What Are the Dangers of Disclosing Material Nonpublic Information
Insider trading is the illegal practice of using nonpublic material information for personal advantage in trading stocks or other securities. Material nonpublic information (MNPI) refers to corporate news or information that has not yet been made public and could affect the share price. The legality of insider trading is not dependent on how the information is obtained or whether the person acting on it is employed by the company or not.
Basics
The use of material nonpublic information for personal gain in stock trading is illegal. This information refers to data about a company that hasn't been publicly disclosed yet but could influence its share price. It is against the law for individuals who possess such information to exploit it for trading advantages. Sharing this information with others who then profit from it in the market is also prohibited.
What Counts as Material Nonpublic Information?
Using material nonpublic information, regardless of how it was obtained or the person's affiliation with the company, is illegal. For example, if someone shares nonpublic information with a friend, who then profits from it in the stock market, all parties involved can face legal consequences.
To avoid legal trouble, it is best not to share material nonpublic information. This includes details such as learning about a company's anticipated poor earnings or receiving information about ongoing lawsuits involving a company.
In determining material nonpublic information, its significance is crucial. The information must be substantial enough to impact a company's stock price. For instance, if a checkout clerk learns that their working hours will be reduced, although it is nonpublic information, it is not considered material since it does not affect the stock price.
MNPI Types
Material nonpublic information encompasses various types of corporate information. It can originate from the affected company itself or external sources such as regulatory agencies, lawmakers, credit agencies, or financial institutions.
Examples of material nonpublic information include:
- Key financial filings, such as earnings reports.
- Updates on corporate actions that could impact stock prices, such as IPOs, acquisitions, stock buybacks, or splits.
- Developments in legal proceedings, including decisions in lawsuits and rulings by regulatory bodies.
MNPI Disclosure
Material nonpublic information can be disclosed by a company in accordance with the law. When a company discloses such information to the public on a large scale, it becomes widely available for all individuals to use. This ensures a level playing field for investors.
Nonpublic Personal Information
Personal details that are not intended to be available to the public are known as non-public information. It includes sensitive information such as Social Security Numbers, bank account details, other personally identifiable financial information, and specific transactions involving financial institutions.
MNPI vs. Insider Trading
Not all insider trading is illegal. Insiders, like company employees, can legally trade their company's stock as long as they register their transactions with the Securities and Exchange Commission (SEC).
Illegal insider trading occurs when people use material nonpublic information to gain an unfair advantage. For example, let's say a marketing director overhears a conversation between the CEO and CFO. The CFO reveals that the company's revenue fell short of expectations and resulted in a loss for the last quarter, three days before the official announcement.
The marketing director, who has this nonpublic information, advises their cousin, who owns shares in the company, to sell them immediately. This is an example of material nonpublic information since the latest financial results are not yet public. If the cousin follows the advice and sells the shares the next day before the earnings report is released, it would likely be considered illegal insider trading because it gives them an unfair advantage.
However, if the cousin waits until after the earnings report is made public to sell the shares, the trade is more likely to be legal. At that point, the information becomes publicly available rather than nonpublic material information.
The Legality of Insider Trading
Using MNPI to make investment decisions is illegal in the context of insider trading. This practice involves having nonpublic information and using it to impact the financial standing of an entity. It is considered both a civil and criminal offense, punishable by imprisonment and fines.
Conclusion
Material nonpublic information is a serious issue that can lead to legal and financial consequences. Insider trading, which involves using MNPI for personal gain, is illegal and can result in imprisonment and fines. It is important to understand what counts as MNPI and to avoid sharing or using it for trading advantages. By staying informed and following the law, investors can ensure a level playing field and maintain the integrity of the financial markets.