Level 1 CFA® Exam Ethics, Standards II (A) & II (B)

Last updated: October 06, 2022

CFA Exam: Material Nonpublic Information

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Standard II is about the integrity of capital markets. Standard II (A) deals with material nonpublic information and Standard II (B) with market manipulation.

When working in finance, say as an analyst, you will have access to numerous information and your work will be to go through it, analyze it in great detail and decide which piece of information is important for you and why.

A good analyst can find information and draw conclusions that others will not be able to find or draw so easily. Your work will be judged based on what kind of information you obtain and what you decide to do with it. In other words, it’ll be evaluated based on how you act upon getting the information.

That is why to perform your duties professionally, you have to be able to distinguish between different types of information, namely between:

  • the information you may act upon, and
  • the information that you must NOT use under any circumstances.

Material versus Nonmaterial Information

There is nothing wrong with using information considered to be common knowledge, i.e. public information. Also, information that is not known to the general public but is considered nonmaterial may be used in an investment professional’s work. So, it’s not about whether the information is public or non-public. It’s materials vs non-material that matters!

What does material and nonmaterial exactly mean?

Material information – carries considerable weight, i.e. the importance of information is so great that it may significantly influence the price of a given security (so, it cannot be used unless it’s public).

Nonmaterial information – has no significant impact on the price of the security (and, thus, it may be used even it is not public).

IMPORTANT: Using material non-public information is prohibited!

Examples of material non-public information:

  • bankruptcy,
  • mergers and acquisitions,
  • annual reports, auditor reports, etc.

Acting upon Material Nonpublic Information

Example 1 (Standard IIA)

Consider a situation in which you get access to some inside information – say, you learn that a company is going to file for bankruptcy, which is generally considered material information. You happen to have shares of this company in your investment portfolio. After weighing up all pros and cons of using this information, you decide to act upon it and sell your shares.

What are the consequences of your decision? Is your decision ok?


  1. You will not make losses that others probably will but you will also violate Standard II (A).
  2. Your reputation as an investment professional will suffer.
  3. Also, as a result of your action, the integrity of the market will be spoiled.

Even if in the short run the decision to use the material information may seem tempting to you, in the wider perspective the decision is harmful – it spoils the market and promotes unethical behavior.

Think of it this way – if investment actions were based on this kind of behavior, financial markets would be greatly distorted and opaque for common investors. After the crisis that the financial world suffered from, it is more important than ever to restore faith in a fair investment process and reliable investment services.


As soon as the information is spread to the general public, you will be able to use it and act to minimize your losses. The point at which you will sell your shares is of great importance here, however. Before the information is disseminated – it means violation, and after the dissemination – there’s no violation involved.

Character vs Source of Material Nonpublic Info

The main factor that distinguishes material non-public information from nonmaterial non-public information is the influence on the price of a security. But not every piece of information will affect the price and not every piece of information will affect the price to the same extent. To identify material non-public information, you should take into account the source of the information and its nature.


Lesson Video

CFA Exam: Market Manipulation

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The aim of Standard II (B) is to secure the market and its participants against the adverse effect of manipulation.

We distinguish two types of market manipulation. In both cases, what decides whether an action is a manipulation or not is the intent that lies behind the action.

Information-based Manipulation

Information-based manipulation is when you spread false information to obtain some unfair gain at somebody else’s expense.

Transaction-based Manipulation

Transaction-based manipulation is when you aim at obtaining an unfair gain not through false information but artificially conducted transactions.

Example 2 (Standard IIB)

Let’s say that you and your brother have shares of Company A. Their price has suddenly fallen and you did not manage to sell them at a good price. To minimize your losses, you decide to carry out some transactions on these shares between your and your brother’s accounts. Your aim is to strengthen the belief that the fall in the price of the shares was just incidental and that their value goes up again.

How should we understand this example?

This kind of action is manipulation and violation of Standard II (B).

Carrying out transactions from your account to your brother’s account and the other way round increased the volume of transactions involving the shares of Company A and probably led to an increase in the price. This way your goal was achieved but the intention behind the transactions was bad and at other investors’ expense.

Level 1 CFA Exam Takeaways for Ethics, Standards II (A) & II (B)

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  1. Both material non-public information and market manipulation are two rather delicate issues that may seriously harm the integrity of financial markets and its perception in the eyes of investors.
  2. Using public information as well as nonmaterial non-public information for investment actions is beyond violation.
  3. Material information may significantly influence the price of a given security. Using material non-public information is prohibited.
  4. Not only the nature of the information but also the degree of reliability and its ambiguity define material non-public information.
  5. The mosaic theory allows analysts to draw their conclusions based on different public and nonmaterial non-public information to provide a valuable service to their clients.
  6. We distinguish two types of market manipulation, i.e. information- and transaction-based manipulation.

Some Compliance Concerns & Responsibilities

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CFA Exam: Material Nonpublic Information

  1. NONPUBLIC INFO: Before acting on such information – make sure it does not constitute material information, especially if it is within the scope of the information that is likely to be material, e.g., earnings, or comes from a reliable source, e.g., the company’s executives.
  2. MATERIALITY OF INFO: You need to be able to determine the materiality of information and weigh against the other known public facts to determine whether the information could be considered material, e.g., info on product development obtained from the executive vs an employee vs hearsay.
  3. MARKET NOISE: People talk – there are often rumors and whispers but you need to be able to tell apart meaningful and meaningless information.
  4. USING EXPERTS: To enhance your knowledge and evaluation process, you can use expert networks and seek advice from professionals within the industry you follow. However, some experts may be willing to provide you with some confidential information for the right incentive. It is your responsibility not to request or act on any confidential information received from external experts.
  5. SOCIAL MEDIA GROUPS: If you participate in a group with membership limitations – mind that not all info you get there may be publically available. So – before using the material information obtained from such sources – verify that it can also be accessed from a public source like company filings, webpages, or press releases.
  6. SOCIAL MEDIA COMMUNICATION: Use social media to communicate with clients or investors but make sure that the information reaches all clients or is open to the investing public.

While doing ethics cases that deal with material nonpublic information always pay attention to the wording:

“material nonpublic information” = “confidential corporate level information” = “protected inside information”, etc.

CFA Exam: Market Manipulation

Threats for the market and prices:

  • reportedly independent analyses,
  • recommendations containing highly promotional info,
  • speculations,
  • spreading false or inaccurate info,
  • creating the appearance of greater investor interest, e.g., in a stock,
  • creating artificial price volatility,
  • distortion of trading volume,
  • manipulating the inputs of a model, e.g., to minimize risk in order to achieve higher ratings,
  • “Pump-Priming” strategy, i.e., a liquidity-pumping strategy, which should be disclosed to clients if used,
  • “Pump and Dump” strategy, i.e., a misleading practice aimed at artificially boosting the price of stocks before selling them.