Question

Briefly discuss the Dodd-Frank Reform Act and the Sarbanes-Oxley Act. How does each of these regulations protect Money Market and Security Market investors? Briefly discuss insider trading. Considering, you are an Investment Analyst in one of the U.S. Fortune 500 investment firm and you are asked to put together a report recommending how your firm can prohibits employees from "Insider Trading." List your recommendations and explain how those will allow your firm to comply SEC's rules and guidelines.

Answer 1

Dodd – Frank reform act & SOX

The Dodd –frank reform act was passed to enact financial reform in order to reduce risk in certain areas of the economy. Whereas sox was enacted to protect the investors from fraudulent accounting by the companies. Sox were passed by congress in response to large corporate scandals’ at Enron. Dodd-frank was enacted in response to 2008 financial crisis.

INVESTOR’S PROTECTION:

Banks were not allowed to get involved with hedge funds or private equity firms as they are very risky. In order to avoid conflicts, the Volcker act was passed which recognized the dangers involved in financial entities extending commercial & investment banking services at the same time.

They also regulate the derivative market such as credit default swaps. As these derivatives were traded over the counter against the centralized exchanges, many were aware that it results in risk to the economy.

The act had set up exchanges to reduce counterparty default & also encouraged information disclosure to bring transparency to the public.

How to avoid insider trading?

Insider trading refers to the act of purchasing or selling a security while in possession of “material” “non public information” relating to the security or its issue.

Companies have blackout periods when officers, directors & others are barred from purchase of company’s securities. They also require their officers, directors & other employees to clear the purchase or sale of company’s securities with their CLO (Chief legal officer) to avoid conflicts & obey security laws.

Companies also conduct education programs for employees on how to avoid insider trading or sharing any non public information. For this purpose employees must learn what is non public, immaterial, to avoid information disclosure relating to earnings, takeovers, security offerings, litigation to outsiders etc.

Preventing insider trading is necessary to comply with SEC rules & also to protect the reputation & integrity of the company & as well as all others who are associated with the company.

The company complies with SEC in the following ways:

• Civil injunctions
• Damage awards to private plaintiff.
• Civil fines for employees who engaged in the trading.
• Civil fines to employers who assisted the violators (employees).
• Criminal fines up to $5,000,000.
• Jail sentences up to 20 years.
• Dismissal of the employee.