Section 16(b)

Definition

Section 16(b) of the Securities Exchange Act of 1934 is a provision that aims to prevent corporate insiders from profiting from short-term trading in their company's stock. It requires insiders to disgorge any profits made from buying and selling, or selling and buying, their company's stock within a six-month period.

5 Must Know Facts For Your Next Test

1. Section 16(b) applies to corporate insiders, including directors, officers, and beneficial owners of more than 10% of a company's stock.
2. The purpose of Section 16(b) is to deter insiders from exploiting their access to non-public information for personal gain through short-term trading.
3. Insiders must disgorge any profits made from buying and selling, or selling and buying, their company's stock within a six-month period, regardless of whether they used inside information.
4. Section 16(b) is a strict liability provision, meaning insiders can be held liable even if they did not intend to profit from their trades or did not actually use inside information.
5. The SEC is responsible for enforcing Section 16(b) and can bring civil actions against insiders who fail to disgorge their short-swing profits.

Review Questions

• Explain the purpose of Section 16(b) and how it aims to prevent insider trading.
  • The purpose of Section 16(b) is to deter corporate insiders from exploiting their access to non-public information for personal gain through short-term trading in their company's stock. By requiring insiders to disgorge any profits made from buying and selling, or selling and buying, their company's stock within a six-month period, Section 16(b) seeks to eliminate the incentive for insiders to engage in this type of short-swing trading, which could give them an unfair advantage over other investors.
• Describe the scope of Section 16(b) and the individuals it applies to.
  • Section 16(b) applies to corporate insiders, including directors, officers, and beneficial owners of more than 10% of a company's stock. These individuals are subject to the short-swing profit rule, which requires them to disgorge any profits made from buying and selling, or selling and buying, their company's securities within a six-month period. The provision is designed to cover a wide range of insiders who may have access to material, non-public information and could potentially use it to their advantage in the securities markets.
• Analyze the key features of Section 16(b), including its strict liability nature and the role of the SEC in enforcement.
  • Section 16(b) is a strict liability provision, meaning that insiders can be held liable for short-swing profits even if they did not intend to profit from their trades or did not actually use inside information. This strict approach is intended to eliminate the need to prove that an insider's trades were based on non-public information, making the provision easier to enforce. The SEC is responsible for enforcing Section 16(b) and can bring civil actions against insiders who fail to disgorge their short-swing profits. This enforcement mechanism helps to ensure that the provision's deterrent effect is realized and that insiders are held accountable for their trading activities.

Related terms

Insider Trading: The use of material, non-public information about a company to trade the company's securities for personal profit.

Short-Swing Profits: Profits realized from the purchase and sale, or sale and purchase, of a company's securities within a six-month period by a corporate insider.

Disgorgement: The act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.