Material information includes reports about a corporation’s activities. The information could influence the price of the company’s stock. As noted by the CFA Institute, when considering a stock purchase, you may review material information such as financial records and potential merger targets.
As its name implies, nonpublic material information is data yet to become publicly known. As confidential information, it could affect a security’s market price once revealed. Corporate insiders and individuals with access to undisclosed knowledge must refrain from using the information for their trading decisions.
How may trades based on inside information breach a securities law?
The U.S. Securities Exchange Commission forbids corporate insiders from using nonpublic information to place profitable trades. When directors or employees have possession of confidential information, they may breach SEC rules by placing investment orders.
The need to refrain from investing extends to an insider’s spouse, relatives and associates. If you receive material nonpublic information, you may face allegations of securities fraud by placing trades before a company publishes a press release.
Who may face charges other than corporate insiders?
Individuals with knowledge of a company’s nonpublic information owe a fiduciary duty of care to maintain confidentiality. The duty then extends to other individuals who also become privy to material information not yet disclosed to the public.
As noted on Investor.gov, if you receive “tips” from an individual who misappropriated confidential information, the SEC may review your trades during an investigation. The FBI may also use artificial intelligence to trace a series of trades.
Trades placed before a company publishes a press release may raise red flags or launch an inquiry. When material information becomes known and available, however, you may place trades.