Agents must not participate in market manipulation even when a customer places an ordinary-looking order. Your responsibility also includes recognizing when confidential information or hidden ownership changes what that order means.
Your work can expose you to confidential facts before other investors learn them. Material nonpublic information (MNPI) is information important to an investment decision that is not yet publicly available. Trading on it can misuse the confidence placed in you.
When assessing trading in breach of a duty of confidence, information is material when there is a substantial likelihood that a reasonable investor would consider it important. An unannounced merger, a major earnings surprise, or the loss of a crucial customer can qualify. Materiality does not require a guaranteed price movement. Ask what the information would change about an investor's decision.
Nonpublic means the information has not been broadly disseminated to investors. Telling several friends does not make a confidential announcement public. Public dissemination requires broad availability and an opportunity for the market to absorb the information.
Common mistakes
- Treating a 30-day waiting period as a complete trading-plan defense. A plan adopted while aware of MNPI fails an essential condition.
- Assuming two different account names prove independent ownership. Wash trading turns on beneficial ownership; matched-order manipulation can involve genuinely different owners.
- Rejecting a genuine 400-share agency cross solely because one broker-dealer represents both customers.
Bottom line
- Unlawful insider trading involves MNPI and a breach of a duty of trust or confidence.
- Liability can reach corporate insiders, outsiders who misappropriate information, tippers, and tippees.
- Broker-dealers must establish, maintain, and enforce written procedures reasonably designed to prevent misuse of MNPI.
- Wash trades, deceptive matched orders, artificial price activity, and misleading pump-and-dump schemes are prohibited.
Exam shortcut
For information questions, trace who knew what, when they knew it, and whose confidence was breached before judging the trade. For matching transactions, inspect beneficial ownership and coordinated purpose. Do not decide from account names or a shared broker alone. For promotional claims, identify who benefits from the induced buying and whether the claimed news, trades, or quotations are genuine.
The full lesson (about 3,749 words, 25 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- H22
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