After the United States stock market crash of 1929, Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934 (the “1934 Act”). The 1934 Act extended federal regulation to trading in securities. The 1934 Act created the SEC as an independent federal agency.

Section 16(b) of the 1934 Act addressed issue of insider trading in the United States directly. Section 16(b) prohibits short-swing profits (profits realized in any period less than six months) by corporate insiders in their own corporation’s stock, except in very limited circumstance. It applies only to directors or officers of the corporation and those holding greater than 10% of the stock and is designed to prevent insider trading by those most likely to be privy to important corporate information.

On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law. This insider trading law is the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt.

The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the “Public Company Accounting Oversight Board,” also known as the PCAOB, to oversee the activities of the auditing profession.

The United States has been the leading country in prohibiting insider trading made on the basis of material non-public information. Thomas Newkirk and Melissa Robertson of the U.S. Securities and Exchange Commission (SEC) summarize the development of U.S. insider trading laws.

 Insider trading has a base offense level of 8, which puts it in Zone A under the U.S. Sentencing Guidelines. This means that first-time offenders are eligible to receive probation rather than incarceration.

Members of the U.S. Congress are not exempt from the laws that ban insider trading, however, they generally do not have a confidential or fiduciary relationship with the source of the information they receive and accordingly, do not meet the definition of an “insider”.

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