While not all insider trading violates federal law, some of it does. If you buy, sell or trade securities based on information that only a few individuals have, you may be guilty of a federal crime. Of course, before a prosecutor charges you with violating securities law, you can expect the Securities and Exchange Commission to investigate. 

Whether you work inside a publicly traded company, for a government agency or at a service firm, you likely understand why it is a bad idea to engage in insider trading. You may not, however, have a firm grasp on how the SEC investigates illegal activity. Here are three common ways the SEC may uncover insider trading: 

1. Market surveillance 

The SEC has sophisticated surveillance programs to monitor public markets. According to the commission, investigators pay special attention to trading activities during certain events, such as the release of earnings reports. 

2. Tips 

Like many other law enforcement organizations, the SEC also institutes investigations to uncover insider trading based on tips and complaints. If, for example, an investor or trader feels wronged because of seemingly improper conduct, he or she may complain to SEC investigators. The SEC may also receive a whistleblower tip from someone within the organization. 

3. Outside sources 

Finally, the SEC may use outside sources as a basis for opening an investigation into suspected insider trading. Media reports, federal and state prosecutors and trading organizations are common sources of insider trading information. Also, the SEC may work with self-regulatory groups, such as the Financial Industry Regulatory Authority, to find evidence of insider trading. 

The SEC is a robust regulatory commission with extensive investigative resources. While the organization commonly uses these three approaches to uncover insider trading, it likely has other tools at its disposal. Therefore, if you believe you are the target of an SEC investigation, you likely need to act quickly to protect your legal rights.