If you follow the financial or political news, then insider trading may be a term with which you’re familiar. It may evoke the image of Martha Stewart being sent to jail, or more recently of a politician seen making a hurried phone call to a family member while at an event in the White House Rose Garden. Though our common use and understanding of the term surrounds unethical and even criminal actions, the truth is that insider trading is not always illegal.

When is insider trading permissible? It’s when a person on the inside of a company – whether a lower-level employee or someone higher up in the food chain – buys or sells shares according to the process established by securities laws. These transactions involve filling out specific forms during established, prescribed periods of time and submitting those notifications to the U.S. Securities and Exchange Commission (SEC). By limiting activities in this way, the regulatory agency is able to preserve a sense of fairness among all who own or want to own stock in a company.

By contrast, the insider trading activities that are illegal are those in which an individual is in possession of what is referred to as “material” information about something that is happening or about to happen to a company that will impact its value and who acts on that information before it becomes public in order to give themselves or another an advantage. The official SEC definition of illegal insider trading is “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.” The definition extends to giving material information to others to give them an unfair advantage.

If the SEC is notified of a possible incident of insider trading, a full investigation is launched to determine whether there is evidence to support the claim.  Once the inquiry is complete and there is enough evidence to support the claim, supervisors at the SEC will review the findings to determine whether it is appropriate for action to be taken against the accused individual or individuals. Actions taken can be civil or administrative: civil actions are filed with a U.S. District Court and if found guilty the individual can face monetary penalties, while administrative actions are held before an administrative law judge and can lead to cease and desist orders, suspension, or revocation of various financial rights and registrations, as well as monetary penalties.