Insider
Candlefocus EditorIllegally obtaining and using insider information for financial gain, however, is a crime commonly referred to as insider trading. Insider trading has been illegal in the United States since 1934, when the Securities and Exchange Commission (SEC) was created. The SEC is a federal agency charged with protecting investors and ensuring the correct use of insider information. Insider trading violators can face both civil and criminal prosecution. The SEC can file civil suits against violators in federal court, and can also seek civil monetary penalties and other relief.
Insider activities such as anyone using material, non-public information on a security is prohibited. Trading while in possession of material non-public information (also known as tipping) is also prohibited by the SEC. All individuals that are considered “insiders” of a company must report any stock trades they make to the SEC within two business days so that any potential violations can be inspected.
The SEC requires that all publicly traded companies establish policies and procedures to prevent the illegal use of non-public information. Employees must be informed of these policies and must be trained to identify potential insider trading issues. Companies must also establish policies that require the prompt filing of insider trading reports and the timely filing of Form 4s (which track company insiders' stock trading activities).
To ensure that both the company and the investors remain in compliance with the SEC, corporate insiders must uncover and report any undisclosed information about the company that could affect its stock value, as well as any insider transactions that may occur. The Securities and Exchange Commission is diligent in monitoring companies’ compliance with insider trading laws and prosecutes those who break them. By understanding the importance of corporate insider information and the laws surrounding this type of data, companies and investors can gain a valuable competitive edge when trading stocks.