What is the Insider Trading Sanctions Act Of 1984

The Insider Trading Sanctions Act of 1984 is a piece of federal legislation that allows the SEC to seek a civil penalty, of up to three times the amount of profit or loss, from those found guilty of using insider information in trades, as well those who provided information not generally available to the public. The Insider Trading Sanctions Act of 1984 also provides for criminal fines to be levied.

BREAKING DOWN Insider Trading Sanctions Act Of 1984

The U.S. Congress passed the Insider Trading Sanctions Act of 1984 in order to help the SEC prosecute those accused of insider trading, which was a top priority in the 1980s. Before the Act was passed, the amount a trader could make through insider trading, far outweighed the potential financial penalties.

Signed into law by President Reagan on August 10th, the Act severely ratcheted up civil penalties and other legal remedies available to federal regulators for violations related to the publishing of "inside" market information. By shifting the emphasis from compensation of victims to punishment for offenders, the move was largely received as a sign the government was getting tough on those abusing inside information.

From a market theory perspective, the Act served as a "risk-reward" mechanism that created an equation by making the penalties for insider trading more aligned with the size of temptation for profit. Lawmakers reasoned potential violators would be restrained by the threat of material pecuniary penalties.

One element of the Act remains an uncertainty today: fiduciary duty. The existence of fiduciary responsibility is the first requirement for establishing liability. Meaning, a defendant must first be an insider. While the Act presented some vagaries surrounding who exactly is an insider, it did add some needed safeguards useful in promoting the confidence of investors in capital markets. By better leveling the playing field for all investors, the Act likely contributed to making U.S. financial markets a stronger target for investment vehicles.