Regulators really look down on insider trading. An SEC agent would rather see you picking your nose while preparing their dinner than they would like to learn that you've pulled off some insider trading.
The short-swing profit rule plays into this aggressive stance against insider trading. But, just as a lead-in, here's how insider trading works in a nutshell:
You are an executive at a company (an insider). You hear through the corporate grapevine that this quarter's earnings report is going to be stellar. In response, you buy some stock the day before the news gets released. The earnings numbers are announced the next day. The stock goes up; you sell the shares soon after, and get a tidy profit.
That series of events epitomizes insider trading. It is very illegal. So illegal that the SEC doesn't even want the whiff of potential criminality. They don't want you profiting from your own company's stock even by accident.
Hence, the short-swing profit rule. It states that if a company insider makes a profit from the quick buying and selling of the firm's stock, they have to return the cash they gained. They have to give up their profit. If a company insider buys and then sells the firm's stock (at a profit) within six months, the short-swing profit rule goes into effect. With a half-a-year timeframe, it becomes difficult to trade on any juicy insider info. The chances of insider trading becomes more remote.
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Finance: What is Regulation Full Disclos...43 Views
finance a la shmoop. what is regulation full disclosure or in industry parlance
reg FD ?all those whispery hallways of the 1970s and 80s
insiders muckety-mucks cheaters Liars deceivers key employees on the take [men in suits discuss stocks]
sound like the dramatic cover for a Hollywood movie and while it was and it
was real life as well. the practice of gleaning information
essentially unavailable to the average investor was a large part of the
practice of quote doing research unquote for all too many of the professional by
side investment firms of the era. the regulator's finally noticed and began to
crack down with only modest success for a while when finally reg FD was enacted
via the SEC in 2000. well that regulation massively prohibited the type of
discussions that could legally happen among analysts and company insiders. in
fact disclosure of much more than much more than the company name mailing
address and the product they sold was prohibited unless it was done in a
broadly available and well-publicized public forum that John Q public could [woman gives presentation]
participate in. the goal here was to take away free money or profits or gains from
insiders leaking information you know so that investors could make bets with way
more information on whether or not the roulette wheel of the company's
quarterly performance in earnings was going to in fact land on red twenty
three. so yeah that's what reg FD is about. trust us we've fully disclosed
everything we know about it and we're going modern here. modern era people come
on get with it. [man folds arms inside casino]
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What is insider trading and the Securities Fraud Enforcement Act of 1988? It's nothing too complicated, if this minute long video is any indication.