Insider Trading Act of 1988 Definition

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Insider Trading Act of 1988 Definition

What is the Insider Trading Act of 1988?

The Securities Exchange Act of 1934 was revised by the Insider Trading Act of 1988, which expanded the Securities and Exchange Commission’s (SEC) authority to enforce insider trading offenses.

Key Takeaways

  • The Securities Exchange Act of 1934 was revised by the Insider Trading Act of 1988, which expanded the Securities and Exchange Commission’s (SEC) authority to enforce insider trading offenses.
  • The Insider Trading Act was signed into law by then-President Ronald Reagan on November 19, 1988, and effectively enhanced the legal penalties for all parties engaged in insider trading.
  • Many incidents of insider trading have occurred since the introduction of the Inside Trading Act in 1988, arguably none more notable than Martha Stewart and the 2001 ImClone case.

Understanding the Insider Trading Act of 1988

The Insider Trading Act was signed into law by then-President Ronald Reagan on November 19, 1988, and effectively enhanced the legal penalties for all parties engaged in insider trading. The Insider Trading and Securities Fraud Enforcement Act of 1988 was its full title (ITSFEA).This legislation was enacted as a result of a rise in high-profile insider trading instances, as well as an increase in the monetary values of the deals. Individuals who unlawfully communicate inside knowledge that leads to an insider transaction may face imprisonment and fines.

The statute authorizes the SEC to levy high monetary penalties, generally in multiples of the profit gained by insider trading, and the guilty parties may face considerable prison time, up to 10 years, depending on the severity of their violation. The real maximum penalty levied were set at 300% of the money generated on the transactions or $1 million, whichever was greater.

  Examples of Exchange-Traded Derivatives

There have been several prominent incidents of insider trading since 1988. The Securities and Exchange Commission (SEC) accused Martha Stewart with obstruction of justice and insider trading in 2003 for her role in the ImClone case in 2001. Stewart was sentenced to five months in a federal prison. Former Amazon finance analyst Brett Kennedy was charged with insider trading in September 2017. Kennedy reportedly supplied a buddy knowledge regarding Amazon’s 2015 first-quarter results before the report was issued in return for $10,000.

The History of Insider Trading

Insider trading happens when people outside of a company are provided knowledge that the general public does not have and utilize it to boost their income by purchasing or selling shares. It usually happens when an unforeseen incident occurs that has a substantial influence on the value of a firm. Insiders may be accountants, attorneys, investors, or anybody who has access to confidential information about a company’s stock price. While possessing such information is not unlawful, disseminating or trading on it is. Furthermore, some insider trading is not illegal and occurs on a daily basis.

The New York Stock Exchange reacted to Goodrich Rubber’s inability to publish critical dividend information in 1914 by mandating corporations to quickly report dividend and interest activities. Twenty years later, the Securities Exchange Act of 1934 considerably enhanced legislation governing the disclosure of business stock transactions. This statute requires directors and important stockholders to declare their interests, transactions, and changes in ownership.

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