Glossary
Insider trading
Trading by corporate insiders; legal when reported to the SEC, illegal when based on material non-public information.
Insider trading has two meanings that point in opposite directions. In everyday market data it means any purchase or sale by a company's officers, directors or owners of more than 10% of a class of its stock, and those trades are legal as long as they are reported. In enforcement language it means trading any security while aware of material non-public information (MNPI) obtained in breach of a duty of trust, which is a federal crime in the US.
How legal insider trades are reported
Under Section 16 of the Securities Exchange Act, insiders file a Form 4 with the SEC within two business days of a trade. The form shows the date, the number of shares, the price and a transaction code (P for an open-market purchase, S for a sale, M for an option exercise, and others).
Many executives sell through a Rule 10b5-1 plan, a written schedule adopted while they hold no MNPI. Since the SEC's 2022 amendments, directors and officers must wait through a cooling-off period, generally at least 90 days, before the first trade under a new plan.
What makes it illegal
Liability turns on two questions: was the information material (would a reasonable investor care about it?) and was it non-public? A tip passes the liability along: a "tippee" who trades on a leak from an insider who breached a duty can be charged too. The SEC can seek a civil penalty of up to three times the profit gained or loss avoided, and the Justice Department can bring criminal charges.