Research and Scenario

First, visit the following websites on insider trading:

Securities and Exchange Commission (SEC) website regarding insider trading.

SEC enforcement actions (insider trading cases)

These websites will help you become familiar with the general basics of the regulatory rules

applying to insider trading. You are not expected to become an expert on this topic. Apply

these rules to the facts of this very brief case:

Someone you know has knowledge of an impending merger between two companies. The

combination of the two firms will certainly change the market dynamics of the industry.

Moreover, owners of stock in both companies will greatly benefit once the news of the

merger is publicly announced.

Project Requirements

Your presentation must consist of 6 to 7 slides that are clear, legible and address the

following:

Discuss the general basics of the regulatory rules applying to insider trading and its

implications and address the following:

Legal implications

Ethical implications

Economic-social implications
Breakdown of Tasks

Task Requirements Students’ Name Status

Introduction definition of insider trading and how it Bukola Oke Done

relates to the paper

regulatory rules Discuss the general basics of the Bukola Oke Done

regulatory rules applying to insider

trading

Legal implications Discuss the Legal implications of the Noriko Osawa Done

regulatory rules

Ethical Discuss the Ethical implications of the Pepple Adonye Done

implications regulatory rules

Economic-social Discuss the Economic-social implications Mahmoud Omar Done

Chukwuma
implications of the regulatory rules Chukwurah

Conclusion Relate the brief case study mentioned in Ammar Done

Chukwuma
the question to all that has been discussed Chukwurah

PowerPoint Organize the write ups into PowerPoint Ammar Done

Presentation format

Introduction
Insider trading can be described as trading in a public company's stock by an internal party or

a person who has private/inside, material information about that stock for any reason either

illegally or legally depending on when the insider makes the trade (Ganti, 2020). Insider

trading can be said to be illegal when a security is bought or sold in breach of a fiduciary duty

or other relationship of trust and confidence while in possession of material, non-public

information (SEC, n.d.). Simply put, Illegal Insider trading occurs when the material

information used or shared is still non-public and it comes with harsh consequences including

both potential fines and jail time (Ganti, 2020). In this Paper, we examine the general basics

of the regulatory rules applying to insider trading as well as its legal, ethical and economic-

social implications.

Note: Non-public information is information that is not legally out in the public domain and

that only a handful of people directly related to the information possess (Corporate Finance

Institute, n.d.).

Regulatory Rules Applying to Insider Trading

We have stated earlier that insider trading can be legal or illegal, what determines which

category an insider trading fall are the regulatory rules. The SEC, as the U.S. regulatory body

that protects the investors and banking industry, has a policy against illegal insider trading

which has the following components:

Handling of Information: Companies’ records and proprietary information (information

pertaining to and used exclusively by the Company) must be treated as confidential and not

be disclosed or used for any purpose other than for Company business and all these

confidential information in the possession of a director, officer or employee is to be returned

to the Company at the point of termination (SEC, 2013).

Trading in the Company and Other Securities: The SEC prohibits directors, officers and

employees of any Company (including directors, officers and employees of any subsidiary of

the Company) from effecting any transaction in the Company’s securities if they possess

material, nonpublic information about the Company (SEC, 2013). The restriction generally

apply to the sale of any shares acquired under such plans, but does not apply to the exercise

of stock options under the Company's stock option or deferred compensation plans (SEC,

2013). Also, any transaction in the Company's securities by a director, officer or employee of

the Company must be cleared by the Compliance Officer (SEC, 2013).

Trading in Securities of Other Entities: Also, the SEC prohibits directors, officers or

employees of a Company from effecting any transaction in the securities of another entity

whose value is likely to be affected by actions of the Company which are not yet publicly

disclosed (SEC, 2013).

Trading Window: Every employee at the Vice President level and above, as well as employees

in the accounting group are prohibited from buying or selling Company securities at all times,
except during the Trading Window Period which is the period extending from the third (3rd)

through the thirteenth (13th) business day following the release of the Company's earnings

for the immediately preceding fiscal period to the public (SEC, 2013).

Applicability to Family Members: These restrictions also extend and apply to relatives of

personnels subject to the Insider Trading Policy as well as every account held by family

members, except accounts where investment decisions are made by an independent

investment manager in a fully discretionary account (SEC, 2013).

Legal implication of the regulatory rules of insider trading

There are Criminal and Civil Legal Implications attached to the regulatory rules of insider

trading. Insider trading, when illegal, can be punished strictly by civil sanctions, or involve

criminal prosecution, or both. Federal law authorizes what are known as “treble” damages if

the SEC brings a civil action against a person or an entity for violating insider trading rules

(Wallin & Klarich, n.d.).

Illegal insider trading carry a maximum sentence of 20 years in a federal penitentiary, a

maximum criminal fine of $5,000,000 for individuals, and maximum fine of $25,000,000 for

“non-natural” persons (such as an entity whose securities are publicly traded) (Wallin &

Klarich, n.d.).
Ethical implications of the regulatory rules of insider trading

According to SEC (n.d.), the Code of Ethics and Insider Trading Policies and Procedures are

designed to protect the public from abusive trading practices and to maintain ethical

standards for access persons when dealing with the public. Insider trading in financial

markets presents various ethical issues, including conflicting rights, differing cultural norms,

and inequalities across market participants. Typically, insider trading is considered unfair

because all market participants do not have an equal opportunity to exploit the information

used to execute insider trades. These trades take advantage of favorable information to reap

personal monetary gain through large sales or seek to avoid heavy losses from unfavorable

information. Insider trading makes those who are not privy to such information feel

powerless and no longer wish to participate, further interrupting the flow of financial markets

(Wenzel, n.d.).

However, some argue that insider trading makes markets more efficient and ensures stock

prices are represented more accurately. This creates the dilemma of whose rights are more

important and whether favoring certain rights can lead to consequences such as unethical

action toward the disadvantaged party (Wenzel, n.d.).

The economic-social implications of regulatory rules applying to insider trading are inversely

proportional to the economic-social implications of insider trading which comes due to loss

of trust in the market. Trust is a major factor when it comes to stock trading. If the traders do

not believe that they are trading on a fair platform, it could dissuade traders and cause the

market to fall. Insider trading gives the impression that some of the traders have an advantage

over others. This is very dangerous, especially in the financial market. Loss of trust by

investors could mean the withdrawal of funds from particular companies in the stock

exchange leading to low demand which can lead to plummeting of the value of shares of a

company, low investor turnout at initial offerings, and low demand or trading within the stock

exchange. All these can lead to high unemployment, less internally generated revenue, less

production, less innovation, and ultimately less money for both government and citizens.

References

Corporate Finance Institute. (n.d.). What is Insider Trading? Retrieved from

https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/what-is-insider-

trading/
Ganti, A. (2020, May 8). Insider Trading. Investopedia. Retrieved from

https://www.investopedia.com/terms/i/insidertrading.asp

SEC (n.d.). Code of Ethics and Insider Trading Policy Procedures. Retrieved from

https://www.sec.gov/Archives/edgar/data/1105446/000110544604000001/exhibit99b18a.htm

SEC. (2013). 2013 Insider Trading Policy. Therapeuticsmd, INC. Retrieved from

https://www.sec.gov/Archives/edgar/data/25743/000138713113000737/ex14_02.htm

SEC. (n.d.). Insider Trading. Retrieved from https://www.investor.gov/introduction-

investing/investing-basics/glossary/insider-trading

Wallin & Klarich. (n.d.). Insider Trading. Retrieved from https://www.wklaw.com/insider-

trading-charges

Wenzel, S. (n.d.) Insider Trading: What Would Rawls Do? Retrieved from

https://sevenpillarsinstitute.org/case-studies/insider-trading-what-would-rawls-do/

Legal implications of the regulatory rules of insider trading

Some regulatory rules of insider trading can be categorized under the following heads-

1. Rule 10b- 5

SEC Rule 10(b)5-1 defining insider trading is the result of the United States Supreme
 Court holding in United States v. O’Hagan, 521 U.S. 642 (2010). The rule provides

that “’manipulative and deceptive devices’ prohibited by Section 10(b) of [the

Securities Exchange] Act and [SEC Rule 10b-5] thereunder include, among other

things, the purchase or sale of a security of any issuer, on the basis of material

nonpublic information about that security or issuer, in breach of a duty of trust or

confidence that is owed directly, indirectly, or derivatively, to the issuer of that

security or the shareholders of that issuer, or to any other person who is the source of

the material nonpublic information” (“WALLIN & KLARICH A LAW

CORPORATION”, n.d.).

2. Rule 14e-3

Rule 14e-3 prohibits insiders of the bidder and the target from divulging confidential

information about a tender offer, exactly the kind of tippee information the Supreme

Court in Chiarella had found not to be a Rule 10b-5 violation. In addition, Rule14e-3,

with narrow exceptions, prohibits any person who possesses material information

relating to a tender offer by another person from trading in target company securities

if the bidder has commenced to taken substantial steps towards commencement of the

bid (Rowe, 2004).

Despite Justice Powell's judicial reprimand about expansive rulemaking outside of the

common law of fraud, Rule14e-3 is not premised on a breach of a fiduciary duty – the
 kind of breach that Justice Powell said in Chiarella was required as a prerequisite to

SEC enforcement. Rule 14e-3 was the SEC's institutional response to the Chiarella

judicial roadblock that had effectively limited the Commission's interpretation of Rule

10b-5.

There are Criminal and Civil Legal Implications. Insider trading can be punished

strictly by civil sanctions, or involve criminal prosecution, or both. Federal law

authorizes what are known as “treble” damages if the SEC brings a civil action

against you for violating insider trading rules (“WALLIN & KLARICH A LAW

CORPORATION”, n.d.).

References

WALLIN & KLARICH (n.d.). Insider Trading. Retrieved from

https://www.wklaw.com/insider-trading-charges

Rowe, R. 2004, May 24. Fair To All People: The SEC and the Regulation
of Insider Trading. Retrieved from
http://www.sechistorical.org/museum/galleries/it/resilience_a.php#:~:tex
t=Rule%2014e%2D3%20prohibits%20insiders,a%20Rule%2010b
%2D5%20violation.

The Economic-social implications of the regulatory rules

 This socio-economic model of regulation coordinates the monetary and regulatory
hypothesis with perspectives from speculations of human science to represent accepted
practices notwithstanding the conventional monetary and specialized handles that are
currently key parts of the regulation. This all-encompassing model clarifies how existing
regulation and regulatory consistence are relied upon to improve the regulatory results by
presenting the necessities of interest and incorporation in the hypothesis and practice of
regulation. The implicit understanding for good regulation additionally requires going past
the conventional order and control model in attempting to advance regulatory consistence,
authenticity and acknowledgment in a mind boggling communication between partners, for
example, residents, organizations, and, governments and offices (Feld and Frey, 2007).

This is much more significant since if the residents see their inclinations and inclinations to
be appropriately spoken to in the regulatory cycle and results they will be bound to legitimize
them and conform to them accordingly expanding the odds for setting up and keeping up a
feasible and fruitful regulatory administration framework. Or on the other hand as Bird et al.
(2007) contends, having cultural organizations for better regulatory consistence speaks to
having a significant voice of residents in impacting the undertakings of the state. Regulatory
changes are bound to be acknowledged by residents when the regulatory cycle is seen to be
reasonable as well as comprehensive and participatory creation the regulatory arrangement
results genuine. In such cases residents see their acknowledgment of regulatory systems as a
"more noteworthy great" and conform to it regardless of whether they don't actually get a full
open great equal from their consistence.

Public decision hypothesis and mental speculations likewise contend that authenticity
depends not just on the regulatory office capacity to give good results however that partners
place incredible significance on the cycles it utilizes (Tyler, 1990). Tyler (1990) in his
examination finds that the impression of authenticity and regulatory consistence is firmly
connected to individuals' perspectives on the decency of the methods utilized and exhibits
that individuals consent more with the law if the systems (more significant) and distributive
equity (less significant) utilized by the regulatory authority are seen to be reasonable. The
adequacy of the regulatory result is the degree to which regulation is actualized and an
individual is improved off and the apparent distributive equity of the result is the apparent
reasonableness of how the advantages or misfortunes are partaken in the general public. With
respect to the proficiency of the regulatory cycle, this includes the interest and consideration
through that individuals see that the regulatory authority is providing for them during the time
spent conveying on its command, and, how genuinely regulatory office treats residents and
organizations that are influenced by the regulatory cycles and results. Tyler (1990) reasons
that the positive results matter less in advancing authenticity than procedural equity and
distributive equity.

The ability to consent originating from accepted practices depends on the apparent
authenticity of the regulatory organizations that are ordered to execute regulations and proof
recommends that a key determinant of saw authenticity is the rule of reasonableness and
consideration being incorporated with the strategies for creating and actualizing regulation.
Henceforth regulatory specialists ought to figure out what cycles and practices are made a
decision about reasonable and comprehensive by those fragments of the populace influenced
by the regulations. Moreover, the regulatory consistence is influenced by authenticity of
regulation that is thusly affected by the results accomplished and by measures utilized in the
regulatory administration. When the regulatory framework gets authenticity an individual
consistence is required to be influenced by the conduct of others by means of the nature and
degree of social impact applied in the network that relies upon the bigger network's view of
the organization's authenticity (Berg, 2000a, 200b; Sutinen and Kuperan, 1999; Young,
1979).

References:

A. Alesina, R. B., J. Alm, G. M., M. Bevir, D. R., S. Bowles, H. G., Coleman, J., NK.
Dubash, B. M., . . . Young, O. (1999, January 01). Regulation and social capital. Retrieved
from https://link.springer.com/article/10.1007/s40847-018-0056-4

Towards socio-economic theory and practice of regulation. Evidence from OECD countries
and Bangladesh (n.d.). Retrieved from
https://www.cogentoa.com/article/10.1080/23311886.2016.1254840

Done By : Mahmod Omar

The Economic-social implications of the regulatory rules

To understand the Economic-social implications of regulatory rules applying to insider

trading we must first understand the Economic-social implications of insider trading.

A list of economic-social implications of insider trading could be represented as

1. Loss of Trust

i. Low market trading

ii. Plummet in share value

iii. Low investor turnout at initial offerings

iv. Fewer investments

v. Fewer jobs

vi. Less tax dollar

vii. Dilapidated cities

viii. Bankruptcy of cities

Trust is a major factor when it comes to stock trading. If the traders do not believe that they

are trading on a fair platform, it could dissuade traders and cause the market to fall. Insider

trading gives the impression that some of the traders have an advantage over others. This is

very dangerous, especially in the financial market. Loss of trust by investors could mean the

withdrawal of funds from particular companies in the stock exchange leading to, low demand

which can lead to plummeting of the value of shares of a company. This lack of trust can also

lead to a widescale distrust of the system. leading to low investor turnout at initial offerings,

and low demand or trading within the stock exchange. A low level of trading within the stock

exchange leads to fewer tax dollars. Low investor turnout at initial offerings also means less
investment into companies and projects. This can lead to high unemployment, less internally

generated revenue, less production, less innovation, and ultimately less money for both

government and citizens. Between 2001 and 2009 Michigan lost over 43 of its manufacturing

jobs and this lead to cities declaring bankruptcy and by 2014 Flint, Michigan could not afford

clean water. The fall of a stock market can have the same effect on cities and towns leading to

the dilapidation of government facilities, underfunding of the police, and an increase in crime

rate. This is why it was so important that congressional action had to be taken to regulate and

ensure trust in the industry.

"The Sarbanes-Oxley Act of 2002 came in response to financial scandals in the early 2000s

involving publicly traded companies such as Enron Corporation, Tyco International plc, and

WorldCom. The high-profile frauds shook investor confidence in the trustworthiness of

corporate financial statements and led many to demand an overhaul of decades-old regulatory

standards." (Kenton, 2020) "When entire markets are widely perceived to be tainted by

insider trading, average people who are also potential investors will avoid markets

altogether." (Clark, 2009).

The economic-social implications of regulatory rules applying to insider trading are inversely

proportional to the economic-social implications of insider trading as explained above.

Furthermore, setting up and maintaining these regulations lead to more jobs within the
regulatory industry to stay compliant and to check compliance. In conclusion, it creates trust

in the market, promotes trading, and fosters growth in both the local and national economies.

References:

Kenton, W. (2020, August 29). Sarbanes-Oxley (SOX) Act of 2002 Definition. Retrieved
October 25, 2020, from https://www.investopedia.com/terms/s/sarbanesoxleyact.asp

Clark, J. (2009, August 26). How Insider Trading Works. Retrieved October 25, 2020, from
https://money.howstuffworks.com/insider-trading3.htm

Done By : Chukwuma Chukwurah

Relate the brief-case study mentioned in the question to all that has been discussed

The brief-case study implies that someone known to me knows an impending merger

between two companies. The combination of the two firms will certainly change the market

dynamics of the industry. Moreover, owners of stock in both companies will greatly benefit

once the news of the merger is publicly announced.

From our study and discussion, it is clear that the information of the merger has not been

made public and is, therefore, it is insider information. It is also illegal insider information

because I do not work for any of the companies and so I am not supposed to have such

information neither should it be leaked from the company. It is a crime to act on such

information. It is legally and ethically wrong with economic-social implications and

punishable by a jail term or/and fines. It is advised to report the information just received to

the Securities and Exchange Commission (SEC) or any other security agency as advised.

Rule14e-3, with narrow exceptions, prohibits any person who possesses material information

relating to a tender offer by another person from trading in target company securities if the

bidder has commenced to taken substantial steps towards the commencement of the bid

(Rowe, 2004). Illegal insider trading carries a maximum sentence of 20 years in a federal

penitentiary, a maximum criminal fine of $5,000,000 for individuals, and a maximum fine of

$25,000,000 for “non-natural” persons (such as an entity whose securities are publicly traded)

(Wallin & Klarich, n.d.).

References

Rowe, R. 2004, May 24. Fair To All People: The SEC and the Regulation of Insider Trading.

Retrieved from
http://www.sechistorical.org/museum/galleries/it/resilience_a.php#:~:text=Rule%2014e

%2D3%20prohibits%20insiders,a%20Rule%2010b%2D5%20violation.

WALLIN & KLARICH (n.d.). Insider Trading. Retrieved from

https://www.wklaw.com/insider-trading-charges

Done By : Chukwuma Chukwurah