Insider Trading
Insider trading occurs when someone trades securities using material, nonpublic information. “Material” in this context means information an investor would find relevant when making an investment decision. Material information has also been described as information that could affect the price of a security. Information that is made public by the issuer, such as the declaration of a dividend, is not considered to be non-public information. It is unlawful for anyone who gains material, nonpublic information and knows it to be confidential to trade on such information. It is also unlawful for anyone to pass on inside information that is then traded on. Both the actions of the person who reveals information (the tipper) and the actions of the person who trades on the information (the tippee) are considered illegal. Insider trading rules are based on the Securities Act of 1934’s prohibition on fraud in the buying and selling of securities. Amendments to the Exchange Act require broker-dealers and investment advisors to have written policies and procedures to prevent persons at the firm from trading on material, non-public information.
Example: An employee of a broker-dealer learns material, nonpublic information about a publicly traded company at an after-hours work party. The employee tells his cousin that he has inside information about a stock and says to his cousin that he is willing to share the profits if the cous