How to Master Material Non-Public Information (MNPI): A Step-by-Step Guide

Material Non-Public Information (MNPI) is crucial for maintaining the integrity of financial markets.

Understanding what MNPI is, how to identify it, and how to manage it effectively is essential for investors, business leaders, and legal professionals.

Mishandling MNPI can lead to serious legal consequences and damage a company’s reputation.

This guide will walk you through the key steps to ensure you handle MNPI correctly and ethically, in compliance with securities laws.

What you’ll learn:

• How to Identify Material Non-Public Information (MNPI)
• How to Safely Handle MNPI
• How to Set Up Effective Information Barriers
• How to Prevent MNPI Breaches
• How to Build a Culture of Compliance
• Best Practices for Ethical MNPI Management
• How to Understand What Makes Information “Material”
• What is “Nonpublic” Information?
• How to Avoid the Risks of Sharing Information Selectively
• The Mosaic Theory: How to Use Information Legally and Ethically
• Real-World Examples of MNPI Violations
• How to Manage the Consequences of MNPI Breaches
• How to Use Investment Research Reports Legally
• How to Maintain Effective Information Barriers
• How to Safely Use Expert Networks
• How to Protect MNPI with Data Protection Systems
• How to Issue Press Releases to Prevent Selective Disclosure
• Final Thoughts on Ethical MNPI Management

How to Identify Material Non-Public Information (MNPI)

Material Non-Public Information (MNPI) refers to confidential information that hasn’t been made public and could significantly influence an investor’s decision. 

Proper identification of MNPI is the first step in preventing its misuse. 

Follow these steps to identify MNPI in your organization:

Review Confidential Information

Step 1

Start by cataloging all sensitive data within your company. 

Look for information like upcoming financial statements, strategic business decisions, potential mergers or acquisitions, and changes in management.

Step 2

Regularly review internal communications, meeting minutes, and strategic plans to identify anything that could impact the company’s market price and qualify as MNPI.

Assess Investor Impact

Step 1

Determine if this information, if made public, could influence a reasonable investor’s decision to buy, sell, or hold stock. 

This means understanding whether the information is material—anything that could significantly affect an investor’s decisions or a company’s stock price.

Step 2

Consult with legal and compliance teams to assess the materiality of the information.

Confirm Non-Public Status

Step 1

Check if the information has been publicly disclosed through official channels such as press releases, SEC filings, or earnings calls.

Step 2

If the information hasn’t been shared publicly, it remains nonpublic and must be handled with care to prevent unauthorized disclosure.

Key Examples of MNPI

• Earnings Reports: Details about upcoming financial performance before they are released.
• Mergers & Acquisitions: News of potential mergers or acquisitions that could impact market movements.
• Management Changes: Information regarding key executives joining or leaving the company.
• Product Launches or Failures: Significant updates on product development that could affect market perception.

How to Safely Handle MNPI

Once you’ve identified MNPI, managing it correctly is crucial to avoid legal risks and maintain market integrity. 

Here’s how to handle MNPI safely:

Set Up Internal Controls

• Step 1: Define who needs access to MNPI within your organization. Limit access to essential personnel only and establish procedures for how this information is stored and shared.
• Step 2: Implement data encryption and tracking systems to monitor who accesses MNPI and when.

Train Your Employees

• Step 1: Organize regular training sessions to educate all employees on the importance of MNPI and the legal consequences of mishandling it.
• Step 2: Use real-world examples and scenario-based exercises to reinforce the importance of proper MNPI management.

Monitor and Audit Trading Activities

• Step 1: Implement sophisticated monitoring tools to track trading activities in real-time. Look for unusual patterns that might suggest insider trading.
• Step 2: Conduct periodic audits to ensure compliance with your MNPI policies, particularly for employees with access to sensitive information.

Restrict Trading Access

• Step 1: Set up blackout periods during which trading is prohibited for key personnel, especially around the time of major announcements or financial disclosures.
• Step 2: Require pre-clearance for any trades by individuals with access to MNPI to add an extra layer of oversight.

How to Set Up Effective Information Barriers

To prevent the misuse of MNPI, establish robust information barriers within your organization, particularly in investment banking departments where possession of material information is common:

Create Firewalls

• Step 1: Physically and electronically separate teams handling MNPI from other departments, particularly between investment bankers and other areas like research or sales.
• Step 2: Use technology to create electronic firewalls, restricting access to shared drives, emails, and communication tools that contain MNPI.

Use Confidentiality Agreements

• Step 1: Require employees, contractors, and external partners who have access to MNPI to sign confidentiality agreements. These agreements should clearly outline their responsibilities and the legal consequences of breaching confidentiality.
• Step 2: Regularly review and renew confidentiality agreements to ensure they remain up-to-date and enforceable.

Maintain Watch Lists

• Step 1: Keep dynamic watch lists that are updated in real-time as new employees gain access to MNPI or as individuals leave the organization.
• Step 2: Implement enhanced monitoring protocols for those on the watch list, including reviewing their communications and trading activities more frequently.

How to Prevent MNPI Breaches

Preventing MNPI breaches is essential for maintaining your organization’s integrity and avoiding legal trouble. 

Follow these strategies to prevent breaches:

Conduct Due Diligence

• Step 1: Set up approval workflows that require multiple levels of authorization before any trades involving MNPI are executed.
• Step 2: Ensure cross-departmental collaboration among legal, compliance, and HR teams to review and approve trades, ensuring they comply with internal policies and external regulations.

Strengthen Cybersecurity

• Step 1: Implement data encryption for all MNPI, both at rest and in transit, to protect it from unauthorized access.
• Step 2: Enforce strict access control policies, requiring multi-factor authentication for anyone accessing MNPI.

Implement Trade Surveillance

• Step 1: Use real-time monitoring systems to flag suspicious trades as they happen, allowing for immediate investigation and response.
• Step 2: Employ machine learning tools to recognize trading patterns that may indicate the misuse of MNPI, and adjust your systems as necessary to improve accuracy over time.

How to Build a Culture of Compliance

Creating a culture of compliance ensures that everyone in your organization understands the importance of ethical behavior when handling MNPI:

Establish Clear Rules

• Step 1: Develop comprehensive guidelines for managing MNPI, ensuring they are easily accessible to all employees.
• Step 2: Regularly update these policies to reflect changes in regulations and company practices, and communicate updates to all staff.

Conduct Regular Training

• Step 1: Organize ongoing training sessions that are mandatory for all employees, with additional sessions for those in high-risk roles.
• Step 2: Use interactive methods, such as workshops and role-playing exercises, to engage employees and reinforce learning.

Enforce Accountability

• Step 1: Implement incident response plans that outline the steps to be taken in the event of an MNPI breach, including investigation and notification procedures.
• Step 2: Apply disciplinary measures consistently across the organization to reinforce the importance of compliance and ethical conduct.

Best Practices for Ethical MNPI Management

To operate ethically and in compliance with the law, your organization must have strong controls in place for managing MNPI. 

This includes setting up robust procedures, providing regular training, and using technology to monitor compliance. 

By fostering an inclusive company culture that emphasizes ethical behavior, you can protect your organization from legal risks and maintain a strong reputation in the investment community.

Best Practices Recap

• Internal Controls: Implement strict procedures for managing MNPI, ensuring that only authorized individuals have access and that all interactions with MNPI are monitored.
• Employee Training: Regularly educate your team on the importance of compliance, using real-world examples and interactive methods to reinforce learning.
• Use of Technology: Utilize advanced tools like DLP systems, trade surveillance, and encryption to enhance monitoring and ensure compliance. Regularly update these systems to keep up with evolving threats.

How to Understand What Makes Information “Material”

Information is considered material if it’s important enough that it could change the market price of a company’s stock or affect an investor’s decision. 

Here’s how to determine if information is material:

Assess Specificity

• Step 1: Review the information to see how detailed it is. The more specific the information, the more likely it is to be material.
• Step 2: Consider how much the information deviates from publicly available data. The greater the deviation, the more likely it is to be material.

Evaluate Substantial Likelihood

• Step 1: Consider whether a reasonable investor would find the information important for making an investment decision.
• Step 2: Assess the potential impact on the company’s market price. If the information is likely to cause significant movement in stock price, it is material.

What is “Nonpublic” Information?

Nonpublic information remains undisclosed to the general public and is typically only available to a select few. 

Here’s how to determine if information is nonpublic:

Check for Public Disclosure

• Step 1: Determine if the information has been released through official channels, such as press releases, earnings releases, or SEC filings.
• Step 2: If the information has not been broadly disseminated, it is still considered nonpublic.

Evaluate Exclusive Access

• Step 1: Identify who has access to the information. If only a select group of people have access, the information is likely nonpublic.
• Step 2: Ensure that nonpublic information is protected and not shared outside of authorized personnel.

How to Avoid the Risks of Sharing Information Selectively

Selective disclosure can lead to unfair trading advantages and serious legal issues. 

Here’s how to avoid these risks:

Enforce Fair Disclosure

• Step 1: Ensure that any material nonpublic information is shared with all market participants at the same time, such as through a press release.
• Step 2: Avoid disclosing MNPI selectively to analysts, hedge funds, or other investors.

Monitor Corporate Insiders

• Step 1: Train corporate insiders on the importance of not sharing MNPI which could give others an unfair advantage.
• Step 2: Implement systems to monitor and record communications that involve MNPI, ensuring compliance with fair disclosure regulations.

The Mosaic Theory: How to Use Information Legally and Ethically

The Mosaic Theory allows financial analysts to piece together information from various sources, both public and non-public (as long as the non-public information isn’t material), to make informed investment decisions. 

Follow these guidelines to use the Mosaic Theory legally:

Combine Public and Non-Material Nonpublic Information

• Step 1: Gather information from a variety of public sources, such as company reports, industry news, and regulatory filings.
• Step 2: Add non-material nonpublic information that you have legal access to, ensuring that none of the information violates securities laws.

Avoid Using Material Nonpublic Information

• Step 1: Ensure that any nonpublic information you use is not material. If it is, do not use it until it has been publicly disclosed.
• Step 2: Document your sources and analysis to demonstrate that you are not relying on material MNPI.

Real-World Examples of MNPI Violations

Examples of MNPI violations show the serious consequences of mishandling this information. 

Here are two real-world cases:

Goldman Sachs Employee (2021)

An employee was charged with insider trading based on MNPI. They used non-public information about upcoming transactions to make illegal profits.

Consequence

The individual faced significant legal penalties, including fines and possible imprisonment.

Chinese Tech Executives (2022)

Two executives were fined for using MNPI to trade stocks. They traded shares based on non-public knowledge of poor earnings reports.

Consequence

The executives were fined a combined amount of $756,834 and faced legal repercussions that damaged their careers and reputations.

How to Manage the Consequences of MNPI Breaches

Mishandling MNPI can lead to serious consequences, such as fines, legal charges, and even imprisonment. 

Here’s how to manage and mitigate the impact of MNPI breaches:

Prepare for Legal Repercussions

• Step 1: Have a legal team ready to respond to any MNPI breach. This team should be able to quickly assess the situation and provide guidance on legal next steps.
• Step 2: If a breach occurs, cooperate fully with regulatory authorities to mitigate the consequences.

Protect Your Company’s Reputation

• Step 1: Implement a communication strategy to address any MNPI breaches publicly. Transparency can help maintain trust with investors and the investment community.
• Step 2: Take corrective actions, such as enhancing compliance programs and retraining employees, to prevent future breaches.

How to Use Investment Research Reports Legally

Investment research reports help analysts make informed decisions. To ensure these reports don’t violate MNPI rules, follow these steps:

Combine Information Ethically

• Step 1: Use the Mosaic Theory to combine different pieces of information legally. Ensure that no material MNPI is used in your analysis.
• Step 2: Document the sources and processes used to compile your report to ensure transparency and compliance.

Monitor Research Processes

• Step 1: Implement internal controls to monitor how analysts gather and use information. Regularly review research reports to ensure they comply with MNPI regulations.
• Step 2: Provide training to analysts on the legal use of information, emphasizing the importance of avoiding MNPI.

How to Maintain Effective Information Barriers

Information barriers are crucial for preventing the unauthorized sharing of MNPI. 

Here’s how to maintain these barriers effectively:

Separate Sensitive Information

• Step 1: Physically and electronically segregate departments that handle sensitive information, particularly between investment banking and other departments.
• Step 2: Use technology to restrict access to sensitive data, ensuring only authorized personnel can access MNPI.

Monitor and Enforce Compliance

• Step 1: Regularly check that your information barriers are working effectively. Conduct audits to identify any potential breaches.
• Step 2: Adjust barriers as necessary to respond to new risks or regulatory requirements, ensuring ongoing compliance with securities laws.

How to Safely Use Expert Networks

Expert networks can provide valuable insights, but they need to be managed carefully to avoid sharing MNPI. 

Here’s how to use them safely:

Enforce Confidentiality

• Step 1: Require all experts involved in the network to sign confidentiality agreements that clearly outline their obligations regarding MNPI.
• Step 2: Monitor interactions with experts to ensure that no MNPI is being shared or discussed.

Use Networks Cautiously

• Step 1: Vet experts thoroughly to ensure they are aware of and comply with securities regulations.
• Step 2: Limit the scope of discussions to ensure that only non-material, public information is shared.

How to Protect MNPI with Data Protection Systems

Data Loss Prevention (DLP) systems are crucial for protecting MNPI. 

Here’s how to use them effectively:

Monitor Data Movements

• Step 1: Implement DLP systems that track the movement of MNPI within your organization. Ensure that any unauthorized attempts to access or share MNPI are flagged immediately.
• Step 2: Regularly review and update your DLP systems to address new threats and vulnerabilities.

Enhance Security Measures

• Step 1: Use encryption and access controls to protect MNPI from unauthorized access. Ensure that all sensitive data is encrypted both at rest and in transit.
• Step 2: Conduct regular security audits to ensure that your data protection systems are functioning effectively and providing the necessary safeguards.

How to Issue Press Releases to Prevent Selective Disclosure

To prevent selective disclosure, companies should issue press releases as soon as possible when they have important news. Here’s how to do it right:

Pre-Disclosure Strategy

• Step 1: Plan press releases to coincide with major announcements, ensuring that all market participants receive the information simultaneously.
• Step 2: Review all communication with analysts, investors, and the media to ensure no MNPI is disclosed before the press release.

Immediate Disclosure

• Step 1: If MNPI is accidentally disclosed during meetings or communications, issue a press release immediately to ensure that the information is made public.
• Step 2: Use scripts and pre-approved talking points in meetings with analysts and investors to avoid unintentional selective disclosure.

Final Thoughts on Ethical MNPI Management

Effectively managing Material Non-Public Information (MNPI) is not just a legal obligation but essential for ethical business operations. 

By following the steps in this guide—identifying MNPI, handling it carefully, setting up strong information barriers, and promoting a culture of compliance—you can protect your organization from legal issues and maintain trust. 

Regularly review and update your processes to stay in line with changing rules and continue building a reputation for doing the right thing.