Why It Matters
Insider trading undermines market fairness and investor confidence. Enforcement has intensified globally โ the SEC, FCA, and European regulators use sophisticated surveillance tools, phone records, and data analytics to detect suspicious trading patterns. You don't have to be an executive to be prosecuted โ tippers, tippees, friends, family, and even casual acquaintances have been convicted.
What Is Material Non-Public Information (MNPI)?
Information is material if a reasonable investor would consider it important in making an investment decision. It is non-public if it hasn't been disseminated to the general public through official channels.
Examples of MNPI:
- Upcoming earnings results (better or worse than expected)
- Pending mergers, acquisitions, or divestitures
- Major contract wins or losses
- Regulatory approvals or rejections
- Changes in executive leadership
- Product launches or recalls
- Cybersecurity breaches or major lawsuits
Who Can Be Liable
- Corporate insiders โ officers, directors, employees with access to MNPI
- Tippers โ insiders who share MNPI with others (even without trading themselves)
- Tippees โ anyone who trades on MNPI received from an insider
- Misappropriators โ anyone who steals MNPI (hackers, consultants, lawyers, accountants)
- Front-runners โ brokers who trade ahead of large client orders
Penalties
United States (SEC/DOJ)
- Criminal: up to 20 years imprisonment, fines up to $5 million (individuals) or $25 million (firms)
- Civil: disgorgement of profits plus penalties up to 3x the profit gained or loss avoided
- SEC Whistleblower Program: 10โ30% of sanctions over $1 million
European Union (Market Abuse Regulation โ MAR)
- Criminal sanctions: imprisonment (varies by member state, typically 2โ5 years)
- Administrative fines: up to โฌ5 million or 3x profits gained (individuals); up to โฌ15 million or 15% of turnover (legal entities)
Prevention (Compliance Programs)
- Trading windows and blackout periods โ restrict insider trading during sensitive periods
- Pre-clearance โ require insiders to get approval before trading company securities
- Insider lists โ maintain and update lists of people with access to MNPI
- Information barriers (Chinese walls) โ separate departments with MNPI from trading functions
- Training โ regular mandatory training on MNPI rules for all employees
- Surveillance โ monitor employee trading for suspicious patterns
- Restricted lists โ securities that employees cannot trade
Key Regulation
- US Securities Exchange Act ยง 10(b) and Rule 10b-5 โ primary US anti-fraud provision
- EU Market Abuse Regulation (MAR) No. 596/2014 โ EU insider trading regime
- UK Financial Services Act 2012 โ criminal insider dealing
- Dodd-Frank Act โ SEC whistleblower incentives for insider trading tips