Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the Security Exchange Commission (SEC) has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.
There’s an important thing to emphasise that insiders don’t always have their hands tied. As Insiders can legally buy and sell stock in their own company all of the time; their trading is restricted and illegal only at certain times and under certain conditions.
The SEC considers company directors, officials or any individual with a stake of 10% or more in the company to be corporate insiders. A person is defined as an “insider” if they’ve a relationship with a business that makes them privy to information that has yet to be released to the public. Insiders are expected to maintain a fiduciary relationship with their companies and shareholders. And trying to profit from insider information puts the insider’s interests above those of the entities to whom they owe this duty.
Corporate insiders are required to report their insider transactions. Where for example, if an insider sold 10,000 shares on Monday, June 12, they’d have to report this changes in insider holdings sent to the SEC electronically as a Form 4. This details a company’s insider trades or loans. Along with a Form 14a, also filed by the company, listing all the directors and officers along with the share interest they have.
Insider information is “material” if its release would affect a company’s stock price. For example, the announcement of a tender offer, a pending merger, a positive earnings report, the pending release of a new product, etc.
As sometimes people outside of a company can run afoul of these laws, as well, using information obtained from those on the inside to seek a profit, even if the insider doesn’t directly profit. In these situations, there’s a “tipper” and a “tippee.”
