Clevency
Standard II-A at a glance
The relevant Standard is II-A: Material Nonpublic Information, in the Code and Standards. The core rule: members and candidates in possession of material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.
Mosaic theory is the recognised exception. The Standard explicitly contemplates that analysts build conclusions from many non-material pieces — some public, some nonpublic — and that such conclusions, even if material, do not themselves trigger the Standard.
What mosaic theory actually means
Picture an analyst building a view on a mid-cap retailer. She reads the company's public filings (public, material). She visits three store locations and counts foot traffic (public, non-material in isolation). She chats with a supplier at a trade show, who mentions in passing that order volumes have been strong this quarter (nonpublic, non-material in isolation). She combines these pieces and concludes that same-store sales growth is likely to beat consensus — a material view, formed legally.
The combination is where mosaic theory lives. Each individual input was permissible. The conclusion is the analyst's work product.
The 3-part test for material information
- Is it material? Would a reasonable investor consider it important in making an investment decision? Would it likely affect the stock price?
- Is it nonpublic? Has it been disseminated to the marketplace broadly, or is it still confined to a limited group?
- Would it affect investment decisions? This overlaps with materiality but adds a practical lens — would an informed trader act on it?
Information is MNPI only if it is both material and nonpublic. Public material information is fair game. Nonpublic non-material information is fair game. Only the intersection — material nonpublic — triggers Standard II-A.
Case study table: violation or not?
| Scenario | Public? | Material? | Violation? | Why |
|---|---|---|---|---|
| Analyst reads 10-K, concludes stock is overvalued | Public | Material | No | Public information, no restriction |
| Analyst counts cars at a retailer's parking lots across 30 locations and projects same-store sales | Public (observable) | Material (the conclusion) | No | Classic mosaic — observable public data combined into a material view |
| CFO tells analyst in a private call that earnings will miss consensus by 20% | Nonpublic | Material | Yes | Direct MNPI — trading on it or recommending others trade is a Standard II-A violation |
| Analyst's cousin, an engineer at Target A, mentions a product recall is imminent | Nonpublic | Material | Yes | MNPI received from a tippee source; trading triggers violation |
| Analyst speaks with 15 suppliers; each shares non-material shipment data; the aggregate suggests a quarterly beat | Nonpublic non-material pieces → material conclusion | Each piece non-material; aggregate material | No | Mosaic theory — the conclusion is the analyst's work, not received MNPI |
| Analyst is told by an investment-bank friend that a merger announcement is coming next week | Nonpublic | Material | Yes | Classic MNPI; the friend is also in violation for tipping |
| Analyst reads a Reddit forum post from an anonymous user claiming insider knowledge of a drug trial result | Technically "public" (posted) but of unknown reliability | Material if true | Case-by-case | Standard II-A guidance treats unreliable or anonymous "public" posts as not meeting the public-disclosure standard; prudent to avoid trading on it |
| Analyst attends a trade conference and overhears two competitors discussing a new product launch | Nonpublic | Material | Possibly | Depends on whether the information was intentionally disclosed to the public setting; typically treated as nonpublic |
The tipping rule
If you share MNPI with someone who then trades — even if you do not trade yourself — you have violated Standard II-A. The "tipping" extension exists because the Standard's purpose is to protect market integrity, not just the member's personal trades.
Likewise, if you receive MNPI as a tippee, acting on it or passing it along is a violation, regardless of whether the original tipper knew they were breaching anything.
Real-world insider-trading parallels
Standard II-A tracks closely to US securities law under Rule 10b-5, though it is broader (the Standard applies globally and to softer MNPI patterns the SEC might not prosecute). Famous insider-trading cases — Raj Rajaratnam's Galleon network, Mathew Martoma at SAC — all involved tippee chains with material nonpublic facts (earnings previews, trial results). The pattern that would clear mosaic theory is the exact opposite: many small, non-material contacts aggregated into a published view.
A CFA-style practice question
Vignette: Priya Nair, CFA, is an equity analyst covering European pharmaceuticals. She has: (i) read the public phase-II trial results for Drug X; (ii) spoken with four doctors at an industry conference, three of whom casually mentioned prescribing patterns in their practice; (iii) received a text from a college friend at the sponsoring pharmaceutical company stating that phase-III results, due to be announced next week, are unexpectedly positive. Priya issues a Buy recommendation that evening.
Which of the following is most likely true?
- Priya has not violated Standard II-A because she had multiple sources of information.
- Priya has violated Standard II-A because the phase-III text message constitutes material nonpublic information.
- Priya has violated Standard II-A because speaking with doctors at a conference is itself a violation.
Answer: B. The phase-III text message is both material (a positive trial result would move the stock) and nonpublic (not yet announced). Possessing it and acting on it violates the Standard, regardless of her other sources. The doctor conversations are legitimate mosaic inputs; the phase-II data is public; it is the single text message that taints the recommendation. If Priya had excluded the text and reached a Buy only from the public and non-material pieces, she would be within mosaic theory.
Frequently asked questions
Is mosaic theory in Standard II-A or Standard III?
Standard II-A — Material Nonpublic Information. Mosaic theory is the explicit exception the Standard provides for analyst work product.
Can I use non-material nonpublic information?
Yes, provided it is genuinely non-material. Non-material pieces aggregated into a material conclusion is the mosaic theory pattern CFA Institute recognises.
What should I do if a company insider tells me MNPI by mistake?
Advise the person of your fiduciary obligations, encourage them to disclose publicly, and do not act on the information or share it until it is in the public domain. The Standard also recommends you document the exchange and inform your firm's compliance team.
Does Standard II-A apply if I don't trade personally?
Yes. Trading, recommending others trade, and tipping are all covered. Sharing MNPI with a client or colleague who then trades is a violation.
How does Standard II-A differ from securities law?
The Standard is broader. It applies globally, to all members and candidates, and in situations where a securities regulator might not have jurisdiction or probable cause. CFA Institute can discipline a member for conduct that is legal under local law if it violates the Standard.
Is overhearing a conversation at a public event MNPI?
Case-by-case. If the information was intentionally disclosed in a public forum (a press conference, a published interview), it is public. If overheard in a hallway or private conversation, it is nonpublic even if the setting was crowded.