The Secs Role in Curbing Insider Trading

The Security Exchange Commission (SEC) are the watchdogs of Wall Street.  One of their major purposes and functions is to stop the abuses and unfair advantages inherent in insider trading. 

♦  What is Insider Trading?

Insider trading is all about unfair advantage.  If a person has some information about a publicly traded company that has not been made public it is illegal to use that information for personal advantage.  An example of this would be someone who finds out (through illegal or legal methods) that a company has made a breakthrough on a truly revolutionary product.  A stock uptick could almost be ensured after release of such information, so it is illegal for people who have that information to buy any stock until the information has been made public in some form.  Insider trading is even considered with passing of this vital information with the “intention” of having someone make a profit from the information.

♦  How SEC came about

The Federal Securities act of 1933 designed to protect the public from abuse from the “insiders” who would take advantage of stocks well before the average citizen could act on it.  This manipulation was also thought to have an effect on the stock market crash of 1929.

♦  Registration of Stock Offerings

All stocks must be registered with the SEC.  This is the way that the SEC can monitor all the stocks being bought and sold and make sure that nothing, “shady” is going on.  This is one of the main ways the SEC is able to keep “fair and honest” markets.

♦  Rule Changes that Modify the SEC’s Curbing Insider Trading

Over the past few years there have been legal clarifications to these basic working definition of the SEC’s role in insider trading.  According to the US  Securities and Exchange Commission’s web-page the first rule, 10b5-1 has exclusions if the person trades in a situation where, “certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.” 

The second exception deals with a clarification on how misappropriation applies to non-business relationships.  According to the SEC website the next rule, 10b5-2 provides that, “person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.”

To find out more on the SEC and insider trading visit:

SEC.Gov  Answers/Insider