Tipping (Insider Trading)
The term tipping refers to the passing of material, nonpublic information to an individual that does not have a confidential relationship with the company. Insider trading laws prohibit the buying or selling of a company's stock while in possession of material, nonpublic information.
The Securities and Exchange Commission (SEC) has jurisdiction with respect to the oversight and enforcement of insider trading laws, which were established to protect the integrity of, and promote investor confidence in, the securities market. These laws also prohibit the passing of nonpublic, material information or providing recommendations to non-insiders based on this information.
Tipping is defined as the passing of material, nonpublic information to individuals that do not have a confidential relationship with the company, or do not have a valid reason to be in possession of this information. Insider trading rules also prohibit making recommendations to purchase or sell the securities of a company based on material, nonpublic information.
For example, an insider cannot tip, or make a recommendation, to a family member, friend or acquaintance. If they do, the tipper may be liable for insider trading transactions conducted by the tippee, or any other person this information is revealed to by the tippee. Even if the tipper does not trade or receive any form of monetary benefit from the material, nonpublic information, they can still be held liable for the actions of those receiving the tip.
Examples of tipping include:
- Revealing to others work is being performed on an acquisition or merger.
- Telling a friend the company is having a great, or poor, fiscal quarter.
- Revealing to a family member the company is considering a stock buyback program.
- Posting material, nonpublic information to a social media website.
Note: An individual can be found in violation of insider trading laws even if the disclosure of information was inadvertent.
SEC rules prohibit individuals from trading in a company's stock while in possession of material, nonpublic information. In this context, trading is broadly defined as:
- Buying and selling of any securities
- Acquiring or disposing of puts, calls and other derivatives
- Exercising stock options
- Transferring into or out of a fund containing company stock such as a 401(k) plan
- Making a gift or donating securities