Guidance for Standard II: Integrity of Capital Markets

Markets work only if investors believe prices reflect information that everyone can access and trading that is genuine. Standard II protects that belief with two rules: do not act on material nonpublic information, and do not manipulate prices or volume. This module shows how to decide whether information is material and nonpublic, how the mosaic theory lets analysts do deep research legitimately, what procedures firms use to keep inside information contained, and how to tell manipulation from aggressive but legitimate trading.

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What you will learn

1. Determine whether information is material and nonpublic, and apply Standard II(A) to acting on such information or causing others to act on it.

Do not act, or cause others to act, on material nonpublic information, including by tipping or recommending.
Material: likely to affect price, or a reasonable investor would want to know it; specificity and source reliability matter.
Nonpublic: not yet disseminated to the market in general; disclosure to a select group is still nonpublic.
The way the information was obtained, even by accident, does not change the duty.
Report to compliance and, where appropriate, encourage the issuer to disclose publicly.

2. Apply the mosaic theory and explain how expert networks, selective disclosure and firm procedures such as information barriers and restricted lists relate to Standard II(A).

Mosaic theory: conclusions built from public and nonmaterial nonpublic information may be acted on.
Keep records of the research that supports mosaic-based conclusions.
Expert networks must not be used to obtain material nonpublic information.
Selective disclosure to some investors does not make information public.
Firms use information barriers, watch and restricted lists, and trading surveillance to prevent misuse.

3. Identify transaction-based market manipulation and distinguish it from legitimate trading strategies under Standard II(B).

Standard II(B): no practices that distort prices or artificially inflate volume with intent to mislead.
Transaction-based forms: wash trades, matched orders, spoofing and layering, marking the close, cornering.
Intent to mislead is the key test; the same trade can be legitimate or manipulative.
Large trades, arbitrage, hedging, market making and tax-loss selling are legitimate.
Firms should monitor order cancellations, end-of-period trading and trading in thinly traded holdings.

4. Identify information-based market manipulation, including false or misleading statements, pump-and-dump schemes and benchmark manipulation.

Information-based manipulation spreads false or misleading information to move prices.
Pump-and-dump: buy, promote with false or exaggerated claims, sell into the rise; short-and-distort is the reverse.
Submitting false inputs to a benchmark that others rely on is manipulation.
Honest, accurate research with disclosed positions is not manipulation, even if prices move.
Be careful with public comments and social media; disclose positions.

Module at a glance

II(A): do not act, or cause others to act, on material nonpublic information, however it was obtained.
Material means likely to move the price or important to a reasonable investor; nonpublic means not yet disseminated to the market.
Mosaic theory: conclusions from public and nonmaterial nonpublic information may be acted on; keep records.
Firewalls, watch lists, restricted lists and trading surveillance keep inside information contained.
II(B): no practices that distort prices or inflate volume with intent to mislead.
Transaction-based: wash trades, spoofing, marking the close, cornering. Information-based: false rumours, pump-and-dump, false benchmark inputs.
Legitimate trading and honest, disclosed research are not manipulation even when prices move.

This free module has 4 lessons, 14 practice questions with full explanations.

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