What is insider trading?
Insider trading is one of those topics that seems like it shouldn’t be a problem. After all, isn’t it the job of the Securities and Exchange Commission to keep a tight lid on executive shenanigans?
Yes, and that lid has been getting tighter with every passing year, according to consultants who help companies comply with the SEC and other regulations. Both corporations and securities dealers file and disclose an enormous amount of information. Here are the things investors should know about insider trading:
The SEC is watching.
“Insider trading has always been a big deal, and it is gradually getting more focus,” says Deirdre Patten, founder of Houston-based Patten Training & Review, a compliance training firm. In the last few years, the SEC updated its rules to ratchet up accountability for corporations and broker-dealers, she says. Now, for example, broker-dealers must keep internal restricted lists of securities for mergers and other deals that could be manipulated by insider trading to investors’ detriment.
‘Disgorged’ profits
Executives were never supposed to short their own companies’ shares, buying and selling quickly in advance of a big announcement or financial revelation, Patten says. But now the SEC is inflicting punishment: If an insider sells his own company’s securities and makes a profit within a six-month window, all that profit has to be disgorged back to the company and the insider has to pay taxes triggered by the transaction. Insiders are also prohibited from pairing up with outsiders to make the trades in the shade of someone else’s ownership.
Don’t trade on disclosures.
Disclosure, by definition, always reflects what happened — but you don’t get time to act on it. The insiders already made their moves by the time a stock price goes higher or lower. That’s always an indication to regulators that there’s nonpublic knowledge, and various parties will be obligated at some point to make it public. “And if they know it, and they acted on it,” says Montieth Illingworth, founder of Montieth & Company, a corporate communications firm in New York that advises firms on compliance-related communications.
Know your 8-K forms.
Insiders are still allowed to trade shares of their companies in general, says Janaya P. Moscony, founder of SEC Compliance Consultants, based in suburban Philadelphia. The big no-no is trading before material information has been publicly released. “It’s prudent for corporations to restrict trading around earnings announcements,” she says. The SEC form 8-K usually publicly discloses big news such as a merger, acquisition, sale of a division, or problems with supply chain or earnings. “I recommend that investors ask, ‘Does this firm trade in the window prior to an 8-K?'” Moscony says.
Am I an insider?
Hooray! Your company is giving you stock or options as your bonus. Uh-oh … are you now an insider, subject to all these rules?
It depends. If you simply own company shares, you are not necessarily an insider, Patten says. But know that that rich basket of shares might not be available for plunder — for a while, anyway. Often, shares are “locked up” for a period of time; you can’t sell them for, say, six months.
You can ask for help.
If you are concerned about your potential insider status or how to handle a cornucopia of company shares, ask the corporate investor relations department or corporate secretary, consultants say. “You become an insider by being a corporate officer, a C-level [executive] or if as an individual you own 10 percent of a publicly traded company’s shares,” Patten says. If that sounds like your situation, prepare to file SEC Form 3. Welcome to the big leagues!
Sometimes a trade is just a trade.
Know that companies are accelerating compliance and record keeping in sync with the SEC’s evolving standards, Moscony says. If you own shares, your company probably has a policy that restricts internal trading. If not, one might be announced soon. That’s partly to keep everyone on the right side of the law, and partly to signal to investors that management “really puts investors first.” And remember, Patten adds, that an inside trade doesn’t mean anything nefarious is going on. “He might just have needed the money to buy a vacation home,” she says.
More from U.S. News
8 Inaugural Trips Down Wall Street
9 Ways to Invest on a Small Budget
7 Facts Investors Should Know About Insider Trading originally appeared on usnews.com
