Legal Basis of Insider Trading I
The growing focus of both the government, the academic community and the media on insider trading have renewed the public’s eye on insider trading and the debates and issues that go along with it. Insider trading incidents have been on the rise since the 1960′s and various amendments and additions to the current law have been added to answer for the demands of insider trading. The face of the concept �insider trading’ is continuously evolving, making actions that were once legal to be currently defined by law as illegal. Debates on the propriety of any legal sanctions to insider trading have arisen. Both economists and legal scholars are asking the question: should insider trading be declared unlawful? Before going into the arguments for and against legalizing insider trading, let us first visit the legal and historical evolution of insider trading through the years.
All through these years it has been the Securities and Exchange Commission that have been the foremost government instrumentality that is directly responsible for regulating not only the stock and securities exchange but even insider trading. The Securities and Exchange Commission was created through a legislative act called the Securities and Exchange Act of 1934. It was this 1934 Act that also initially became the starting point in the evolution of insider trading laws. As you will see, the subject of insider trading has come a long way since its beginnings in 1934. It has been Section 10 paragraph b subsection five of the Securities and Exchange Act of 1934 that has been the often cited legal provision that pertains to insider trading. According to this section any act that is uses any �manipulative or deceptive device’ that is �in connection with the purchase or sale of any security’ is prohibited and banned by law. You will notice that the provision is rather vague in that any reader would ask, what are manipulative devices and how do you connect them with security trading. To settle the controversy, common law, which is the body of jurisprudence or court decisions, had the answer to what the civil law, which is the body of enacted legislative and executive laws, lacked. The court decided in the case of Speed v. Transamerica Corporation (99 FSupp. 808, 828-32 [D. Del. 151]) that the afore quoted section would be interpreted to mean as a broad prohibition against trading where the insider takes advantage of the confidential and material information he has obtained in order to profit from buying and selling the corporation’s or firm’s securities.
Another important provision of the Securities and Exchange Act of 1934 that is material to insider trading is Section 10 paragraph b and Section 17 paragraph a. These sections of the 1934 Act give a general prohibition against the insider in trading any information that is both intended to be non-public or confidential as well as material to the firm or corporation. Section 16 paragraph b of the same Act, on the other hand, mandates the return of any profits that has been obtained by the insider through short-swing profits.