Insider Trading Laws
The term insider trading laws refers to a set of federal rules that prohibit fraudulent activities in connection with the purchase or sale of securities. Insider trading is against the law if a person trades a security while in possession of material, nonpublic information.
The Securities and Exchange Commission (SEC) has jurisdiction with respect to the oversight and enforcement of insider trading laws. These rules were established to protect the integrity of, and promote investor confidence in, the securities market. These laws also prevent insiders from taking advantage of what is considered material information that has not been disclosed to other stockholders or the public.
Generally, insider trading laws are violated when a person:
- Has a duty of trust, or confidence, to the owner of the information.
- Is in possession of nonpublic, material information about a company.
- Trades in that company’s securities, or provides nonpublic, material information about the company to another person that subsequently trades in the company’s securities.
Individuals that have a duty of trust, or confidence, as insiders include:
- A company’s directors, officers, and employees.
- Those that have a fiduciary duty, or other relationship of trust or confidence with the company, such as the independent auditors of the company’s financial statements.
This duty of trust can be assigned to another individual when the above corporate insiders tip them about material, nonpublic information. If the person receiving the tip engages in fraudulent activity in connection with the sale or purchase of the company’s securities, the person providing the tip may also be found liable for this act.