Material Nonpublic Information (MNPI)

Material nonpublic information is information a reasonable investor would consider important that hasn't been released to the market yet. Earnings before they're announced, a merger under negotiation, the loss of a major customer: all of it qualifies. If you have MNPI, you can't trade on it and you can't pass it to someone who will. Tipping a friend or a family member puts both of you at risk.

What makes information material?

There's no list. Materiality is a standard, and the controlling formulation of it comes from the Supreme Court.

TSC Industries v. Northway set it in 1976: "An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important," and disclosure of it must have "significantly altered the total mix of information made available." Basic Inc. v. Levinson expressly adopted that standard for Rule 10b-5 in 1988.

Basic also answered the question employees actually run into, which is what to do about something that hasn't happened yet. A merger under negotiation might close or might collapse. The Court held that the materiality of a contingent event turns on probability times magnitude: how likely the event is, weighed against how big it would be for the company. A low-probability deal that would double the company's size can be material. A near-certain event with trivial financial effect usually isn't.

Two working rules follow, and both are worth saying to employees directly:

• The size of the company sets the scale. A $2 million contract is noise at a large issuer and material at a small one. There's no dollar threshold that travels.
• If you're weighing whether it's material, treat it as material. The test is applied after the fact by someone who already knows how the stock moved.

What makes information nonpublic?

The closest thing to a definition in the rules is Regulation FD's. Under 17 CFR 243.101(e), an issuer makes information public by furnishing or filing a Form 8-K, or by using another method or combination of methods "reasonably designed to provide broad, non-exclusionary distribution of the information to the public."

That standard is about the channel. A press release, a filing, a webcast open to the public: broad and non-exclusionary. Telling a large group of people isn't the same as telling the market, rumor circulating inside the building isn't publication, and a reporter having the story before it runs isn't either.

Company policy usually adds a waiting period on top of the channel, because posting results at 4:01 pm doesn't put them in front of investors at 4:02. A full trading day after disclosure is a common policy line. Follow the one your policy sets rather than deciding for yourself when the market has caught up.

What counts as MNPI at a typical company?

The classic categories, with the roles that tend to hold them first:

Two patterns catch people who never think of themselves as insiders. Engineers and support staff often learn about an outage or a defect days before anyone in finance does. And employees at private companies hold MNPI about public counterparties: the customer you just lost, the acquirer you're negotiating with, the vendor whose breach you're responding to.

Why is the tipper liable too?

Passing MNPI to someone who trades exposes both people. Dirks v. SEC set the framework in 1983: a tippee inherits the insider's duty when the insider breached a duty by disclosing, and the test for that breach is whether the insider received a personal benefit. Dirks also held that "an insider makes a gift of confidential information to a trading relative or friend" satisfies the test on its own.

That last point is the one employees miss. There's no need for money to change hands. Telling a sibling counts. Salman v. United States settled any doubt in 2016, unanimously reaffirming Dirks and rejecting the Second Circuit's Newman requirement that the benefit be pecuniary.

One correction worth making, because compliance training gets it wrong often: Regulation FD is not an insider trading rule. It's a disclosure rule governing selective disclosure by issuers, and 17 CFR 243.102 provides that "no failure to make a public disclosure required solely by section 243.100 shall be deemed to be a violation of Rule 10b-5." The two overlap in subject matter and operate separately.

What are trading windows, preclearance, and 10b5-1 plans?

Most public companies build three controls on top of the legal rule, and your code of conduct or a standalone insider trading policy is where they live.

• Trading windows. Designated employees may trade only in an open window, typically after results are released and closing before the next quarter end. A window being open is a company control, not legal permission. If you hold MNPI, you can't trade in an open window.
• Preclearance. Named individuals ask legal or compliance before each trade. It catches the case where one person knows something the rest of the company doesn't.
• 10b5-1 plans. Rule 10b5-1 provides an affirmative defense for trades made under a binding contract, instruction, or written plan adopted before the person became aware of MNPI, where the plan specifies amount, price, and date or a formula for them, and the trades follow the plan. Directors and officers face a cooling-off period running to the later of 90 days after adoption or two business days after results are disclosed, capped at 120 days, and must certify in the plan that they're not aware of MNPI and are acting in good faith. Everyone else has a 30-day cooling-off period.

Note the awareness standard underneath all of it. Rule 10b5-1(b) provides that a trade is on the basis of MNPI if the person was aware of it when trading. Awareness, not use.

For the broader offense and how enforcement works, see insider trading. For the policy record that proves your rules reached the people they bind, see policy attestation.

FAQ

Can I trade if the information is already a rumor?

No. Rumor inside the company, or a story in the press, isn't broad, non-exclusionary distribution by the issuer. Wait for the company's own disclosure, and then for whatever waiting period your policy sets.

Does MNPI apply if I work at a private company?

Yes, when the information concerns a public company. Employees at private companies routinely hold MNPI about public customers, suppliers, and acquirers.

Is it a violation if I tell someone and they don't trade?

The trading liability turns on someone trading. But passing confidential information almost always violates your own confidentiality obligations and your code of conduct on its own, regardless of what the recipient does with it.