Material Nonpublic Information (MNPI)

Material nonpublic information, often abbreviated MNPI, is information about a company or its securities that (a) a reasonable investor would consider important in making an investment decision and (b) has not yet been released to the market generally. Neither half is a term the securities laws define outright. Rule 10b5-1(b) says plainly that "the law of insider trading is otherwise defined by judicial opinions construing Rule 10b-5", so the materiality half comes from Supreme Court decisions and the nonpublic half from how dissemination is treated under Regulation FD and the case law.

The phrase is spelled two ways in the SEC's own documents, which is worth one sentence because it looks like an error and is not. The rules that define the concept write "nonpublic" as one word: that is the spelling in the title of 17 CFR 240.10b5-1 and throughout Regulation FD. Form 8-K's Item 2.02 writes "material non-public information" with a hyphen. Both refer to the same thing, and this site uses the spelling the defining rules use.

Materiality: the standard, and why it has no bright line. In TSC Industries, Inc. v. Northway, Inc., the Supreme Court held that "an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote", adding that the test asks whether disclosure "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available". That case arose under the proxy rules. In Basic Inc. v. Levinson the Court carried the standard across: "We now expressly adopt the TSC Industries standard of materiality for the § 10(b) and Rule 10b-5 context."

Basic also decided what to do about information that describes something that has not happened yet, which is the hard case in practice. Merger negotiations, a drug trial in progress and a large contract under discussion are all contingent. The Court rejected a bright-line rule that such information becomes material only at agreement in principle, and instead endorsed a balancing: materiality "will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity". The consequence for anyone holding such information is uncomfortable but honest: the line moves with the facts, so an early-stage negotiation about a transformative deal can be material while a late-stage negotiation about a trivial one is not.

Nonpublic: the test is distribution, not publication in a particular place. Regulation FD, which governs an issuer's selective disclosure rather than an individual's trading, supplies the clearest regulatory statement of what counts as making information public. Rule 101(e) says an issuer makes public disclosure "by furnishing to or filing with the Commission a Form 8-K", or is exempt from doing so "if it instead disseminates the information through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public". Read as a mirror, that is what nonpublic means: the information has not yet been put where investors generally can get it. Telling a group of analysts is not broad distribution; posting to a website nobody has been pointed to is arguable; a press release over a wire service and a filing on EDGAR are not.

The duty is the third element, and it reaches well beyond insiders. Rule 10b5-1(a) describes the prohibited conduct as a purchase or sale "on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is owed directly, indirectly, or derivatively, to the issuer of that security or the shareholders of that issuer, or to any other person who is the source of the material nonpublic information". Rule 10b5-2(b) then lists three circumstances, expressly "among others", in which such a duty exists: whenever a person agrees to maintain information in confidence; whenever the two people have "a history, pattern, or practice of sharing confidences" such that the recipient knows or should know confidentiality is expected; and whenever a person "receives or obtains material nonpublic information from his or her spouse, parent, child, or sibling", unless that person can show no such expectation existed. So a consultant, a printer, a lawyer's assistant and a spouse can all be caught by rules most people associate with executives.

Awareness, not use. Rule 10b5-1(b) provides that a trade is on the basis of MNPI "if the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale". That is a lower bar than proving the information caused the trade, and it is why the rule carries affirmative defenses in paragraph (c) for a contract, instruction, or written plan adopted before the person became aware of the information. A written trading plan adopted in the clear is the standard answer to the problem of an employee who is routinely aware of company news.

What this means for someone who simply works there. Employees at public companies are frequently exposed to information that is material long before it is public: a quarter's numbers, a customer loss, a pending acquisition, a regulatory decision. The usual institutional responses are a written insider trading policy, a blackout period around each reporting cycle, a pre-clearance process, and a Rule 10b5-1 plan for anyone who needs to sell on a schedule. None of those is a legal safe harbor by itself; they are ways of arranging your affairs so that the decision to trade is made at a time when you are not holding anything.

Begin with something concrete. A mid-size manufacturer's finance team closes the quarter internally on the 5th and knows revenue came in far below what the company had publicly guided to. The earnings release is scheduled for the 22nd. Between those dates the number is information a reasonable investor would obviously consider important, and it has not been distributed to anyone outside the company. It is material and nonpublic.

Take an example of what happens next for three different people. A controller who sells shares on the 12th traded while aware of the information and owes a duty to the company: that is the core case. Her brother, who sells on the 13th after she mentioned the number at dinner, is reached by Rule 10b5-2(b)(3), which creates a duty whenever someone receives material nonpublic information from a sibling, unless he can show there was no expectation of confidence. A contractor who agreed in writing to keep company information confidential is reached by 10b5-2(b)(1) from the moment he agreed.

Now the timing question people get wrong. The information stops being nonpublic when it has been broadly distributed, not at the instant the release is sent to one wire service or discussed on a call. Regulation FD's own standard for public disclosure is a method "reasonably designed to provide broad, non-exclusionary distribution". In practice companies treat the window as opening after the market has had time to absorb the release, which is why an insider trading policy normally permits trading starting a day or two after earnings rather than minutes after.

Finally, the amount does not save anyone. Nothing in Rule 10b-5 sets a threshold dollar value for a trade, so a $4,000 sale and a $4,000,000 sale are analyzed the same way. What differs is the size of the loss avoided or profit made, which affects the remedy rather than whether there was a violation.

Pros

• The standard is qualitative, so it adapts to facts a numeric threshold would miss, such as a small contract that determines whether a company survives.
• Basic's probability-and-magnitude balancing gives a workable way to think about contingent events instead of pretending they are binary.
• Rule 10b5-2 states the family and confidentiality duties explicitly, so an ordinary person can see that the rules are not limited to executives.
• Rule 10b5-1's affirmative defenses give someone who is routinely exposed to company information a legitimate, documented way to sell.

Cons

• There is no bright line, so a person of good faith can hold something and be genuinely unsure whether it is material.
• The awareness standard means a trade can violate the rule even when the information played no part in the decision, unless a defense applies.
• "Nonpublic" depends on how widely information has spread, a judgment that is easy to make wrong in the hours around a release.
• The rules attach to the information rather than to a job title, so people with no access to counsel, such as family members and contractors, can be exposed without realizing it.