What is MNPI?

MNPI is material non-public information: information a reasonable investor would consider important to an investment decision, which has not yet been made available to the market. Trading on it, or passing it to someone who trades, in breach of a duty of trust or confidence is insider trading.

For an investment adviser there is a second, separate obligation. Section 204A of the Investment Advisers Act requires every registered adviser to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of MNPI by the firm and the people associated with it. A firm can violate Section 204A without anyone ever trading on anything: the failure is in the procedures.

This guide covers both halves: how to tell whether information is MNPI, and what an adviser's program for handling it needs to include.

What makes information "material"

There is no numerical threshold. The test comes from two Supreme Court cases:

• TSC Industries v. Northway (1976): information is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision, or that it would significantly alter the "total mix" of information available.
• Basic v. Levinson (1988): for events that may or may not happen, such as merger talks, materiality depends on the probability the event will occur and its magnitude if it does. Preliminary discussions can be material.

Information that is usually treated as material includes:

• earnings, revenue or guidance before it is announced
• a pending merger, acquisition, tender offer or sale of a business
• a new financing, securities offering, or restructuring
• winning or losing a significant contract or customer
• a regulatory decision, such as a drug approval or an enforcement action
• a change in senior management or the board
• a dividend change, a credit rating change, or a cybersecurity incident

A practical check: if you would want to trade on it, or would want to tell someone who could, assume it is material. Examiners and courts look at materiality with hindsight, and a trade made right after receiving the information is itself evidence that it mattered.

When information becomes "public"

Information is public once it has been disseminated in a way that makes it available to investors generally, and the market has had time to absorb it. The usual routes are a press release over a wire service, an SEC filing on EDGAR, or broad news coverage.

Information is not public just because:

• an executive told you in a one-on-one meeting or a call
• you believe other people in the market probably know it
• it is circulating as a rumor or appeared in a small number of private research notes
• a company disclosed it selectively in breach of Regulation FD. Until the company makes the public disclosure Regulation FD requires, it is still non-public to you.

Information also stops being MNPI when it is no longer material, for example when a deal is abandoned and the moment has passed. That is a judgment, and it should be made and recorded by compliance, not assumed by the person who received the information.

Where advisers come across MNPI

Most advisers who get into trouble did not go looking for inside information. It arrived through an ordinary part of the business:

• Board seats and observer rights at portfolio companies, common for private fund managers.
• Private placements, PIPEs and wall-crossings, where the adviser is brought over the wall before a public offering.
• Creditor committees and restructurings.
• Expert networks and industry consultants, who may be current or former employees of a public company, its suppliers or its customers.
• Meetings with company management, especially private ones.
• Political intelligence about pending government action.
• Clients and their families who are officers or directors of public companies.
• Friends, family and former colleagues of anyone at the firm.

The mosaic theory

Analysts may combine public information with non-public information that is not material, and reach a conclusion that is material. That is legitimate research. The mosaic breaks down when one of the pieces is itself both material and non-public. Document how a significant conclusion was reached; it is the evidence that the mosaic was built from permitted pieces.

The law in brief

Insider trading is not defined in a statute. It is prosecuted mainly under Section 10(b) of the Securities Exchange Act and Rule 10b-5, under two theories:

• The classical theory: a corporate insider (an officer, director or employee, or a "temporary insider" such as the company's lawyer, banker or consultant) trades in the company's securities on MNPI, in breach of a duty to its shareholders.
• The misappropriation theory (United States v. O'Hagan, 1997): a person trades on MNPI taken in breach of a duty owed to the source of the information, even if the source is not the issuer.

Tippers and tippees are liable too. Someone who passes on MNPI for a personal benefit, and someone who trades knowing (or having reason to know) the information came from a breach, can both be liable (Dirks v. SEC, 1983). Exchange Act Rule 10b5-2 lists situations in which a duty of trust or confidence exists, including when a person agrees to keep information confidential.

The penalties reach the firm. Under Exchange Act Section 21A, the SEC can seek civil penalties of up to three times the profit gained or loss avoided, and can pursue a controlling person, including the adviser itself, that knew or recklessly disregarded that a violation was likely and failed to take appropriate steps to prevent it.

What Section 204A requires of an adviser

Section 204A requires written policies and procedures "reasonably designed, taking into account the nature of such investment adviser's business," to prevent misuse of MNPI. Three words carry the weight:

• Written. A shared understanding that nobody trades on inside information is not a policy.
• Reasonably designed for your business. A firm with board seats needs different controls from one that only buys index funds. The policy should name the ways MNPI actually reaches your firm.
• Enforce. A policy on file with no record of anyone applying it is the most common finding. The record of what was received, who knew, and what compliance did about it is how a firm shows the procedures work.

Rule 204A-1, the code of ethics rule, is the companion requirement: access persons report their holdings and transactions, those reports are reviewed, and access persons need approval before buying in an IPO or a limited offering. Personal trading review is where most firms first catch a trade that should not have happened.

Section 204A applies to SEC-registered advisers whatever their size, a solo adviser included. State-registered advisers should check their state's rules, and the insider trading prohibitions apply to everyone.

What a working MNPI program includes

1. A written policy that defines MNPI with examples drawn from your business, prohibits trading on it and passing it on, and says exactly what to do on receiving it.
2. Escalation before action. Anyone who thinks they may have MNPI stops, tells compliance, and does not trade or share it until compliance decides.
3. A register of matters. For each piece of MNPI: the issuer, what the information is, where it came from, when it was received, and when it is expected to become public.
4. An insider list for each matter. Who has the information, inside and outside the firm, when and how they received it, and why they needed it.
5. A restricted list and a watch list. The restricted list is visible firm-wide and bars trading in the named securities. The watch list is confidential to compliance and is used to monitor trading without signaling to the firm that something is going on.
6. Preclearance checked against both lists, for personal trades by access persons and their households and, where relevant, for client and fund trades.
7. Information barriers where one part of the firm receives MNPI and another trades, with a record of who was brought over the wall.
8. Expert network controls: approved networks only, consultant certifications that they will not share confidential information, and notes or chaperoning for higher-risk calls.
9. Surveillance. Review personal and firm trades against the restricted and watch lists, and against each matter's insider list for the time people were on it.
10. Clearing matters deliberately. Decide when information has become public or stale, record the reason, and only then lift the restriction.
11. Training and attestation at hire and at least annually, with the attestation kept.
12. Testing in the annual review under Rule 206(4)-7: pick matters and check the record from receipt to clearance.

What examiners look for

• A policy that is generic, and does not mention the ways MNPI actually reaches the firm, such as its board seats or expert network use.
• No log of MNPI received, so the firm cannot say what it knew and when.
• A restricted list that is out of date, or never compared with trades.
• Expert network calls with no record of who was spoken to or what was said.
• Personal trading reports collected but not reviewed.
• Matters that were never cleared, or cleared with no record of why.

Common questions

Is MNPI the same as inside information?

In practice, yes. "Inside information" is the everyday term. "Material non-public information" is the term in the rules and the cases, and it is broader than information from inside a company: it covers information about a company that comes from anywhere, such as a pending government decision or a large order from a client.

Can I be an insider without working at the company?

Yes. Lawyers, accountants, bankers and consultants who receive information in confidence are treated as temporary insiders. Under the misappropriation theory, anyone who takes information in breach of a duty to its source can be liable, and so can tippees who trade on what they are told.

How long does information stay MNPI?

Until it is publicly disseminated and the market has absorbed it, or until it is no longer material. Both are judgments, and a firm should record when and why it decided a matter was cleared.

Does a solo adviser need MNPI procedures?

If the adviser is registered with the SEC, yes. Section 204A applies to every registered adviser regardless of size. Even a firm that never expects to receive MNPI needs a policy that says what to do if it does, and a solo adviser who is also a director of a public company, or advises one of its officers, has a real exposure.

Keep the record as it happens

Luna's MNPI register records each matter, its insider list and when each person learned of it. It refuses preclearance to anyone on an open matter's insider list, can place the securities on the restricted list without naming the matter, and checks every day whether the issuer has filed with the SEC. It flags; a person decides when a matter is cleared, and the decision is recorded.