What is insider trading?

Who counts as an insider

Federal securities law treats a specific group of people as "insiders" subject to special reporting duties: directors, officers, and any shareholder who owns more than 10 percent of a class of a company's equity securities registered under the Exchange Act. Under Section 16 of the Securities Exchange Act, these insiders generally must report their transactions in the company's stock to the SEC within two business days, using Forms 3, 4, or 5. A shareholder who acquires more than 5 percent of a registered class faces a separate disclosure duty and must file a Schedule 13D or 13G until their holdings drop below that threshold. These filings become public through the SEC's EDGAR system, which is how outside investors can see what a company's own leadership is doing with its stock.

The line between legal and illegal trading

Trading by an insider is not itself the violation; trading on material nonpublic information while owing a duty not to use it is. A corporate officer who buys shares based only on publicly available information, or under a preplanned, properly disclosed trading arrangement, is trading legally even though they work inside the company. The problem arises when someone trades, or passes a tip to someone who trades, based on confidential facts likely to move the stock's price once disclosed, such as unannounced earnings, a pending merger, or a drug trial result. The SEC's own explainer on this distinction is central to how the guide to insider trading frames the issue for investors, distinguishing ordinary insider ownership and reporting from the fraud theories the Commission actually prosecutes. Section 16(b) of the Exchange Act adds a separate, strict rule for company insiders: it lets the company recover any "short-swing" profit an insider realizes from buying and selling the same class of stock within a six-month window, and it bars insiders from short-selling their own company's securities altogether, regardless of intent or whether nonpublic information was involved, as described in the SEC's discussion of Section 16 obligations for officers, directors, and 10 percent shareholders.

Trading plans and the Rule 10b5-1 defense

Because insiders often want to sell or acquire stock on a schedule without appearing to trade on inside information, the SEC allows pre-arranged trading plans under Rule 10b5-1 that can provide an affirmative defense against insider-trading liability if set up properly, before the person possesses material nonpublic information. In December 2022 the Commission tightened these rules substantially. Under the amendments described in its Insider Trading Arrangements and Related Disclosures compliance guide, most new or modified plans must include a cooling-off period before trading can begin, and directors and officers must certify, in good faith, that they were unaware of any material nonpublic information when they adopted the plan and were not using it to evade Rule 10b-5. The amendments also restrict overlapping plans, limit most non-issuer individuals to one single-trade plan per twelve-month period, and add new company-level disclosure obligations, including quarterly reporting of insiders' trading arrangements and annual disclosure of a company's insider-trading policies, as summarized in the SEC's rule announcement. Forms 4 and 5 must now flag any transaction made under one of these plans and state when the plan was adopted, closing off much of the ambiguity that previously let insiders quietly amend plans shortly before market-moving news broke.

How the SEC investigates and punishes violations

The SEC treats insider trading as a form of securities fraud and pursues violators through civil enforcement actions that can result in the return of illegal profits, monetary penalties, and bars from serving as an officer or director. Civil penalties adjust for inflation periodically; under the SEC's current inflation-adjusted schedule, the maximum civil penalty for a person who controls an insider trader who commits the violation can reach $2,626,135 per violation, alongside separate penalty tiers for individuals and entities under other fraud provisions, as listed in the SEC's civil monetary penalties inflation adjustments. Anyone can look up whether a specific person has already been charged and sanctioned in an SEC insider-trading or other securities case through the SEC Action Lookup for individuals, which covers judgments and orders issued in federal court actions and administrative proceedings.

Reporting suspected insider trading

Someone with firsthand knowledge of possible insider trading can report it directly to the SEC, and the agency's whistleblower program offers a financial incentive to do so. Under the SEC Whistleblower Program, an eligible whistleblower who voluntarily provides original, credible information that leads to a successful enforcement action resulting in more than $1 million in sanctions can receive an award of 10 to 30 percent of the money collected, and the program has paid out substantial sums to hundreds of individuals since 2012. Tips, complaints, and general questions about suspected trading violations can also be submitted through the SEC's Complaint Center, the same portal the SEC's own insider-trading guide directs the public to use for reporting concerns and seeking further explanation of insider reporting requirements.