Sec Regulation Memo

DATE: October 1st, 2014

SUBJECT: SEC Regulation FD

In 2000, the Security Exchange Commission acknowledged that the system they used to conduct their business was imperfect. They found three aspects particularly problematic (1). For starters, information could be selectively disclosed, giving some companies the upper-hand in stock trading and other business deals. They worried about the people with inside information having insider trading liability, and also about people giving their family or close friends special information or deals on stock that weren’t available to the general public. In this document, the SEC addressed these issues, cracked down on people taking advantage of tipping, and set out to make the stock exchange a fair, even playing field.

In Rule 10b5-1, the SEC determines that people are not legally allowed to invest in a stock for which they have received inside information, unless they can prove that that information did not in any way influence their decision. Admittedly, this sounds like an extremely convoluted thing to prove. Rule 10b5-2 addresses the issue of insiders giving information to family and friends. The regulation on this was also tightened, though there was also a strain on the ambiguity of interpretation. The SEC mandated that information was not allowed to be passed unless the parties involved could prove that “a duty of trust or confidence was owed to the person receiving information”.

This can make it difficult for strategic investors to toe between the lines of having enough information to make a confident decision, and having too much information. Any person who becomes aware of nonpublic information and trades that company’s stock can be considered guilty of a crime (2). For this reason, employees investing in their own company are heavily monitored and are required to report their actions as they occur.

Economists argue on the subject of who wins and who loses when it comes to insider trading. It certainly...