Most advisers are familiar with the phrase “material nonpublic information” or “MNPI” for short, but it’s still something that causes confusion and concern for many—especially since it can lead to some serious violations when mishandled.
The Investment Advisers Act of 1940 requires SEC-registered investment advisers to develop and enforce written Policies and Procedures, which should be designed to specifically prevent the misuse of MNPI by adviser’s firm personnel and as well as their family, friends, clients, or coworkers (known as “access persons”).
Let’s take a look at what MNPI is, as well as some other frequently asked questions advisers have.
What is MNPI?
Material nonpublic information (MNPI) refers to any type of information that can impact the market value of a security but has not been shared with the general public. MNPI can refer to confidential information from within the company itself, though it may also come from outside sources like lawmakers, financial institutions, regulatory agencies (such as the FDA), credit agencies, or other organizations.
Examples of MNPI include:
- A pending purchase of significant assets
- Upcoming changes to a company’s leadership team (CEO stepping down, for example)
- A proposed merger
- An upcoming earnings report that does not meet expectations
- Developments in an ongoing lawsuit
If you come into contact with MNPI, you are not permitted to use it for your personal benefit. You are also not allowed to disseminate the information so others (including family members, friends, colleagues, or clients) can gain from it either.
Attend COMPLY’s upcoming education session Two Persistent Compliance Challenges: Insider Trading and Advisory Contracts to learn more.
What qualifies MNPI as “material”?
Not all nonpublic information is considered “material.” The information needs to be significant enough that it has the potential to change the price of the company’s stock if shared with the public.
For example, if a company switches payroll platforms for employees, that may be considered nonpublic information. It’s not likely to be considered “material” however, because it’s not significant enough to impact company stock.
Here’s a good rule of thumb: If you were considering buying a particular stock and this information would influence your decision either way, then it can be considered material.
When does MNPI go public?
Material nonpublic information becomes material public information once it’s been disclosed by a company (in compliance with the law). Once the information is widely available to investors, it is no longer illegal to use that knowledge to inform your or your client’s investment decisions.
What is “Insider Trading”?
Insider trading is defined as the purchase or sale of a security on the basis of material nonpublic information about that security or the issuer in breach of a duty of trust or confidence that is owed to the issuer of that security or the shareholders of that issuer, or to any other person who is the source of the material nonpublic information, made with scienter (a.k.a., knowingly or willfully).
In other words, if an adviser is privy to material information that the general public isn’t (a.k.a., MNPI) and then buys or sells a security accordingly, that’s insider trading.
Who is liable in cases of Insider Trading?
Liability may arise when an insider or “misappropriator” passes information (tipper) to an outsider (tippee) who then trades based on that MNPI. The tippee and the tipper may both be liable and, notably, employees of an investment adviser can be either a potential tippee or tipper.
It is important to remember: If an individual were to tip someone else off to MNPI and then the tippee were to execute a trade, the tipper can still face civil or criminal liability even if the individual themself did not engage in a trade if they receive some sort of “personal benefit.”
Do MNPI rules only apply to public companies?
While MNPI primarily applies to public companies, SEC scrutiny extends into the private markets as well. In recent years, the SEC has acted against private market fund managers that neglected to implement policies mitigating the risk of using MNPI for personal gain.
Manage and Mitigate MNPI Risk with COMPLY
Ready to control your MNPI risk with confidence?
COMPLY’s Control Room is an integrated solution designed to improve visibility into potential conflicts at the firm and employee levels. Keep close tabs on potential conflicts of interest or misuse of MNPI and address them before they become critical concerns.
Book a demo today to see Control Room in action.