MNPI: what material non-public information is, and what never to say on an expert call

MNPI stands for material non-public information: a fact about a company or its securities that a reasonable investor would consider important and that has not been released to the market. Trading on MNPI, or passing it to someone who trades, can be illegal insider trading when the information was obtained in breach of a duty to keep it confidential. On an expert call the safe rule is simple: talk about your own work and the industry, and decline anything your employer, client or a public company has not announced.

This page is general information, not legal advice. If you work at a fund, a bank or a public company, your compliance team's rules come first.

1. "Material" means a reasonable investor would care, and the bar is lower than most people assume

The test comes from the Supreme Court. In TSC Industries v. Northway (1976), a case about a proxy statement, the Court said an omitted fact is material if "there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote," or if it "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information." In Basic v. Levinson (1988), the Court adopted that standard for Rule 10b-5 cases, which cover buying and selling securities, and rejected the idea that merger talks only become material once price and structure are agreed.

For events that might or might not happen, Basic, quoting an earlier appeals court case, balances "the indicated probability that the event will occur and the anticipated magnitude of the event." A deal that looks unlikely can still be material if it would be very large. The Court also said materiality is decided case by case, which is a polite way of saying there is no safe list.

There is a useful unsafe list. When the SEC adopted Regulation FD, its final rule release said these deserve careful review for materiality:

• Earnings information.
• Mergers, acquisitions, tender offers, joint ventures and changes in assets.
• New products or discoveries, and developments with customers or suppliers, such as winning or losing a contract.
• Changes in control or in management.
• A change of auditors.
• Events affecting the company's securities, such as defaults, buybacks, stock splits, dividend changes or new share sales.
• Bankruptcies and receiverships.

The release adds that none of these is automatically material. Treat them as material anyway when you are the one deciding mid-call. The tradeoff is that you will occasionally decline something harmless, which costs a minute of conversation instead of a career.

2. "Non-public" lasts until investors generally have it

The same release says information is nonpublic "if it has not been disseminated in a manner making it available to investors generally." Regulation FD counts a Form 8-K filing, a press release over a widely circulated news service, or a conference call that the public had notice of and could join. In 2000 the SEC said a website post "may not now, by itself, be a sufficient means of public disclosure," though it could be part of a combination.

So a fact is not public because many people inside the company know it, because a vendor mentioned it at a trade show dinner, or because it is "an open secret." (Open secrets are the ones that end up in enforcement releases.)

Use this rule: if you cannot point to where the company or a regulator published it, treat it as non-public. The tradeoff is that you will sometimes withhold a rumor that turns out to be in a trade paper. Say so, and let the asker go find it.

Regulation FD also explains why public companies are careful with analysts. It requires a company that tells MNPI to market professionals or likely traders to publish it, at the same time if the disclosure was intentional and promptly if it was not. The release also says a company "cannot render material information immaterial simply by breaking it into ostensibly non-material pieces." The same logic is worth applying on expert calls.

3. Insider trading needs MNPI plus a broken duty, and payment makes the duty easier to prove

Rule 10b-5 is an anti-fraud rule. It bans any "device, scheme, or artifice to defraud" in connection with buying or selling a security. Insider trading cases fit under it in three ways, which the SEC's insider trading spotlight page summarizes: insiders trading, insiders "tipping" others who trade, and people who misappropriate confidential information from their employers.

• Insiders. Officers, directors and employees who trade after learning of confidential company developments.
• Misappropriation. In United States v. O'Hagan (1997), a law firm partner bought Pillsbury call options and stock while his firm represented Grand Met on a planned tender offer, a matter he did no work on. He made more than $4.3 million. The Court upheld liability for trading on confidential information "in breach of a duty owed to the source of the information." You do not need to work at the company being traded.
• Tipping. In Dirks v. SEC (1983), the Court said a tipper breaches a duty when they "personally will benefit, directly or indirectly," from the disclosure, and a tippee inherits the duty when they know or should know of the breach. Benefits include a pecuniary gain.

Rule 10b5-2 adds that a duty of trust or confidence exists "whenever a person agrees to maintain information in confidence." Nondisclosure agreements and many employment agreements contain that kind of promise.

Put those together and an expert call is an awkward place to share secrets. The expert usually owes a duty to an employer or client, and a fee can look like the personal benefit Dirks describes. In the 2011 expert network cases, the SEC said technology company employees working as consultants for Primary Global Research tipped confidential information and received "hundreds of thousands of dollars in sham consulting fees" (SEC News Digest, February 8, 2011). The channel checks guide covers how that investigation grew.

Short version: being paid for a call does not make sharing a secret acceptable. The payment can supply the personal benefit the law looks for.

4. Expert networks have compliance rules because their clients are required to have them

Broker-dealers must "establish, maintain, and enforce written policies and procedures" to prevent the misuse of MNPI under Section 15(g) of the Exchange Act, and Section 204A of the Investment Advisers Act puts similar duties on registered advisers. An SEC staff report from September 2012 on these "information barriers" notes that the statute leans on the case law definitions above, citing TSC and Basic. FINRA's Rule 3110(d) also requires member firms to review trades in firm and employee accounts for possible insider trading and to investigate promptly.

That is why an expert network puts rules on both sides. GLG's compliance page, for example, says experts re-sign terms every year promising not to give clients confidential information, including material non-public information, may not take part in projects about their own employer, and must end a project that moves into subjects they cannot discuss. Its clients can have their compliance teams pre-approve consultations and add their own screening questions.

Follow whichever set of rules is stricter: your firm's or the network's. The tradeoff is fewer eligible experts and slower scheduling. For research methods that stay clear of the line, see investment research.

5. On the call, the expert declines specifics and the asker never asks for them

Here is a made-up example. Dana runs procurement at a mid-size contract manufacturer that buys chips from a public semiconductor company. An analyst pays for a 30-minute call.

If you are the expert, decline any question about your current or former employer, a client or a supplier that would need non-public facts to answer. Say "I can't discuss that, but I can tell you how this usually works." You are allowed to be boring. Also decline calls that are really about a specific public company you work for or with.

If you are the asker, open with the boundary: you do not want confidential information about any employer, client or unannounced event. Ask about patterns and the person's own judgment. Do not rephrase a declined question, and do not collect small pieces from the same insider that add up to the thing they declined. That last move is the expert-call version of the piecing-together the Regulation FD release warned about. What to do when an expert cannot share confidential information covers how to keep the call useful after a "no."

6. If MNPI slips out, stop the topic, write it down, and do not trade

Accidents happen. A tired expert answers a question two steps too far. What you do next matters more than the slip.

1. Stop the topic. Either person can say "let's not go there" and move on. End the call if it keeps happening.
2. Write down what was said and when. Keep it out of your shared notes and summaries.
3. Tell compliance the same day if you have a compliance team. They may restrict the stock.
4. Do not trade, and do not pass it on, until the information is public. If you have no compliance team, ask a securities lawyer before you act on anything near it.

The tradeoff is that you may lose a trade or a client conversation. That is cheaper than explaining a well-timed options purchase.

Your next step

Before your next call, write one sentence you will say at the start: "Please don't share anything confidential about any employer, client or unannounced event." Then check your question list against the Regulation FD examples in section 1 and cut any question that needs one of them to answer.

Instant Expert finds people who match a description, sends them paid invitations for a short call or a written answer, and charges only if someone books or answers. Its terms bar respondents from sharing MNPI and requesters from asking for it, and directory pages such as chief compliance officers and broker-dealer compliance experts are a place to start if you need someone to review your own call rules.