A person who, because of his employment or business connections, has intimate knowledge of the financial affairs of a concern before such information is published and is available to the public. He is therefore in a peculiarly advantageous position for capitalizing on this information by speculating, i.e., making commitments in the securities of the concern in accordance with this knowledge, in advance of the public.
Under Section 16 of the SECURITIES EXCHANGE ACT OF 1934, every person who is directly or indirectly the beneficial owner of more than 10% of any class of an equity security (except exempted securities) registered on a national securities exchange, or who is a director or officer, is required to file at the time of registration of the security, or within ten days after becoming such owner, director, or officer, a statement with the exchange and with the Securities and Exchange Commission of the amount of all equity securities of the issuing company of which he is the owner. Thereafter, within ten days after the close of each calendar month, he is required to file with the exchange and the commission a statement, if there has been any change in ownership during the month, indicating his ownership at the close of the calendar month and such changes in his ownership as have occurred during the month.
Similar provisions applicable to insiders of registered public utility holding companies and registered closed-end investment companies are contained in the PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, and the Investment Company Act.
The Securities Exchange Act goes on to provide that for the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of the issuing company (other than an exempted security) within any period of less than six months shall inure to and be recoverable by the issuing company, unless such security was acquired in good faith in connection with a debt previously contracted. This recovery shall be irrespective of any intention on the part of such beneficial owner, director, or officer in entering into the transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months.
Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuing company, or by the owner of any security of the issuer in the name and in behalf of the issuing company if the latter fails or refuses to bring suit within 60 days after request or fails diligently to prosecute the suit thereafter. However, no such suit shall be brought more than two years after the date such profit was realized.
In connection with insider securities transactions under Section 16 of the Securities Exchange Act, the Securities and Exchange Commission has adopted various amendments to Rules 16B-3 and 16a-6(c) under the act for the purpose of including specified transactions in STOCK APPRECIATION RIGHTS within the exemptions provided by those rules. The amendments exempt from the reporting requirements of Section 16(a) and the shortswing profit recovery provisions of Section 16(b) cash settlement of stock appreciation rights by insiders, provided certain conditions are met. Included among those conditions are requirements relative to the issuer, the rights, and the administration of the plan under which the rights are granted. In addition, the amendments clarify the conditions for the availability of the exemption provided by Rule 16b-3 and make clear the circumstances under which amendments to existing plans must be submitted to an issuer's security holders for approval.
In addition, Section 16 of the Securities Exchange Act of 1934 provides that it shall be unlawful for any such beneficial owner, director, or officer either directly or indirectly to sell any equity security of the issuing company (other than an exempted security) if the person selling the security or his principal does not own the security sold or, if owning the security, does not deliver it against such sale within five days after such sale by depositing it in the mails or using other usual channels of transportation. This provision does not apply in the case of inability to make delivery or deposit within the deadline despite exercise of good faith, or where undue inconvenience or expense is involved.
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