While working out at a private gym, an equity analyst overhears the CEO of Company A tell a friend, "The board approved our acquisition of Company B this morning, but the announcement isn't until next Monday." The analyst has no other information about the deal. What is the analyst's best course of action under Standard II(A), Material Nonpublic Information?
- ADisclose the information only to the firm's compliance department, who may then trade on the firm's behalf
- BNot trade on or disclose the information, and not use it as a basis for recommendations, because it is both material and nonpublic
- CTrade immediately, because information overheard in a public setting is not considered inside information
- DUse the mosaic theory to combine this with public information and trade before the announcement
Show answer & explanationAnswer & explanation
Correct answer: B. Not trade on or disclose the information, and not use it as a basis for recommendations, because it is both material and nonpublic
The overheard statement is both material (an announced acquisition would likely affect share price) and nonpublic (not yet disclosed, to be announced the following Monday). The mosaic theory does not apply because this is direct nonpublic material information, not an inference from public and immaterial nonpublic data points. The analyst must not trade, disclose, or cause others to trade on it.
Why the other options are wrong
- A. Compliance cannot legitimize trading on MNPI; the firm must still refrain from trading.
- C. The setting where information is overheard does not determine its public/nonpublic status.
- D. Mosaic theory applies only to combining public and non-material nonpublic information, not clearly material nonpublic facts.
Material Nonpublic Information (II(A))
Members who possess material nonpublic information must not trade, cause others to trade, or communicate the information to others who might trade on it.
- Materiality: would affect price or investment decision
- Nonpublic: not yet disseminated to marketplace
- Mosaic theory does NOT cover clearly material nonpublic facts obtained directly
Memory trick: Overheard secrets are still secrets — don't trade on them.