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When Did Insider Trading Become Illegal?

insider trading

Insider trading has been around since the advent of the stock market, but it wasn't until recently that it became illegal. In fact, the legislation that made insider trading illegal was only enacted in the 1980s. Despite this law, some individuals still use insider information to their advantage. Former Enron CEO Jeffrey Skilling prison is one of the most famous cases of insider trading. In this article, we will discuss when did insider trading become illegal.

What is Insider Trading?

Insider trading is when a person trades in securities, such as stocks, based on information that is not available to the public. It became illegal in 1934 with the passage of the Securities and Exchange Act. This act was created to regulate the securities market and ensure investors were provided with complete and accurate information to make informed decisions. Insider trading can include buying or selling stock based on inside information, using confidential information to gain an advantage over other traders, or tipping off others about confidential information. When caught, perpetrators can face significant fines and prison sentences.

When Did Insider Trading Become Illegal?

Insider trading became illegal in the United States after the Securities and Exchange Commission (SEC) passed regulations in 1934. Prior to that, insider trading was not regulated or controlled by any federal laws, allowing corporate executives and other individuals with inside knowledge of corporate activity to buy and sell stocks based on information not available to the public.

However, in 1934, Congress passed the Securities Exchange Act, which created the SEC and made it illegal for corporate insiders to trade on material nonpublic information. In addition to the Securities Exchange Act, Congress also passed the Insider Trading Sanctions Act of 1984, which increased the maximum civil penalty for insider trading violations from two times to three times of the profit gained or loss avoided. This was designed to further discourage insider trading.

Since then, the SEC has aggressively pursued cases of insider trading. In some cases, criminal prosecution and jail time have been handed down to those found guilty of violating insider trading laws.

The Role of the SEC

The Securities and Exchange Commission (SEC) is responsible for regulating the financial markets, including enforcing laws on insider trading. Insider trading was illegal before the creation of the SEC, but the agency clarified the rules and increased enforcement efforts when it came into existence.

Since its formation, the SEC has been actively investigating and prosecuting cases of insider trading. Former Enron CEO Jeffrey Skilling prison is one of the most high-profile cases that occurred of insider trading related to his role at the company in 2001. In addition to a $45 million fine, he received a 24-year prison term. This case highlighted the importance of the SEC's work in protecting investors and deterring would-be wrongdoers. 

How Has the Law Changed Over Time?

Insider trading laws had changed significantly since when insider trading became illegal. Initially, insider trading laws were largely unregulated and relied on the principle of fairness to protect investors from misusing material, nonpublic information. As the stock market grew and new technology allowed for faster and more frequent transactions, Congress took action to protect investors from unscrupulous traders. 

The first law to criminalize insider trading was the Securities Exchange Act of 1934, which mandated that all corporate insiders, such as directors and officers, must disclose any trades they make involving their company’s securities. The SEC then expanded on this concept with the Insider Trading Sanctions Act of 1984, which set a precedent for issuing civil penalties for violations.

In 1988, Congress passed the Insider Trading and Securities Fraud Enforcement Act, which amended the 1934 Act by adding criminal sanctions for insider trading and other securities fraud. This act also created a private cause of action so that investors who have been harmed by insider trading can sue for damages.

Since then, the SEC has continued to update and refine its rules on insider trading. In 2000, the Commission established Regulation FD to prohibit the selective disclosure of material information by companies. This regulation requires companies to disclose all material information in a manner that is available to the public simultaneously. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 strengthened the SEC’s authority to pursue violators of insider trading laws and imposed stiffer penalties for those who were found guilty.

The evolution of insider trading laws has ensured that individuals who trade on nonpublic information are held accountable for their actions. This protects investors from unfair practices, ensuring that the markets remain fair and transparent.

What Future May Hold?

When it comes to insider trading, the future may be uncertain. Although laws have been in place for quite some time, the rules and regulations are constantly changing as new technologies and methods of communication make it easier for traders to engage in illegal activity. As technology advances, lawmakers and regulators must continue to adapt the laws to keep up with these changes. Additionally, enforcement efforts have become more stringent, as the consequences of engaging in insider trading are serious and can include hefty fines or even prison time.

Conclusion

Insider trading has long been a controversial practice and has been illegal since the Securities Exchange Act of 1934. This act, which was largely prompted by the crash of the stock market in 1929, made it illegal for corporate insiders to trade stocks based on nonpublic information. Since then, the SEC has continued to refine and enforce insider trading regulations in order to protect investors and ensure the integrity of the markets. While there are still gray areas in terms of what constitutes illegal insider trading, the law has been enforced vigorously, and those caught engaging in it have faced steep penalties. In summary, when did insider trading become illegal? The answer is 1934, with the passage of the Securities Exchange Act.

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