U.S. Securities and Exchange Commission: Its Role

• The Securities and Exchange Commission, or SEC, is the federally mandated body charged with regulating and supervising all transactions that occur in the U.S. financial markets (stock markets, bond markets and short-term money markets). The SEC was established in 1934 following the economic devastation resulting from the stock market crash of 1929. Since that time, the SEC has sought to ensure a high level of market fairness integral to the American capitalist ideal.
  
  

Insiders and Inside Information

• Broadly defined, the term "insider" refers to any individual with access to private information. In the stock market, insiders are regarded as having a potentially unfair advantage over the vast majority of participating investors. In addition to a company's managers and large-scale shareholders, insiders may include certain lower-level employees, their family members and their close friends. Friends and family with whom a company's employees or shareholders may share confidential company information are said to receive "tips" where stock trading is concerned. These individuals are also culpable should they illegally use this information to their trading advantage.
  
  

Insider Trading: When Is It Not Okay?

• When an investor is privy to inside information, insider trading can only occur between the time the investor acquires that information and the time at which the information is made public by way of a market announcement. To illustrate, suppose an investor confidentially learns on Jan. 15 that company XYZ's earnings exceeded expectations in the previous quarter. If company XYZ plans to publicly announce this information on Jan. 20, there is a five-day period during which this investor cannot legally buy or sell company XYZ's stock. Such action would constitute insider trading.
  
  

Insider Trading: When Is It Okay?

• Despite the sanctions against trading stocks on the basis of sensitive company information, it is perfectly acceptable for insiders to place trades for the relevant stock once this information has been made available to all investors. Should an employee choose, in this manner, to trade his or her company's stock, he or she must file special forms with the SEC. This procedure demonstrates to the SEC and the public-at-large that the trades were executed fairly following an official company announcement of information, which might have heretofore provided for an unfair advantage.
  
  

Insider Trading: What Are The Consequences?

• Insider trading committed illegally by an insider at any level carries criminal prosecution. Classified as a form of "white collar" crime, insider trading is punishable by several years imprisonment, frequently combined with a fine which runs in the hundreds of thousands of dollars. The length of the prison sentence and the amount of this fine varies in relation to the intent and magnitude with which the insider transaction was carried out. Though these penalties may appear highly severe, their magnitude is meant to exemplify the consequences for compromising market fairness. In this way, inside traders are not only punished, but would-be inside traders are deterred from making a similar attempt.