Why It Matters
Insider trading undermines market fairness and investor confidence. Enforcement has intensified globally — 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 — 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 — officers, directors, employees with access to MNPI
- Tippers — insiders who share MNPI with others (even without trading themselves)
- Tippees — anyone who trades on MNPI received from an insider
- Misappropriators — anyone who steals MNPI (hackers, consultants, lawyers, accountants)
- Front-runners — 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: 10–30% of sanctions over $1 million
European Union (Market Abuse Regulation — MAR)
- Criminal sanctions: imprisonment (varies by member state, typically 2–5 years)
- Administrative fines: up to €5 million or 3x profits gained (individuals); up to €15 million or 15% of turnover (legal entities)
Prevention (Compliance Programs)
- Trading windows and blackout periods — restrict insider trading during sensitive periods
- Pre-clearance — require insiders to get approval before trading company securities
- Insider lists — maintain and update lists of people with access to MNPI
- Information barriers (Chinese walls) — separate departments with MNPI from trading functions
- Training — regular mandatory training on MNPI rules for all employees
- Surveillance — monitor employee trading for suspicious patterns
- Restricted lists — securities that employees cannot trade
Key Regulation
- US Securities Exchange Act § 10(b) and Rule 10b-5 — primary US anti-fraud provision
- EU Market Abuse Regulation (MAR) No. 596/2014 — EU insider trading regime
- UK Financial Services Act 2012 — criminal insider dealing
- Dodd-Frank Act — SEC whistleblower incentives for insider trading tips