Insider Trading
The Securities Exchange Act of 1934 and The Sarbanes Oxley Act of 2002The type of "insider trading" we have been reading and hearing about in the news recently is "illegal". But, in fact, insider trading is only illegal under certain circumstances. This web guide will provide you with links to learn about the origin and history of insider trading as a civil and criminal wrong and the reporting requirements of the Securities and Exchange Commission, along with the recent changes mandated by the Sarbanes Oxley Act. It will also direct you to websites where you can track the "legal" type of "insider trading" activities for particular companies.
The Securities Exchange Act of 1934
The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) and empowers the SEC to regulate all aspects of the securities industry. Pursuant to the Act, the SEC identifies and prohibits certain types of conduct, to include "illegal insider trading" and takes disciplinary action against regulated entities and persons who engage in such conduct. As part of its rules and regulations, the SEC also requires periodic reporting by companies with publicly traded securities.Legal Insider Trading
The legal version of insider trading occurs when corporate insiders (directors, officers, and greater than 10% beneficial owners) buy and sell stock in their own companies. When they do trade their own stock, insiders must report such trades to the SEC by filing the following forms required by Section 16 of the Securities & Exchange Act of 1934 :Form 3: Must make initial filing withn 10 days of becoming an officer, director or beneficial owner.
Form 4: Must report changes in ownership within 10 days of the end of the month in which the change took place (shortened by theSarbanes Oxley Act).
Form 5: Must file an annual statement of ownership of securities.
Sarbanes Oxley Act of 2002
The Sarbanes Oxley Act of 2002, enacted on July 30, 2002, dramatically changed the reporting obligations of "insiders" (directors, officers, and greater than 10% beneficial owners) of public companies under Section 16(a) of the Securities and Exchange Act. The Amendments to Rules and Reporting Forms by the SEC , which became effective August 29, 2002, reduced the reporting deadline for filing Form 4 to within two business days after the transaction giving rise to the change has been executed.
Illegal Insider Trading
The "illegal"version of insider trading occurs when a person buys or sells a security in breach of his or her fiduciary duty or other relationship of trust and confidence while in possession of "material, nonpublic information" or when a person misappropriates such information by tipping another or trades based upon such a tip. These "Illegal" types of insider trading are governed by the following SEC Rules:Rule 10b5-1 -- Trading "on the Basis of" Material Nonpublic Information in Insider Trading Cases
Rule 10b5-2 -- Duties of Trust or Confidence in Misappropriation Insider Trading Cases
Examples of Illegal Insider Trading
Provided by the SRC
The SEC explains the difference between "legal" and "illegal" insider trading and gives examples of the latter.Cases reported by abcNews.com
In the wake of the controversy surrounding Martha Stewart and Imclone, abc report discussed different types of cases brought over the years against persons alleged to have engaged in "illegal" insider tradining.Penalties
Civil Penalties
Can be up to three times the profit gained or loss avoided as a result of an unlawful purchase, sale, or communication. A person in control of the violater can also be held liable for the greater of $1,000,000, or three times the amount of the profit gained or loss avoided as a result of such controlled person's violation.Criminal Penalties
Include various monetary fines, imprisonment, or both, depending on position and level of involvement. A company may be fined up to $2,500,000 and a person may be imprisoned up to 10 years.
Should Insider Trading Be Prohibited: The Debate
The SEC Argues For
Speech by SEC staff describes the history of "illegal" insider trading legislation and explains why it should be prohibited and why we need both civil and criminal snctions.A Ph.D. in economics Argues Against
Professor of Law at Northwestern University with aPh.D in economics explains why he believes most investors are neither helped nor hurt by insider trading.If They're Trading, Should You Sell?
Q& A from The Motley Fool explains why insider trading is not necessarily a "red flag" to sell your stock.Are They Trading?
The following websites help you track legal insider trading within the companies in which you own or wish to purchase stock:msnMoney/CNBC Gives you the 20 most recent Form 4 SEC filings indicating completed transactions by corporate insiders or major shareholders for the previous 12 months. Also provides the 10 largest purchases in the last 30 days.
YahooFinance Provides insider and restricted shareholder transactions reported over the last 2 years.
CBS MarketWatch Allows you to search by company or by insider.
Terrye Conroy 9/28/2002
Email: TerryeC2002@yahoo.com