Insider Trading Law

An insider trading law such as Securities Exchange Act of 1934 and Insider Trading Sanctions Act of 1984 has the provisions to forbid this illegal trade. When a person possesses material nonpublic information regarding a particular company and he trades in that company’s shares and avoids a loss or makes a profit, it is called insider trading. Let us see the various laws associated with insider trading in detail.

Sections 14e and 10b of Securities Exchange Act of 1934 offer the Securities and Exchange Commission the power to get a court order asking violators to give back the profits made from the illegal trading. With this trading law, the SEC can request the court to impose a penalty of three times of the profits the violators made from their illegal insider trading. Also there are criminal penalties apart from financial penalties. Many industry insiders feel that the penalties are not enough and they are working towards increasing the penalties substantially. A US Senate bill seeks making defrauding shareholders like a felony punishable by 10 years in prison.

According to SEC’s Full Disclosure (FD), if a company discloses material nonpublic information to a person intentionally, it should disclose that information simultaneously to the public. Even if the company discloses nonpublic information unintentionally the company should make the disclosure public promptly. SEC’s rules related to tender offers and takeovers under Williams Act also govern insider trading and similar practices. Misappropriation Theory is now part of the US insider trading law. According to insider trading law, any person that misappropriates information from his employer and makes a trade with that information in a stock will be considered guilty of insider trading.

If you are an executive you should not involve in insider trading and police your potential insiders yourself. You should prevent insider trading in your company so that you need not find SEC officers in your company investigating your insiders. Even if your company and all the executives are cleared off insider trading, the news will have substantial unwanted effects on your company’s stock performance and the reputation. You can make some precautions. First and foremost you should share any material information with people who are not insiders. Ensure that all your insiders aware of this. Also make sure that all the executives of your company aware of the circumstances that will make them insiders temporarily and how to deal with that sort of situation.

In the US the prohibition of insider trading exists mostly independent of the relevant statues, although the legal liability is according to the federal securities regulation statues such as Rule 10b-5 of the Securities Exchange Act of 1934. The insider trading law has evolved over a series of judicial opinions through a method that resembles common law adjudication closely instead of statutory interpretation.

We take another view as we delve into Insider trading rules. Or, you can easily return to Martha Stewart Insider Trading from Insider Trading Law.