Kenneth Relwani

Material nonpublic information, as opposed to immaterial non-public information, can be manipulated to gain an unfair advantage in the marketplace. This is known as insider trading or insider dealing.

The terms ‘material’ and ‘immaterial’ mean ‘relevant’ and ‘irrelevant’ in the contexts when they are used.

For example, imagine you are one of the directors at John Doe Organics Inc., a company that sells organic milk, eggs and some other foods to supermarkets across the country. People buy your company’s products because they are free of pesticides, artificial fertilizers, preservatives, etc.

You have just been told in a confidential meeting that an internal investigation has found that 15% of all John Doe’s products contain significant traces of insecticides – thus making them not organic. As soon as this information goes public, you know that sales will nosedive.

If your best friend owns $1 million dollars’ worth of John Doe’s shares and you tell her to sell them immediately, you are doing this based on material non-public information – confidential information that is relevant to the company’s share price and investor decision-making, about which the public knows nothing.

By telling your friend about this, and your friend acting on that information to sell the shares before the bad news becomes public, you are guilty of insider trading – in some jurisdictions your friend is also guilty. Unlawful insider trading is an imprisonable offence.

The information you give your friend is ‘material’ in the sense that it is ‘relevant’ to the company’s share price and how investors are likely to decide.

If you hear that the CEO of your company has taken up basket-weaving as a weekend hobby, and nobody outside the company knows about this, it is nonpublic information, but definitely not ‘material’ – there is no way that this information, if it became public, could have an effect on the company’s share price or investor decision-making. Hence, the basket-weaving information is ‘immaterial’.

The US Securities and Exchange Commission (SEC) makes the following comment regarding insider trading and material nonpublic information:

“Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material nonpublic information about the security.”

Many companies, especially those whose employees gain access to confidential information on several publicly-traded corporations, have a policy for material nonpublic information.

New York-based Moody’s, the famous bond credit rating company, says that employees who have access to confidential information are not allowed to share or use that information of the purposes of buying or selling securities, or any other purpose except for those related to their employment duties at Moody’s.

On its website, Moody’s writes:

“Insider trading (or dealing) laws and regulations globally prohibit buying or selling a company’s securities while in possession of Material Non-Public Information about that company. You can also violate these laws by disclosing Material Non-Public Information to another person if, as a result, that person – or any other person – buys or sells a security while aware of that information.”

“If you make such a disclosure or use such information, you can be punished, even if you yourself stand to make no financial gain.”

‘Material’, in this context, refers to any information that:

Information is deemed to be ‘nonpublic information’ unless it has been released for public access, for example, through:

Insider trading is illegal when somebody uses material non-public information for personal gain or to avoid a personal loss. This Seeker Daily video explains what Martha Stewart did and why she ended up in prison. Martha Stewart is an American businesswoman, TV personality and writer.

Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company. In the calculation of AUM, some financial institutions include bank deposits, mutual funds, and cash in their calculations.

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