Insider dealing, also known as insider trading, refers to the practice of trading a public company's stock or other securities by individuals with access to non-public, material information about the company. This practice is illegal and unethical as it gives an unfair advantage to insiders over regular investors. This guide provides a comprehensive overview of insider dealing, focusing on regulations, compliance, and enforcement.
What is Insider Dealing?
Definition
Insider dealing involves trading in securities by individuals who have access to confidential information about a company. This information is not available to the general public and can significantly impact the company's stock price once released.
Key Terms
- Insider: An individual with access to non-public, material information about a company. This includes executives, directors, employees, and sometimes external parties like auditors or consultants.
- Material Information: Information that could influence an investor's decision to buy or sell securities. Examples include earnings reports, mergers and acquisitions, and significant business developments.
- Non-public Information: Information that has not been released to the general public and is not available through public sources.
Legal Framework
United States
Securities Exchange Act of 1934
The primary legislation governing insider trading in the United States is the Securities Exchange Act of 1934. Section 10(b) of the Act and Rule 10b-5, promulgated by the Securities and Exchange Commission (SEC), prohibit fraudulent activities in connection with the purchase or sale of securities.
- Section 10(b): Prohibits the use of any manipulative or deceptive device in connection with the purchase or sale of any security.
- Rule 10b-5: Prohibits making any untrue statement of a material fact or omitting to state a material fact necessary to make the statements made not misleading.
Read more about the Securities Exchange Act of 1934
Insider Trading Sanctions Act of 1984
This Act imposes civil penalties for insider trading violations. It allows the SEC to seek penalties of up to three times the profit gained or loss avoided through insider trading.
Read the full text of the Insider Trading Sanctions Act of 1984
Insider Trading and Securities Fraud Enforcement Act of 1988
This Act further strengthens the penalties for insider trading and requires companies to establish and enforce policies to prevent insider trading.
Read the full text of the Insider Trading and Securities Fraud Enforcement Act of 1988
European Union
Market Abuse Regulation (MAR)
The Market Abuse Regulation (MAR) is the primary legislation governing insider trading in the European Union. It aims to increase market integrity and investor protection by prohibiting insider dealing, unlawful disclosure of inside information, and market manipulation.
- Article 7: Defines inside information.
- Article 8: Prohibits insider dealing.
- Article 10: Prohibits unlawful disclosure of inside information.
Read the full text of the Market Abuse Regulation
United Kingdom
Criminal Justice Act 1993
Part V of the Criminal Justice Act 1993 deals with insider dealing. It makes it a criminal offense to deal in securities while in possession of inside information.
Read the full text of the Criminal Justice Act 1993
Financial Services and Markets Act 2000
This Act gives the Financial Conduct Authority (FCA) the power to enforce insider trading laws and impose penalties.
Read the full text of the Financial Services and Markets Act 2000
Compliance
Corporate Policies
Insider Trading Policies
Companies are required to establish and enforce insider trading policies. These policies typically include:
- Blackout Periods: Specific times when insiders are prohibited from trading the company's securities.
- Pre-clearance Procedures: Requirements for insiders to obtain approval before trading.
- Training and Education: Programs to educate employees about insider trading laws and company policies.
Example of an Insider Trading Policy
Reporting Requirements
Form 4
Insiders are required to file Form 4 with the SEC within two business days of any transaction involving the company's securities. This form discloses the details of the transaction, including the number of shares bought or sold and the price.
Schedule 13D
Individuals or entities acquiring more than 5% of a company's shares must file Schedule 13D with the SEC. This form provides information about the acquirer's intentions and plans regarding the company.
Enforcement
Regulatory Bodies
Securities and Exchange Commission (SEC)
The SEC is the primary regulatory body responsible for enforcing insider trading laws in the United States. It has the authority to investigate and bring civil enforcement actions against individuals and entities involved in insider trading.
Learn more about the SEC's enforcement actions
Commodity Futures Trading Commission (CFTC)
The CFTC oversees the trading of commodity futures and options markets in the United States. It has the authority to investigate and enforce actions against insider trading in these markets.
Read the CFTC's Enforcement Manual
Financial Conduct Authority (FCA)
The FCA is responsible for enforcing insider trading laws in the United Kingdom. It has the authority to investigate and bring enforcement actions against individuals and entities involved in insider trading.
Learn more about the FCA's enforcement actions
Penalties
Civil Penalties
Civil penalties for insider trading can include fines, disgorgement of profits, and bans from serving as an officer or director of a public company. The SEC can seek penalties of up to three times the profit gained or loss avoided through insider trading.
Criminal Penalties
Criminal penalties for insider trading can include imprisonment and substantial fines. In the United States, individuals convicted of insider trading can face up to 20 years in prison and fines of up to $5 million.
Notable Cases
United States v. Martha Stewart
Martha Stewart was convicted of insider trading in 2004 for selling shares of ImClone Systems based on non-public information. She was sentenced to five months in prison and fined $30,000.
Read more about the Martha Stewart case
United States v. Raj Rajaratnam
Raj Rajaratnam, the founder of the Galleon Group hedge fund, was convicted of insider trading in 2011. He was sentenced to 11 years in prison and fined $10 million.
Read more about the Raj Rajaratnam case
Preventive Measures
Whistleblower Programs
Whistleblower programs encourage individuals to report insider trading violations. The SEC's Whistleblower Program offers monetary rewards to individuals who provide information leading to successful enforcement actions.
Learn more about the SEC's Whistleblower Program
Surveillance and Monitoring
Regulatory bodies and companies use advanced surveillance and monitoring systems to detect suspicious trading activities. These systems analyze trading patterns and identify potential insider trading violations.
Education and Training
Regular education and training programs help employees understand insider trading laws and company policies. These programs emphasize the importance of compliance and the consequences of violations.
Insider dealing is a serious offense that undermines market integrity and investor confidence. Regulatory bodies worldwide have established stringent laws and enforcement mechanisms to combat insider trading. Companies must implement robust compliance programs to prevent insider trading and ensure adherence to legal requirements. By understanding the regulations, compliance measures, and enforcement actions, individuals and entities can contribute to a fair and transparent market environment.
References
- Securities Exchange Act of 1934
- Insider Trading Sanctions Act of 1984
- Insider Trading and Securities Fraud Enforcement Act of 1988
- Market Abuse Regulation (MAR)
- Criminal Justice Act 1993
- Financial Services and Markets Act 2000
- SEC Form 4
- SEC Schedule 13D
- SEC Enforcement Actions
- CFTC Enforcement Manual
- FCA Enforcement Actions
- SEC Whistleblower Program
- Martha Stewart Case
- Raj Rajaratnam Case
