• Corporate insiders include the inner circle of any public company. A company's management, senior officers and board of directors are also considered insiders. A large owner of the company's stock registered under the Securities Exchange Act of 1934 as per Section 12 (owning 10 percent or more of the company's outstanding shares) may also be considered an insider. Insiders must abide by trading rules that restrict buying or selling before relevant shareholder announcements.
  
  

Securities Exchange Act of 1934

• Section 16 of the Exchange Act of 1934 defines the requirements for corporate officers and insiders to register ownership of their shares. In 2002, after passage of the Sarbanes-Oxley Act, insiders were required to file these statements electronically. Section 20 defines the liability of insiders for trading on information that isn't available to the public. Liability doesn't exceed the amount of profits gained from trading; liability for gains are reduced by any amounts disgorged according to Court order; and liability for insider trading's statute of limitations doesn't exceed five years.
  
  

Insider Trading Act of 1984

• Insider trading cases prior to the passage of this act were protected by a loophole. When investors traded options or over-the-counter derivatives rather than actual equity securities--considered the "underlying" in options trades--they were not considered subject to disclosures about insider information. The Insider Trading Act of 1984 closed this loophole.
  
  Insiders and "tippers" -- who may be insiders or outsiders as defined by the law -- are subject to criminal penalties under the law. Fines for breaches of the law raised the maximum of $10,000 under the 1934 Act to $100,000.
  
  

Regulation FD

• Insiders cannot provide sensitive information to investment professionals, such as securities analysts, prior to a public announcement. Securities analysts make buy- and sell pronouncements based upon fundamental public information. Investment banks may have a close relationship with a company's senior management team. When an insider provides information to any professional investor ahead of the general public--even when the information is characterized as fundamental or financial information--the insider and professional investors break the law. When securities analysts trade on insider information, they break Regulation FD.
  
  

Securities Fraud Enforcement Act of 1988

• The Securities Fraud Enforcement Act of 1988 underscores the Insider Trading Act of 1984. The Act recodifies the 1984 Act as Section 21 (a) of the Securities Exchange Act of 1934. Under this revision, penalties imposed on inside trading infractions were increased three-fold. Criminal fines were raised to $1 million. A caveat to this rule includes maximum fines of up to $2.5 million for individuals trading on inside information. Prison sentences under the rule increased to 10 years from a previous five years.
  
  The law also provides payment to whistleblowers. Ten percent fines may be paid to whistleblowers providing information about insider trading violations.