Guidance for Standard II: Integrity of Capital Markets

Markets work only if investors trust that prices are not rigged by insiders or manipulators. Standard II protects that trust by banning action on material nonpublic information and by prohibiting practices that distort prices or volume with intent to mislead. Level II vignettes test the fine lines: when information becomes material or public, when a mosaic of research is legitimate, how information barriers and restricted lists work, and how to tell manipulation from normal trading. This module covers each of these and the compliance practices that prevent violations.

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What you will learn

1. Determine whether information is material and nonpublic and what actions are prohibited once it is held.

Material: likely to move the price or wanted by a reasonable investor; weigh specificity, reliability and size of impact.
Nonpublic until disseminated to the market generally; disclosure to a select group does not make it public.
The source and the legality of the disclosure are irrelevant under the Standards: overheard and misdirected information count.
Do not trade, recommend, tip or cause others to trade, including through derivatives or related securities.
Inform compliance and encourage the issuer to disclose publicly; the restriction ends when the information is public.

2. Apply the mosaic theory and explain the role of information barriers and restricted lists.

Mosaic theory: public information plus nonmaterial nonpublic information can support a conclusion you may act on.
If any single input is material nonpublic information, the mosaic defence fails.
Document the research behind a mosaic conclusion so it can be defended.
Information barriers rely on compliance-controlled communication, separation, wall-crossing procedures and trading review.
Watch lists are confidential monitoring tools; restricted lists limit activity and must not be used in a way that leaks the deal.

3. Distinguish legitimate trading and information activity from information-based or transaction-based market manipulation.

II(B) prohibits distorting prices or artificially inflating volume with intent to mislead.
Information-based: false rumours, pump-and-dump, short-and-distort, insincere research.
Transaction-based: wash trades, marking the close, spoofing or layering, and squeezes or corners from a dominant position.
Legitimate strategies such as order-splitting, arbitrage, tax-loss selling and disclosed market making are not manipulation.
Intent to mislead is decisive; trading patterns are often the evidence of intent.

4. Recommend compliance practices that help prevent violations of Standard II.

Information barriers, watch and restricted lists, and restrictions on proprietary trading are the core MNPI controls.
Personal trading needs pre-clearance, reporting and review against the lists.
Expert network calls need approved providers, pre-clearance, expert undertakings and monitoring.
Surveillance should target end-of-period trading, wash trades and high cancellation rates.
Small firms without separate departments may need broad trading restrictions when MNPI is held.

Module at a glance

Do not act or cause others to act on material nonpublic information, however it was obtained.
Material means price-moving or wanted by a reasonable investor; nonpublic means not yet disseminated to the market generally.
The mosaic theory protects conclusions built from public and nonmaterial nonpublic information, never from MNPI.
Information barriers, confidential watch lists, restricted lists and wall-crossing procedures keep MNPI contained.
Manipulation is information-based (false rumours, pump-and-dump) or transaction-based (wash trades, marking the close, spoofing, squeezes).
Intent to mislead separates manipulation from legitimate trading that happens to move prices.
Surveillance, pre-clearance and expert network controls turn the Standard into daily practice.

This free module has 4 lessons, 15 practice questions with full explanations.

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