The UK and US enforcement agencies have been actively pursuing insider dealing (“insider trading”, in US parlance) since the COVID-19 pandemic ended. The UK and US have different securities enforcement regimes, but both have seen recent developments expanding the scope of conduct that can be prosecuted.
For individuals and organizations trading across multiple jurisdictions, it is important to keep abreast of the scope of these offenses and of the different rules that apply in key enforcement jurisdictions. In this article, we will summarize the UK and US criminal offenses of insider dealing and highlight some key similarities and differences between those enforcement regimes. We will review recent legislative changes and enforcement activity and touch upon how enforcement agencies are signaling greater abilities to identify insider dealing, through reporting and the use of more advanced technical capabilities.
UK Legal Framework
In the UK, the criminal offense of insider dealing is committed where a person who has information as an insider deals with price-affected securities in relation to the information. The acquisition or disposal in question must occur in a regulated market, or by or through a professional intermediary.1 Insider dealing is punishable by up to 10 years’ imprisonment.2
Improper disclosure of information to another person or encouraging another person to deal on inside information is also a criminal offense.
Inside information is specific or precise nonpublic information. It must relate to particular securities, or a particular issuer, which would be likely to significantly affect the price of any securities if made public.
A person has information as an insider when they know that it is inside information, and they have it and know that they have it from an inside source. This can include having information as a director, employee, shareholder or professional or obtaining such information through someone in that capacity.
On June 15, 2023, the UK expanded the list of securities3 under the criminal insider dealing regime to capture currency options, credit default swaps and units in collective investment undertakings, such as exchange-traded funds.
It also expanded the scope of the criminal regime to include securities traded on any UK-, EU- or Gibraltar-regulated market, multilateral trading facility and organized trading facility, as well as the Nasdaq Stock Market, the New York Stock Exchange, and SIX Swiss Exchange.4
This article focuses on the UK criminal offense of insider dealing, but it is worth remembering that the UK has broader criminal offenses for market misconduct, as well as civil offenses for insider dealing and market abuse.
US Legal Framework
Federal securities laws in the US create criminal offenses for insider trading and market manipulation. The primary federal regulator in the US is the Securities and Exchange Commission (SEC). Each state also has its own securities laws and regulations, known as “blue sky laws.” While these laws vary from state to state, in general they all govern the offer and sale of securities, as well as the requirements for registration, exemptions and reporting.
The SEC regulates securities trading on the secondary market and US stock exchanges, and participants in these markets. Participants can include securities exchanges, brokerage firms, transfer agents and clearing agencies. The secondary market serves as the platform for trading securities after their initial issuance by a company, including stocks, bonds, stock options and stock futures. In recent years, the SEC has intensified its enforcement efforts to investigate and prosecute insider dealing, mainly targeting hedge funds and expert networks.
In the US, federal securities laws define illegal “insider trading” as “trading a security while possessing material nonpublic information obtained in breach of a fiduciary or functionally equivalent legal duty.”5 For this purpose, an “insider” is a director, executive or senior officer of a publicly traded company; any person or entity that holds more than 10% of any class of a company’s securities; and anyone who trades a company’s shares based on material nonpublic knowledge.
An insider trading offense can occur when an insider trades (i.e., purchases or sells securities) on the basis of material, nonpublic information and in violation of a fiduciary duty owed by the insider to a company.6 An insider trading offense can also occur when an individual trades on the basis of confidential information from a party to whom that person owes a fiduciary duty (e.g., a lawyer trading on a client’s information).7
Key Similarities and Differences Between the UK and US Criminal Insider Dealing Regimes
Below, we set out some of the key similarities and differences between the UK and US regimes.
Statutory regime – In the UK, legislation provides for a specific criminal offense of insider dealing and sets out the key requirements to establish liability.8 In the US, there is no specific federal statute prohibiting insider dealing. Rather, cases are brought under more general provisions of the federal securities laws, including the general antifraud provision of the Securities Exchange Act of 1934, as amended (Exchange Act)9 and a securities fraud provision in the Sarbanes-Oxley Act of 2002 (SOX).10 States also have the power and authority to bring cases pursuant their own securities laws. This means that, in the US, the law of insider dealing is continually developing through case law, and different principles can apply depending upon the basis of a particular prosecution. Although there have been attempts to pass a federal law specifically banning insider trading in the US, these have not yet resulted in a statute being passed.11
Definition of “inside information” – In the UK, inside information must relate to particular securities or issuer(s) of securities and not to securities or issuers generally. The information must be specific and precise, it must be nonpublic, and if it were made public would be likely to have a significant effect on the price of shares. In the US, the offense relates to trading on “material nonpublic information” (MNPI), which refers to nonpublic information that would likely affect the market value of a security or influence an investor’s decision to buy or sell securities.
In 2024, one US federal district court significantly broadened the scope of MNPI when it secured convictions in its first “shadow-trading” prosecution.12 “Shadow-trading” is where an investor possesses MNPI about Company A and uses it to trade in the securities of Company B, which is not directly related to Company A but is a “closely comparable company” in the market (also described as sharing a “market connection”).
Whereas, previously, insider dealing had considered the materiality of the confidential information to the company or companies to which the information relates, this case expanded the scope of MNPI by acknowledging that the MNPI could be material to other companies by significantly altering the available information about the sector or market generally. If the judgment stands, insiders having possession of MNPI should carefully consider how it impacts their trading in “closely comparable companies”, not just in the company or companies to which the MNPI relates. We note, however, that an important feature of this case (which may limit its broader application) was that the defendant’s own company’s insider trading policy prohibited employees from trading in any publicly traded securities where the MNPI obtained in their role might give them an investing edge. Accordingly, people receiving MNPI should look carefully at any insider dealing policies that apply to them when assessing whether particular trading activity will expose them to risk.
Personal benefit – Historically, under US federal law, it has been necessary to show a personal benefit to establish that insider dealing has occurred. In cases involving using an insider providing MNPI to another person for use in that person’s securities-trading activities (“tipping”), the relevant test has been “whether the insider personally will benefit, directly or indirectly, from his disclosure.” “Absent some personal gain” by the insider, there has been no breach and thus no duty to refrain from trading.13 For a little over thirty years, in relation to violations of the Exchange Act, courts have deemed the personal benefit requirement to be satisfied if the government proved a monetary benefit or an intangible benefit, such as friendship to the tipper.14 Since 2017, the personal benefit test in such cases can be satisfied in one of two ways: either if the tipper and tippee share a quid pro quo relationship or if the tipper simply intended to benefit the tippee.15
However, the position in relation to cases brought specifically under SOX is less clear. In 2019, the US Court of Appeals for the Second Circuit issued an opinion that, in these cases, both tippers and tippees can be held criminally liable even if the tipper did not receive a “personal benefit” from sharing the information.16 At least one judge has expressed concern that this would result in unfairness because fewer elements would be required to convict someone of criminal insider dealing than for comparable civil offenses and because it could inhibit lawful market activity.17
In the UK, there is no requirement to establish that the insider actually received a personal benefit for them to be liable for the offense of insider dealing (although an individual has a defense if they can show that they did not expect it to be profitable).18
- Part V, sections 52 and 57 of the Criminal Justice Act 1993 (CJA).
- Section 31 of the Financial Services Act 2021 amends Section 61 of the CJA and Section 92 of the Financial Services Act 2012 to increase the maximum sentence for conviction on indictment for insider dealing offenses from seven to 10 years.
- The Insider Dealing (Securities and Regulated Markets) Order 2023 (2023 Order), which replaced the Insider Dealing (Securities and Regulated Markets) Order 1994 (1994 Order).
- Paras 7.6 and 7.7 of the Explanatory Memorandum to the Insider Dealing (Securities and Regulated Markets) Order 2023 No. 582.
- Dirks v. SEC, 463 US 646, 660 (1983); see Exchange Act Section 10(b), 15 USC Section 78j(b), SEC Rule 10b-5, 17 CFR Section 240.10b-5.
- Chiarella v. United States, 445 US 222 (1980).
- United States v. O’Hagan, 521 US 642 (1997).
- CJA, Section 52.
- Section 10(b) of the Exchange Act and SEC rule 10b-5, promulgated under it.
- 18 U.S.C. Section 1348 of SOX.
- See, e.g., the Insider Trading Prohibition Act bill passed in the US House of Representatives in 2019 and an identical bill passed in 2021.
- “Jury Returns Verdict Finding Defendant Matthew Panuwat Liable for Insider Trading,” Litigation Release No. 25970, SEC, April 8, 2024.
- Dirks v. SEC, 463 U.S. 662 (1983)
- See United States v. McPhail, 831 F.3d 1, 10–11 (1st Cir. 2016); United States v. Salman, 792 F.3d 1087, 1092 (9th Cir. 2015), aff’d, 580 U.S. 39 (2016).
- United States v. Martoma, 894 F.3d 64 (2d Cir. 2017) (amended June 25, 2018).
- US v. Blasczack, 947 F.3d 19 (Second Circuit, 2019).
- US v. Blasczack, 56 F.4th 230 (Second Circuit, 2022).
- The Offence of Insider Trading, CJA c. 36, Part V.
