Material Nonpublic Information
Material Nonpublic Information (MNPI) is information about a public company that is both material — meaning a reasonable investor would consider it important in making an investment decision — and nonpublic — meaning it has not been disseminated in a manner making it generally available to the investing public.
The prohibition on trading securities while in possession of material nonpublic information is the foundation of insider trading law in the United States, derived primarily from Rule 10b-5 under the Securities Exchange Act of 1934 and the misappropriation theory developed through decades of court decisions.
Materiality is a fact-specific determination based on the probability that the information would affect a reasonable investor's investment decision. Information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy, hold, or sell a security. Courts have applied both quantitative and qualitative factors. Quantitatively material information typically includes quarterly earnings results that differ significantly from expectations, revenue guidance changes, major contract wins or losses, and merger discussions. Qualitatively material information can include regulatory investigations, executive misconduct, or undisclosed operational problems even when the financial magnitude is uncertain.
The nonpublic prong is satisfied when information has not been broadly disseminated through a recognized public channel that makes it effectively available to market participants. A Form 8-K filing, a press release on a major newswire, or an earnings call webcast publicly distributed all satisfy the public disclosure test. A disclosure made only to analysts or selected investors — the problem Regulation FD was designed to address — leaves information nonpublic with respect to the general market.
Insider trading liability under Rule 10b-5 requires both the possession of MNPI and a breach of a duty — either the classical theory (trading by corporate insiders who owe a fiduciary duty to shareholders) or the misappropriation theory (trading by outsiders who misappropriate MNPI in breach of a duty owed to the source of the information). Tipping liability extends to those who provide MNPI to traders, with both tipper and tippee potentially liable if the tipper breached a duty and received a personal benefit.
Compliance programs at financial institutions devote extensive resources to MNPI management: maintaining watch lists and restricted lists of securities subject to MNPI restrictions, training employees on identification and escalation procedures, and maintaining the information barriers (Chinese walls) that separate business units with different information access.