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Guide for Insight Providers on Material NonPublic Information
Guide for Insight Providers on Material NonPublic Information

Guidance on how to avoid infringing Material NonPublic Information obligations when producing content.

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Written by Research Team
Updated over a week ago

This Guide is designed to assist Insight Providers who are producing content for Smartkarma by providing guidance on the subject of Material NonPublic Information (“MNPI”)

It has been prepared with a focus on Insight Providers producing content to be published on and distributed via Smartkarma. It is intended to inform and empower Insight Providers by assisting them in ensuring they understand and avoid infringing MNPI obligations.

The information contained in this guide is based on the Standards of Practice Guidance, as prepared and disseminated by the CFA Institute. The information is simplified and must not be taken as a definitive statement of the law or practice. The information is for general guidance on matters of interest only and is provided on the understanding that the authors and publishers are not hereby rendering ongoing legal or other professional advice and services unless formally retained to do so. This document is intended as a general guide to enlighten analysts and provide them with a framework within which to anticipate potential legal issues, minimise risk and identify when specific legal advice should be sought.

Table of Contents

What Is “Material” Information?

Information is “material” if its disclosure would probably have an impact on the price of a security or if reasonable investors would want to know the information before making an investment decision. In other words, information is material if it would significantly alter the total mix of information currently available about a security in such a way that the price of the security would be affected.

The specificity of the information, the extent of its difference from public information, its nature, and its reliability are key factors in determining whether a particular piece of information fits the definition of material. For example, material information may include, but is not limited to, information on the following:

  • Earnings;

  • Mergers, acquisitions, tender offers, or joint ventures;

  • Changes in assets or asset quality;

  • Innovative products, processes, or discoveries (e.g., new product trials or research efforts);

  • New licenses, patents, registered trademarks, or regulatory approval/rejection of a product;

  • Developments regarding customers or suppliers (e.g., the acquisition or loss of a contract);

  • Changes in management;

  • Change in auditor notification or the fact that the issuer may no longer rely on an auditor’s report or qualified opinion;

  • Events regarding the issuer’s securities (e.g., defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits, changes in dividends, changes to the rights of security holders, and public or private sales of additional securities);

  • Bankruptcies;

  • Significant legal disputes;

  • Government reports of economic trends (employment, housing starts, currency information, etc.);

  • Orders for large trades before they are executed; and

  • New or changing equity or debt ratings issued by a third party (e.g., sell-side recommendations and credit ratings).

In addition to the substance and specificity of the information, the source or relative reliability of the information also determines materiality. The less reliable a source, the less likely the information provided would be considered material. For example, factual information from a corporate insider regarding a significant new contract for a company is likely to be material, whereas an assumption based on speculation by a competitor about the same contract is likely to be less reliable and, therefore, not material. Additionally, information about trials of a new drug, product, or service under development from qualified personnel involved in the trials is likely to be material, whereas educated conjecture by subject experts not connected to the trials is unlikely to be material.

Also, the more ambiguous the effect of the information on price, the less material that information is considered. If it is unclear whether and to what extent the information will affect the price of a security, the information may not be considered material. The passage of time may also render information that was once important immaterial.

What Constitutes “NonPublic” Information?

Information is “nonpublic” until it has been disseminated or is available to the marketplace in general (as opposed to a select group of investors). “Disseminated” can be defined as “made known.” For example, a company report of profits that is posted on the internet and distributed widely through a press release or accompanied by a filing has been effectively disseminated to the marketplace. Researchers must have a reasonable expectation that people have received the information before it can be considered public. It is not necessary, however, to wait for the slowest method of delivery. Once the information is disseminated to the market, it is public information that is no longer covered by this standard.

Researchers must be particularly aware of information that is selectively disclosed by corporations to a small group of investors, analysts, or other market participants. Information that is made available to analysts remains nonpublic until it is made available to investors in general. Corporations that disclose information on a limited basis create the potential for insider-trading violations.

Issues of selective disclosure often arise when a corporate insider provides material information to analysts in a briefing or conference call before that information is released to the public. Analysts must be aware that a disclosure made to a room full of analysts does not necessarily make the disclosed information “public.” Analysts should also be alert to the possibility that they are selectively receiving material nonpublic information when a company provides them with guidance or interpretation of such publicly available information as financial statements or regulatory filings.

Mosaic Theory

A financial analyst gathers and interprets large quantities of information from many sources. The analyst may use significant conclusions derived from the analysis of public and nonmaterial nonpublic information as the basis for investment recommendations and decisions even if those conclusions would have been material inside information had they been communicated directly to the analyst by a company. Under the “mosaic theory,” financial analysts are free to act on this collection, or mosaic, of information without risking violation.

The practice of financial analysis depends on the free flow of information. For the fair and efficient operation of the capital markets, analysts and investors must have the greatest amount of information possible to facilitate making well-informed investment decisions about how and where to invest capital. Accurate, timely, and intelligible communication is essential if analysts and investors are to obtain the data needed to make informed decisions about how and where to invest capital. These disclosures must go beyond the information mandated by the reporting requirements of the securities laws and should include specific business information about items used to guide a company’s future growth, such as new products, capital projects, and the competitive environment. Analysts seek and use such information to compare and contrast investment alternatives.

Much of the information used by analysts comes directly from companies. Analysts often receive such information through contacts with corporate insiders, especially investor-relations staff and financial officers. Information may be disseminated in the form of press releases, through oral presentations by company executives in analysts’ meetings or conference calls, or during analysts’ visits to company premises. In seeking to develop the most accurate and complete picture of a company, analysts should also reach beyond contacts with companies themselves and collect information from other sources, such as customers, contractors, suppliers, and the companies’ competitors.

Recommended Procedures for Compliance

Public Dissemination

If an analyst determines that information is material, the analyst should make reasonable efforts to achieve public dissemination of the information. These efforts usually entail encouraging the issuing company to make the information public. If public dissemination is not possible, the researcher must communicate the information only to the designated supervisory and compliance personnel within the Insight Providers firm and must not take investment action or alter current investment recommendations on the basis of the information. Moreover, analysts must not knowingly engage in any conduct that may induce company insiders to privately disclose material nonpublic information.

Compliance Procedures

Analysts should encourage their firms to adopt compliance procedures to prevent the misuse of material nonpublic information. Particularly important is improving compliance in such areas as the review of employee and proprietary trading, the review of investment recommendations, documentation of firm procedures, and the supervision of interdepartmental communications in multiservice firms. Compliance procedures should suit the particular characteristics of a firm, including its size and the nature of its business.

Analysts are encouraged to inform their supervisor and compliance personnel of suspected inappropriate use of material nonpublic information as the basis for security trading activities or recommendations being made within their firm.

Disclosure Procedures

Firms should follow disclosure policies designed to ensure that information is disseminated to the marketplace in an equitable manner. Analysts should encourage the development of and compliance with procedures for distributing new and updated investment opinions to clients. Recommendations of this nature may represent material market-moving information that needs to be communicated to all clients fairly.

Personal Trading Limitations

Research firms should consider restrictions or prohibitions on personal trading by employees and should carefully monitor both proprietary trading and personal trading by employees. Securities should be placed on a restricted list when a firm has or may have material nonpublic information. The broad distribution of a restricted list often triggers the sort of trading the list was developed to avoid. Therefore, a watch list shown to only the few people responsible for compliance should be used to monitor transactions in specified securities. The use of a watch list in combination with a restricted list is an increasingly common means of ensuring effective control of personal trading.

Communication to All Employees

Insight Providers should circulate written compliance policies and guidelines to all employees. Policies and guidelines should be used in conjunction with training programs aimed at enabling employees to recognize material nonpublic information.

Employees must be given sufficient training to either make an informed decision or to realise they need to consult a supervisor or compliance officer before engaging in questionable transactions. Appropriate policies reinforce that using material nonpublic information is illegal in many countries. Such trading activities based on material nonpublic information undermine the integrity of the individual, the firm, and the capital markets.

Last updated: 23 March 2023

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