The Securities Act of 1934 prohibits insider trading, and the Insider Trading and Securities Fraud Enforcement Act of 1988 specifies the penalties for these prohibited activities.

What is an Insider?
An insider, affiliate or control person is defined as an officer, director or owner of more than 10% of the voting stock in a company, or the immediate family of any of these persons. This Act incorporates all of the prohibitions against the activities of insiders and the use of insider information. An insider is guilty of breaking SEC rules when using material, non-public information to trade securities, or when passing on information to another person who acts upon the information.

Insider Information Recipient Fines and Penalties
In addition to increasing the fines and penalties that can be levied, the 1988 Act also makes the recipient of insider information as guilty as the insider who was the source of the information. Investors who have suffered monetary damage because of insider trading have legal recourse against the insider or any other person who misuses non-public information. Furthermore, the SEC may seek civil and criminal penalties against anyone it believes to have violated this Act. Liability for violating this Act is capped at the greater of $1 million or 300% of profits made or losses avoided.

All broker-dealers must establish and actively enforce written supervisory procedures that prohibit the use of material non-public information by all persons affiliated with, interested in, or in any way engaged in securities-related activities.

Look Out!
Note, the following sections on the Securities Investors Protection Act of 1970 and Blue Sky Laws is no longer included in the new Test Series 6 study guidelines. We have included it here for your interest only.


Securities Investors Protection Act of 1970

Related Articles
  1. Investing

    How Insider Trading Is Prevented in Corporations

    Insider trading can undermine the markets and damage reputations, so companies and regulators alike have instituted policies and actions to prevent it.
  2. Insights

    Why Insider Trading Is Bad for Financial Markets

    Insider trading can come in many forms, some of them even legal, with the benefits and costs often debated by practitioners and academics alike.
  3. Investing

    When Insiders Buy, Should Investors Join Them?

    Insider tracking can inform your investment strategy, but it requires research and a level head. Find out what to look for.
  4. Investing

    Keeping An Eye On The Activities Of Insiders And Institutions

    These transactions reveal much about a stock. We go over what to consider and where to find it.
  5. Personal Finance

    Insider Selling Isn't Always A Bad Sign

    Predated trades at regular intervals can instill confidence, not fear, for investors.
  6. Investing

    Infamous Insider Traders

    Check out these bizarre insider trading cases that helped define the SEC's laws against it.
  7. Personal Finance

    Delving Into Insider Investments

    Keeping tabs on company executives can provide clues about where a stock is headed.
  8. Trading

    The Truth About Insider Trading

    Allowing insider trading to go unchecked could hurt confidence in the system enough to hinder the economy in general.
  9. Trading

    Trade Forex Through Inside Day Breakout Strategy

    Inside day breakout is a popular strategy for forex trading. Here's how to recognize the patterns, entry/exit points and trading scenarios.
  10. Insights

    The 3 Biggest Penalties for Insider Trading in the U.S.

    The three large penalties for insider trading in the United States have been handed down in recent years, leading to civil and criminal charges for the culprits.
Frequently Asked Questions
  1. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  2. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  3. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
  4. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ...
Trading Center