Trading on the basis of material, non-public information is illegal, and everyone knows it. Less obvious is the importance of insiders advising their spouses and other household members that they also cannot trade on the basis of material, non-public information they may obtain from the insider. For the company insider, however, this conversation can make all the difference. I’ll explain why in this piece and also provide some best practice reminders.

Consider the husband of the Informatica senior tax director. He observed his wife’s unusual behavior—working during vacation—and overheard telephone calls made while he drove with his wife to Reno for vacation. He gleaned from all of this that Informatica Corp. was about to miss its earnings. He could have limited his activities to being warmly supportive of his wife’s work. Instead, he shorted the stock. When the earnings miss was announced and the stock price fell, the husband achieved a profit of $140,000.

A similar set of facts played out for a finance manager at Oracle Corp. In that case, the husband of the Oracle insider overheard work calls his wife was making. He learned that Oracle was working on a still-secret acquisition of another public company, Acme Packet Inc. The husband proceeded to purchase shares in Acme Packet. He ultimately realized a profit of about $150,000 when Oracle announced the acquisition and he sold his stock.

In both cases, the Securities and Exchange Commission (SEC) pursued the husbands for illegal insider trading. As a result, they were forced to disgorge their profit and pay a penalty of an almost equal amount. But in both cases, it was only the husbands that were in the crosshairs of the SEC—not the wives (the insiders). Why?

It was a critical fact for the SEC that both wives had admonished their husbands not to trade in their companies’ stock based on information the husbands might obtain from them. In the Informatica case, the wife had instructed her spouse never to trade in her company’s stock. In the Oracle case, the wife had specifically told her husband that Oracle’s insider trading window had been closed due to a pending acquisition.

In the classic tipper/tippee case, an insider discloses or tips material, non-public information to a third party for personal benefit, and the tippee making the trade has reason to believe the information is confidential. In this scenario, the both the tipper and tippee are liable for illegal insider trading. The most famous recent example of tipper liability is probably former Goldman Sachs Group Inc. director Rajat Gupta.

By admonishing their husbands not to trade in securities of their companies, the wives escaped tipper liability. Instead, the SEC went after the husbands under a misappropriation—stealing—theory of illegal insider trading under Section 10(b) and Rule 10b-5.

What does this mean for general counsel of public companies? Companies have a duty to supervise when it comes to illegal insider trading, so be sure to have a written, easily accessible, up-to-date policy against it. Conservative blackout periods are warranted, for example beginning the first day of the last month of the quarter until the third trading day after the earnings release. Preclearance of sales for Section 16 officers and board members—if not a broader group—is a good idea.

One commonly missed item is making gifts of securities subject to the insider trading policy. However, in light of New York University professor David Yermack’s 2008 study on opportunistic timing around gifts of securities by insiders, making gifts of company securities subject to the company insider trading policy is a good idea.

Finally—training. Real life examples make much more of an impact than a mere recitation of the law. And don’t forget to teach insiders to admonish their family members to comply with the company’s insider trading policy.