President Reagan yesterday nominated Northwestern University law Prof. David S. Ruder to be the next chairman of the Securities and Exchange Commission, a move praised by Wall Street and SEC officials but questioned by legislators concerned about Ruder's stance on policing illegal insider stock trading.

Sen. Donald W. Riegle (D-Mich.), a key member of the Senate Banking Committee that will review the nomination, said Ruder would have to "prove" to the committee that he will continue the crackdown on insider trading and other securities law violations. But numerous congressional sources predicted that the Senate would confirm Ruder after he undergoes wide questioning. They noted his outstanding academic credentials and reputation among practicing securities lawyers.

"Ruder has an extensive background as an academic and a theoretician," Riegle said. But "his commitment to a strong enforcement program is unclear and a matter of specific concern to me. I also believe we need a clear and tight definition of insider trading. This activity must be prohibited, and I am going to want some assurance from Prof. Ruder that he shares those views."

Ruder, in Washington to accept the nomination to replace outgoing SEC Chairman John Shad, said he supports the SEC's aggressive insider trading enforcement policy and thinks it should be continued with "full vigor."

But in a letter he submitted last month when asked to comment on a proposed definition of illegal insider trading, Ruder said he would narrow that proposed definition and abandon the "misappropriation theory," one of the key legal theories the SEC has used to prosecute securities law violators.

Under the misappropriation theory, individuals who trade stocks on the basis of information misappropriated or stolen from their employers may be liable for prosecution, even if they do not work in the securities industry.

Ruder, a 58-year-old Republican, has been a member of Northwestern's law school faculty for 25 years, and served as dean from 1977 to 1985. He has published more than 40 articles on securities regulation and is regarded as one of the leading scholars in the field. His lack of direct experience in enforcement contrasts with U.S. Attorney Rudolph W. Giuliani, who was under White House consideration to head the SEC.

Giuliani is the Manhattan prosecutor overseeing the recent string of criminal insider trading cases. Wall Street executives said they were concerned about his possible nomination because of his aggressive prosecutorial stance and lack of securities expertise. By contrast, Wall Street executives praised Ruder's nomination.

Donald M. Feurstein, a Salomon Brothers managing director, said his firm supports Ruder's nomination.

"He is an eminent legal scholar," Feurstein said. "He has had experience in private practice, before he taught, and while teaching he has worked at Schiff, Hardin {a law firm} in Chicago. He has had enough practical experience in private practice . . . but has no taint or conflict since he has not been on the firing line all these years."

John Bachmann, chairman of the Securities Industry Association, said Wall Street executives are pleased with the choice. "It would be easy to go out and get someone that might not understand the industry," Bachmann said. "They have got a fellow who seems well qualified."

At the SEC, reaction was also upbeat. Commissioner Joseph A. Grundfest said he had discussed the nomination with SEC enforcement director Gary Lynch. "Gary is very high on it," Grundfest said. "He was smiling. I'm very positive on it. He {Ruder} is certainly one of the most respected lawyers in this area." Grundfest said Ruder's experience as a law school dean would contribute to his ability to manage the SEC.

SEC Commissioner Edward H. Fleischman, who had been in the running for the chairman's job, said he has "great respect" for Ruder. "I think he is an absolutely first-rate choice," Fleischman said. "I've learned a lot from him over the years at various seminars for lawyers. He has a fairly conservative lawyers' attitude toward the federal/state law questions {favoring states rights} with which I strongly agree."

With Shad's departure from the SEC to become ambassador to the Netherlands, Ruder could be appointed to a full five-year term at the SEC or to a term with only four years remaining, Grundfest said. However, Ruder acknowledged that if confirmed by the Senate later this year, he might only serve until January 1989 when a new president is sworn in. The president traditionally appoints his own SEC chairman.

Reagan issued an unusually lengthy statement yesterday in support of Ruder. Reagan said Ruder's expertise in securities law matters ensures that the commission will have the guidance of a "steady hand."

Georgetown Law School Prof. Donald E. Schwartz said Ruder's view of insider trading prosecution is more conservative than that of the SEC's staff. Ruder detailed his criticism of the SEC's misappropriation theory, used to prosecute illegal trading by those who steal the information from their employers, in comments on proposed legislation that he submitted last month.

"The misappropriation theory has no reasonable relationship to the desire to protect the integrity of the marketplace and should be abandoned," Ruder said in the letter. "The theory reaches too far and has no identifiable limits. . . . My comments should be understood as supportive of an effort to define insider trading in order to create certainty, but not supportive of an effort to increase the reach of the insider trading restrictions to persons . . . whose activities are remote from the securities markets."

Commenting yesterday to reporters on his nomination, Ruder described himself as an expert on securities regulation. "My knowledge is really extensive," he said. "I believe myself to be as well-informed in a large number of areas as almost anyone in the country."

Ruder, known for his sense of humor, added "I even know the names of all of the acts which the commission administers."