Insider Trading Under Section 16 of 1934 Act - Explained
Section 16 - Insider Trading
Written by Jason Gordon
Updated at September 25th, 2021
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Table of Contents
What is liability under Section 16 of the 1934 Act?Discussion QuestionPractice QuestionAcademic ResearchWhat is liability under Section 16 of the 1934 Act?
Section 16 of the 34 Act governs the sale or transfer of securities by insiders of the corporation. An insider is an officer, director, or large shareholder (holding 10% or more of outstanding securities). Insiders must generally register with the SEC an indicate their ownership interest at the time of filing the registration statement or within 2 days of becoming an insider (i.e., acquiring a large ownership of shares). Section 16 prohibits insiders from making short-swing profits by trading their shares within 6 months of the registration or acquiring the shares. There is an assumption that insiders have material, non-public information during this period. As such, any trades during this period are per se illegal. Any profits derived from the sale are forfeited to the corporation.
- Note: The SEC does not enforce the short-swing profit rule; rather, this rule is enforced through civil action by the company or shareholders.
Next Article: Section 18 Liability Back to: SECURITIES LAW
Related Topics
- The Security Exchange Act of 1934
- When must an issuer register pursuant to the 34 Act?
- What disclosures are required of reporting companies under the 34 Act?
- What is liability under Section 10(b) and Rule 10(b)(5)?
- What is insider trading under Rule 10(b)(5)?
- What damages are available under Section 10 and Rule 10(b)(5)?
- What is insider trading under Section 14 of the 34 Act?
- What is liability under Section 16 of the 34 Act?
- What is liability under Section 18 of the 34 Act?
- What is criminal liability under the 34 Act?
Discussion Question
Why do you think the securities laws absolutely prohibit insiders from earning short-swing profits from trading the business securities? Do you think that allowing for private civil actions for such profits is an effective manner of policing this practice? Why or why not?
Practice Question
McKenzie is the Chief Operating Officer of ABC Corp. She recently acquired a large block of stock as part of her executive compensation. There is a rumor in the market that 123 Corp is interested in partnering with ABC Corp for an international joint venture. The speculation has pushed up the stock price. McKenzie is considering selling most of the stock she recently acquired, which will yield a handsome profit for her. Does she face potential civil liability for this action?