An analyst is researching a semiconductor company. Through public filings, industry trade publications, and casual conversations with the company's regional sales managers about routine but non-public order backlog trends (not material on its own), the analyst pieces together a mosaic suggesting next quarter's earnings will beat consensus. She issues a 'buy' recommendation based on this analysis. Under Standard II(A) Material Nonpublic Information, this is:
- AA violation, because any nonpublic information used in analysis is prohibited
- BNot a violation, because the mosaic theory permits combining public and immaterial nonpublic information to reach conclusions
- CA violation, because the sales managers had a duty of confidentiality to the company
- DNot a violation only if the analyst first receives written permission from the company's investor relations department
Show answer & explanationAnswer & explanation
Correct answer: B. Not a violation, because the mosaic theory permits combining public and immaterial nonpublic information to reach conclusions
The mosaic theory permits analysts to combine public information with nonmaterial nonpublic information, using skill and judgment to reach conclusions, even if the resulting conclusion would be material if it came from a single MNPI source. No violation occurs because no single piece of information was both material and nonpublic.
Why the other options are wrong
- A. Too broad; only material nonpublic information is prohibited, not all nonpublic information.
- C. The sales managers' duty is not the deciding factor; materiality of each individual piece is.
- D. No such permission requirement exists under the Code.
Mosaic Theory
Analysts may combine public information with non-material nonpublic information and use professional judgment to reach investment conclusions, even if those conclusions would be material if based on a single MNPI source.
- Distinguishes legitimate analysis from insider trading
- Each individual piece of information used must not itself be both material and nonpublic
- Widely used defense in II(A) analysis of research-based conclusions
Memory trick: Small tiles, big picture, no insider info needed.