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What is Involved in Insider Trading Regulation?

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  • Written By: Dana DeCecco
  • Edited By: Amanda L. Wardle
  • Last Modified Date: 29 August 2016
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    Conjecture Corporation
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Insider trading regulation is strictly enforced by regulatory authorities in the financial industry. Insider trading is a common practice, and may be defined as legal or illegal depending on the circumstances. Legal insider trading by corporate executives and large shareholders is based on information publicly available. Large trades must be reported and made public. Illegal insider trading involves information that is not available to the general public.

Illegal insider trading has an adverse impact on market integrity. Insiders with advance knowledge can avoid losses or profit from future market moves, leaving typical investors at a great disadvantage. The loss of investor confidence in capital markets can lead to severe consequences. Insider trading regulation has been adopted on a global scale to help avoid these problems. It exists in most jurisdictions around the world.

When a person discloses material nonpublic information to someone who can trade on the basis of that information, regulations dictate that the individual must make disclosure of the information public. Another form of insider trading, known as tipping, can be done in person, on the phone, or by mail. Insider tipping is against the law because it gives the recipient an unfair advantage over other investors. Regulatory authorities have liberally interpreted insider trading regulation to encompass all forms of tipping confidential information.

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Insider trading regulation provides stipulations for non-intentional and intentional selective disclosure. In situations of non-intentional disclosure, the person must publicly disclose the information promptly. In the case of intentional selective disclosure, the person must publicly disclose the information simultaneously. The method for sharing this information must be reasonably designed to effect a broad, non-exclusionary distribution to the public. All forms of passing on confidential information are covered under inside trading regulation.

Not all insider trading is illegal. Insiders, such as corporate directors and administrators, are free to trade shares as long as the proper disclosure forms are filed with regulatory authorities. Insider trading data is available to the general public from many online resources. Investors commonly refer to insider trading activities for a variety of reasons. This type of insider trading activity can provide insight on corporate stability or possible changes in leadership.

Various countries have adopted insider trading regulations. The rules and regulations vary slightly from country to country, but the essential elements are the same. Unlawful disclosure of proprietary information is the basis for all international insider trading policies. Insider trading has been regulated in an effort to protect investors and to preserve market integrity.

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