Material Insider Information
What it is:
Material insider information is material, nonpublic information about a security or its. Information is material if it might reasonably influence the users of the ’s .
How it works/Example:
Let's assume you are vice president of finance for Company XYZ, and you know the company missed its
Insider information could include things such as:
- events regarding the defaults, calls for redemption, repurchase plans, splits, changes in dividends, changes to the rights of security holders, public or private sales of additional securities, and changes in ratings) ’s securities (e.g.,
- significant legal disputes
- government reports of economic trends
- orders for large trades before they are executed
The reliability of the source is important when determining whether something is material insider information. It is also important to that disclosing information to analysts does not necessarily make the information public.
Financial institutions and other companies commonly have "fire walls" to prevent the communication of material nonpublic information among departments of the same company. This may controlling interdepartmental communication, creating lists of that employees and their families are not permitted to buy or sell, and reviewing employees' trading activity.
Why it matters:
Trading on material insider information is generally illegal. It erodes the public's confidence in
However, some is OK -- as long as the trader follows SEC regulations, which include limiting the times during which can trade company and requiring insiders to publicly disclose their trades.
It is important to that traditional insiders -- employees, directors or officers of an -- are not the only people who can be convicted of illegal . Anyone who purposely acts on material nonpublic information is committing the crime. This can be family members of the issuer's CEO, the friend of an employee who works for the issuer, a for one of the issuer's directors, government employees who become aware of unannounced contracts with an issuer, etc.