The SEC defines illegal insider trading as:

[...] buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.

So far so good. Stocks are traded by the public and material, nonpublic information should not be exploited by the few that have access to it. The SEC goes on to mention a few examples of insider trading cases, mostly involving corporate officers or financial intermediaries exploiting private information pertaining to the company.

However, at what point does information become "material" or even "non-public"? It's not quite clear in my mind as the SEC doesn't offer a strict definition, just a few legal cases outlining more or less obvious criminal behaviour. Ambiguities remain.

For example, professional investors in public equities tend to do their own research into a company when deciding whether to invest in it. This could involve calling up its suppliers, its store managers etc. to validate public information or forecasts the company is providing in its SEC filings (which include both audited and unaudited data and management opinion and forecasts). In addition, it could also mean asking a supplier or client of said company about their business relationship and any expected changes. However, by doing this one gains non-public information which, depending on how one interprets this information, may be material since an investor would presumably trade on his own research (though most likely not in breach of any fiduciary duty or relationship of trust).

This seems to be an accepted practice, however, I would like to understand at what point (or even if) it becomes illegal according SEC's insider trading rules. What is the current legal thinking here?

FWIW - I believe that doing your own research is incredibly useful and is a benefit for the greater public as well. If there wasn't a way to independently verify publicly traded companies and the data and forecasts they make available, there would be little incentive for management to stay honest.

  • 1
    This seems to be a question of law rather than an issue of personal finance. Jun 6, 2014 at 12:46

2 Answers 2


It becomes illegal when it is both material and nonpublic information.

Material being defined as: Information that you would want and significantly alters the perception of the stock. To your point -- "materiality" is really up to the courts

Nonpublic This is a little easier to define, but need to be careful if the information is disclosed selectively -- ie to just a small number of investment analysts -- this may still be nonpublic

There is also an exception to this --

Mosaic Theory - This is the research you are referring to where the analyst calls up suppliers, etc and obtains information that is nonmaterial (wouldn't move the price of the security) but using experience and combined with public information creates something that is meaningful and could move the price of the security. This is perfectly legal.

Material examples:

 Dividend increase, decrease or omission

 Quarterly earnings or sales significantly different from consensus

 Gain or loss of a major customer

 Changes in management

 Major development specific to that industry

 Government reports of economic trends (housing starts, employment etc.)

 Major acquisition or divestiture

 Offer is made to tender shares (acquisition)
  • RE materiality, some of the jurisprudence out there uses this as a criteria: would a reasonable investor want to know the information before making a buying or selling decision with respect to a particular security.
    – user68318
    Sep 1, 2023 at 3:05

You have to read some appeals court cases see scholar.google.com , as well as SEC enforcement actions on sec.gov to get an understanding of how the SEC operates.


There are court created guidelines for how insider trading would be proven

There is no clear line, but it is the "emergency asset injunctions" (freezing your assets if you nailed a suspiciously lucrative trade) you really want to avoid, and this is often times enforced/reported by the brokers themselves since the SEC does not have the resources to monitor every account's trading activities.

There are some thin lines, such as having your lawyer file a lawsuit, and as soon as it is filed it is technically public so you short the recipient's stock. Or having someone in a court room updating you on case developments as soon as possible so you can make trades (although this may just be actually public, depending on the court). But the rules create the opportunities

Also consider that the United States is the most strict country in this regard, there are tons of capital markets and the ideals or views of "illegal insider trading" compared to "having reached a level of society where you are privileged to obtain this information" vary across the board

contains charts of countries where an existing insider trading prohibition is actually enforced: http://repository.law.umich.edu/cgi/viewcontent.cgi?article=1053&context=articles


Finally, consider some markets that don't include equities, as trading on an information advantage is only applicable to things the SEC regulates, and there are plenty of things that agency doesn't regulate.

So trying to reverse engineer the SEC may not be the most optimal use of energy

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