Members and Candidates who possess material nonpublic information that
could affect the value of an investment must not act or cause others to act
on the information.
Trading on the basis of inside information furthers the perception that markets are “rigged” in favor of insiders and erodes confidence in the investment profession. Any trading based on material nonpublic information violates Standard II(A).
Information is “material” if reasonable investors would want to know it before making an investment decision. Key factors in determining materiality include its specificity, how much it differs from public information, its nature, and its reliability. If it is unclear whether or how much the information will influence a security’s price, it may not be material.
Information is considered “nonpublic” until it is made available to the general market (as opposed to a select group of investors.) Information received at a company meeting or conference call may not be considered publicly available.
A major part of an analyst’s job is to piece together different sets of data to form a conclusion. A conclusion formed by careful analysis of public data and non-material non-public data is acceptable even if the conclusion itself would constitute material non-public information if told to the analyst directly. This is called the “mosaic theory.” Careful record-keeping can support an assertion that information was obtained legitimately through the mosaic theory.
When in possession of material, non-public information analysts should first ask that the information be disseminated widely. Until such time, the analyst should not trade or cause others to trade based on the information. Firms should adopt compliance procedures to prevent misuse of material, non-public information and follow disclosure policies to ensure its dissemination to the public. Further, firms should implement firewalls to prevent such information from being transmitted from one part of the firm to another.
Companies should issue press releases prior to conference calls and other events to prevent selective disclosure.
The CFA Institute Standards of Practice Handbook provides a number of examples of potential violations of Standard II(A).
- Acting on information received from a corporate officer (even indirectly) regarding a takeover agreement at a premium to the share price.
- Failing to ensure that non-public information received is not overheard by others.
- Getting information from unreliable sources (people with no known connection to the source of the information) would not typically be a violation.