom line
- Standard II(A) bars acting on, or causing others to act on, material nonpublic information, including derivatives, funds, and alternatives
- Material means price-moving or decision-relevant; specificity, difference from public data, nature, and source reliability all matter
- Nonpublic until broadly disseminated by release, wide distribution, or filing; a room of analysts or a closed online group is not public
- Legitimate due-diligence inside information may be used for that engagement only, never to trade or tip
Exam shortcut
Run every II(A) vignette through two gates in order. First, is it material? Test the source: insider or involved technician means yes; competitor, doctor, or rumoring trader means no. Second, is it public? Look for a press release or filing, not an audience size. Both gates yes means do not trade and do not tell.
The full lesson (about 2,009 words, 13 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- standard II integrity of capital markets
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