Question

The Securities Act provision 10(b) requires that all buyers and sellers of stock have access to the same information. Please, give an example of a violation of this rule and how it might occur. (insider trading).

Answer 1

All buyers and sellers of stock should have access to the same information. Insider trading is the violation of this rule.

Insider trading is the buying or selling of a publicly traded company's stock by someone who has non-public, material information about that stock.Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still non-public. In other words, that individual has an edge that few others have.

Material information is any information that could substantially impact an investor's decision to buy or sell the security. Non-public information is information that is not legally available to the public.

The non public information used by any employee or board of director for him/her personal gain or any tip given to some friend or relative to buy/sell securities based on the insider information qualifies as insider trading.

Examples of insider trading that are legal include:

• A board member of a company knows that a merger is going to be announced within the next day or so and that the company stock is likely to go way up. He buys 1,000 shares of the company stock in his mother's name.

• A government employee is aware that a new regulation is going to be passed that will significantly benefit an electricity company. The government employee secretly buys shares of the electricity company.

• A high-level employee of a company overhears a meeting where the CFO is talking about how the company is going to be driven into bankruptcy as a result of severe financial problems. The employee knows that his friend owns shares of the company. The employee warns his friend that he needs to sell his shares right away.

These are some of the many examples of insider trading that occur.

Hope it help!