Standard II: Integrity of Capital Markets
About this episode
Standard II of the CFA Institute Code of Ethics and Standards of Professional Conduct is about protecting the market itself. In a two host format, one host explains the material while the other plays a fictional exam candidate, and together they reason out loud through the two sub-standards of Integrity of Capital Markets: Material Nonpublic Information, including the mosaic theory and the two part test for what counts as material and nonpublic, and Market Manipulation. Using fully fictional scenarios, they work the situations the exam is built around, to help you practice reasoning through a vignette rather than guessing at it.
In this episode
Standard II shifts the focus from the individual professional to the market as a whole, and this episode works through its two sub-standards with fully fictional scenarios.
Standard II(A), Material Nonpublic Information, is built around a two part test: information is a problem only when it is both material and nonpublic. The hosts reason through what makes information material, what makes it nonpublic, and the prohibition on acting or causing others to act on it.
The episode also works through the mosaic theory, the idea that an analyst can combine public information with nonmaterial nonpublic pieces to reach a conclusion, and why that is treated differently from trading on a single material nonpublic fact.
Standard II(B), Market Manipulation, covers both information-based manipulation, such as spreading false rumors, and transaction-based manipulation, such as trades designed to create a misleading picture of price or volume.
The scenarios are used to show how the exam disguises these issues as ordinary-looking research and trading decisions, and the episode points to the free practice exam at tottenprep.com.
What this episode covers
- Standard II(A) Material Nonpublic Information: the two part test for material and nonpublic.
- The mosaic theory and why it is treated differently.
- Standard II(B) Market Manipulation: information-based and transaction-based.
- How the exam hides these inside ordinary-looking research and trading.
Frequently asked questions
What does CFA® Standard II cover?
Standard II of the CFA Institute Code of Ethics and Standards of Professional Conduct covers Integrity of Capital Markets: II(A) Material Nonpublic Information, including the mosaic theory, and II(B) Market Manipulation.
What is the mosaic theory?
The mosaic theory is the idea that an analyst can reach a conclusion by combining public information with nonmaterial nonpublic information, without violating the prohibition on trading or causing others to trade on material nonpublic information. This episode reasons through it with fictional scenarios.