What Is Insider Trading? How Material Non-Public Information Rules and Fair Disclosure Actually Work

Three Days Before Earnings, an Executive Sells a Big Chunk of Stock

A company's CFO offloads a large block of personally held shares through an after-hours sale, three days before that same company's quarterly earnings are due. A few days later, earnings come in well below what the market expected, and the stock drops sharply. Did the CFO know the numbers were bad and get out ahead of the damage — or was this simply a personal cash need with unfortunate timing? Answering that question, and more importantly, preventing this exact kind of trade from happening in secret in the first place, is what insider trading regulation and fair disclosure rules exist to do. Both ultimately protect the same thing: the basic premise that makes a public market function at all — that everyone trading in it has access to the same information at roughly the same time.

What Counts as Material Non-Public Information

Korea's Financial Investment Services and Capital Markets Act defines material non-public information as anything related to a listed company's business that could meaningfully affect an investor's decision and hasn't yet been made available to the public. Trading on it, or passing it along for someone else to trade on, is prohibited. Two things matter here. First, the bar is "material" — a routine schedule change or unverified rumor doesn't count, but an earnings surprise, a major contract win or termination, an M&A negotiation, clinical trial results, or a capital raise plan all clearly do, because each is the kind of fact that genuinely moves a stock. Second, the clock matters: once information is formally released through the exchange's disclosure system and the market has had reasonable time to absorb it, the same fact is no longer off-limits. The information itself isn't the problem — trading on the gap between "known internally" and "known publicly" is.

Why It's Banned: Information Asymmetry Erodes Market Trust

As covered in the efficient market hypothesis, the whole premise of a functioning market is that prices absorb new information quickly and accurately. Insider trading attacks that premise directly. When someone holding material non-public information trades before that information reaches the public, the price ends up on the wrong side of a trade for everyone who doesn't have it — the informed party captures value that, in a fair market, would never have been up for grabs in the first place. Left unchecked, this pushes ordinary investors toward a simple, corrosive conclusion: no amount of research or diligence can beat someone who simply knows the answer ahead of time. That conclusion drives participation down, participation drives liquidity down, and thinner liquidity raises the discount companies have to offer when they issue new shares to raise capital. Banning insider trading isn't just about compensating the specific investors who got the worse end of a specific trade — it's about protecting the trust and cost of capital of the market as a whole.

Who Counts as an Insider — Further Than You'd Think

A common misconception is that insider trading rules only reach a company's own employees. The actual scope is much wider. Primary insiders — executives and major shareholders — are the obvious category, but quasi-insiders, meaning government officials with regulatory authority over the company, or outside lawyers, accountants, and bankers who gain access to material information while working with the firm, are covered too. The scope extends further still, to tippees — anyone who simply received the information from an insider and traded on it. If an executive tells a spouse or a friend "something good is coming next week" and that person buys the stock, both the executive who leaked it and the friend who traded on it can be held liable. The reason tippees are included at all is straightforward: without that rule, insiders could simply stop trading themselves and instead pass tips to people one step removed, and the entire regulation would be trivially easy to route around.

Fair Disclosure: Why Everyone Has to Learn It at the Same Time

If insider trading rules punish trades made on information that has already leaked, fair disclosure rules exist to stop the leak from happening selectively in the first place. When a company holds an investor relations meeting or an earnings call with sell-side analysts who help build analyst consensus estimates or with institutional investors, there's an obvious temptation to share forward guidance or business plans ahead of the formal announcement. Fair disclosure rules require that any time a company shares this kind of material information with a specific analyst or institution, it must simultaneously release the same information to the entire market through the exchange's public disclosure system. Without this rule, whoever happens to be in the room — or on the call — with the company gets a structural head start over retail investors, sometimes by hours, sometimes by days. Fair disclosure removes that "first in line" advantage entirely, so that even if not everyone acts on information at the same speed, everyone at least starts from the same line when the information becomes available.

Korea's 2024 Insider Pre-Disclosure Rule: From Catching It After to Preventing It Before

For years, insider trading enforcement was almost entirely reactive — regulators identified suspicious trades only after they had already happened. To close that gap, Korea's insider pre-disclosure rule took effect on July 24, 2024. Under it, an executive or major shareholder planning to trade a large stake — 1% of outstanding shares or roughly ₩5 billion in value, whichever threshold is crossed — must publicly disclose the purpose, price, quantity, and timeframe of that planned trade at least 30 days before actually executing it. That means the market learns "a key executive intends to unwind a large position" before the trade happens, not after, giving prices a chance to reflect that intent in advance rather than absorb it as a shock after the fact. The regulatory focus has shifted from "how well can we catch unfair trades after they occur" to "how do we shrink the window during which information asymmetry can exist at all" — the same institutional-maturing logic behind changes like T+2 settlement and circuit breakers elsewhere in Korea's market structure.

How Violations Still Get Caught

Smaller trades that fall below the pre-disclosure threshold, and information passed along informally to tippees, still rely on after-the-fact detection. The Korea Exchange's market surveillance division runs real-time systems that flag abnormal trading patterns — a sudden volume or price spike right before a major announcement, a dormant account that suddenly trades heavily at one precise moment, or trade timing that lines up suspiciously well with a disclosure date. Cases flagged this way move to the Financial Supervisory Service and, where warranted, criminal prosecution; a conviction can carry fines of up to three to five times the illicit gain, along with potential prison time. But detection after the fact is inherently a process of confirming harm that has already occurred. It becomes genuinely effective only alongside preventive tools like pre-disclosure and fair disclosure that shrink the window for information asymmetry to exist in the first place.

How the US Approaches This Differently: Regulation FD and 10b5-1 Plans

The concept of fair disclosure didn't originate in Korea — it's modeled on Regulation FD, which the US Securities and Exchange Commission introduced in 2000. At the time, US-listed companies routinely gave large institutional investors and favored analysts a heads-up on earnings before the public announcement, and Regulation FD was the first rule of its kind to require that any selective disclosure of material information be immediately followed by disclosure to the entire market. Korea's fair disclosure system, in effect since 2002, borrows this structure almost wholesale.

The idea of requiring insiders to pre-announce their trading plans also started in the US first. The SEC's Rule 10b5-1, also from 2000, lets an executive set up a pre-arranged trading plan — fixed dates, prices, or formulas decided before they hold any non-public information — under which trades execute automatically. Trades made under such a plan are shielded from insider trading liability even if the executive later turns out to have known material non-public information at the time of the trade, because the trade was locked in beforehand, not decided in the moment. Critics pointed out that executives were gaming this by frequently modifying or canceling plans in ways that effectively let them trade on live information anyway, so the SEC tightened the rule in 2022, requiring a cooling-off period of 90 to 120 days between when a plan is adopted and when trading under it can actually begin. That cooling-off period serves roughly the same purpose as Korea's 30-day pre-disclosure window — creating enough distance between the decision to trade and the trade itself that fresh non-public information can't realistically slip in between. The mechanics differ, though: Korea's rule makes the trading plan itself public information, while a US 10b5-1 plan is locked in internally at the company, with actual public disclosure of insider transactions governed by a separate set of filing requirements.

Takeaway

• Material non-public information is anything not yet released through formal disclosure that could meaningfully move a stock; trading on it is banned under Korea's capital markets law.
• The rule reaches beyond company employees to quasi-insiders (lawyers, accountants, regulators) and tippees — anyone who received the tip and traded on it, not just the person who created it.
• Fair disclosure requires that any material information shared with analysts or institutions be released to the whole market at the same time, closing off the "first in line" advantage.
• Korea's insider pre-disclosure rule (effective July 2024) requires executives and major shareholders to announce large planned trades (1% of shares or ~₩5 billion) 30 days ahead of execution, shifting enforcement from after-the-fact punishment to advance transparency.
• Trades below that threshold still depend on the exchange's after-the-fact anomaly detection, which works best alongside — not instead of — preventive disclosure rules.
• Korea's fair disclosure rule is modeled on the US's Regulation FD (2000), and the pre-disclosure requirement shares the same goal as the US's 10b5-1 trading plans, though the two work differently in practice.

FAQ

If a friend or family member hears a tip and trades on it, are they actually liable, not just the insider?

Yes. Anyone who receives material non-public information from an insider and trades on it — a tippee — can be held liable under the same regulation as the insider who leaked it. Both the source and the person who acted on the tip can face legal consequences.

Is it illegal for executives to buy or sell their own company's stock at all?

No — executives can and regularly do trade their own company's shares. The problem arises only when they trade while holding material information that hasn't yet been made public. That's why large trades now require 30-day advance disclosure under the 2024 rule, while ordinary trading done without access to non-public information isn't restricted.

If an analyst gets a hint from an IR contact before earnings and writes a report based on it, is that a problem?

If the IR contact shared a specific, undisclosed number or plan with just that analyst, it likely violates fair disclosure rules — the company is required to release the same information to the whole market at the same time it shares it with any single analyst or institution. An analyst who knowingly uses selectively leaked information to get clients ahead of the public disclosure can also face separate liability.

⚠️ This article is for informational and educational purposes only and is not investment advice. Specific thresholds and penalties under insider trading and fair disclosure rules can change with amendments to Korea's capital markets law, so consult the Financial Supervisory Service or a legal professional for guidance on specific situations.