Material Nonpublic Information (MNPI)
Material nonpublic information (MNPI) is information that has not been released to the public and that a reasonable investor would consider important, the kind of news likely to move a security’s price.
MNPI is a two-prong test, and the SIE builds its insider-trading questions by knocking out one prong. Material but public, such as this morning’s earnings release, is fair game. Nonpublic but immaterial, such as an unannounced change of cafeteria vendor, moves no price and breaks no rule. Only the combination is poison.
Applying the two prongs
Materiality is price impact on a reasonable investor: earnings surprises, mergers, major contract wins or losses, regulatory decisions.
Nonpublic is about dissemination, not headcount. Information becomes public when it is broadly released, through a press release or an SEC filing. One analyst hearing it on a call does not make it public. Note what the test never asks: whether you paid for the information, whether you work at the company, or whether you profited.
Example: an executive assistant learns her company will be acquired at $45 per share, 40% above its $32 market price, two days before the announcement. That premium is plainly material, and nothing has been announced, so it is nonpublic. She trades nothing, but she tells her brother, who buys and clears $60,000 on the announcement. Both are liable, she as tipper and he as tippee, and the SEC may seek a civil penalty of up to three times the profit gained or loss avoided: up to $180,000 on his $60,000 gain, with criminal charges possible on top.
The exam trap
The most-missed point: the tipper is liable even though she never traded and never made a dollar. Passing the information in breach of a duty is itself the violation. Candidates look for a trade by the insider and, finding none, pick the answer that clears her.
The mirror-image trap runs the other way. Merely overhearing MNPI is not a violation. A representative who catches two bankers discussing an unannounced deal has done nothing wrong yet. The correct action is always three-part: do not trade, do not tell the customer, report it to compliance. Choices that have her quietly avoid the stock while telling no one are incomplete, and choices that let her recommend it “because she did not seek it out” are wrong.
Watch the chain, too. A tippee who passes the information along becomes a tipper in turn.
Related distinctions
MNPI is why firms build information barriers between investment banking and the research, trading, and retail sides: broker-dealers must maintain written policies reasonably designed to prevent its misuse. Do not confuse insider trading with front running, which is trading ahead of a customer’s large order rather than on corporate news.
Check yourself
A corporate officer learns her company will badly miss its earnings target. She sells no shares. She tells her brother-in-law, who sells his entire position two days before the announcement. Under federal securities law:
- Neither is liable, because the officer did not trade
- Only the brother-in-law is liable, because only he traded
- Both the officer, as tipper, and the brother-in-law, as tippee, may be held liable
- Only the officer is liable, because only she owed the company a duty
Show answer and explanation
Answer: C. Both the officer, as tipper, and the brother-in-law, as tippee, may be held liable.
The trap is hunting for a trade by the insider. Tipper liability attaches to the disclosure itself, made in breach of duty; no trade by the tipper is required. The tippee is liable for trading while knowing, or having reason to know, of that breach.
A registered representative overhears two bankers from her firm discussing an unannounced acquisition by name. That morning a customer who knows nothing about the deal asks her opinion of that same stock. What should she do?
- Recommend the stock, since she did not seek out the information
- Decline to recommend or trade the stock, and report what she overheard to compliance
- Recommend it only if the customer's order is unsolicited
- Wait 24 hours, then recommend it
Show answer and explanation
Answer: B. Decline to recommend or trade the stock, and report what she overheard to compliance.
The trap is the half-right answer that stops at "do not trade." Hearing MNPI is not itself a violation, but she must not trade, must not tip, and must escalate the apparent breach of the firm's information barrier. Time alone never makes information public; dissemination does.
Practice it: insider trading practice questions
