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1) What is the SEC’s Short-Swing Rule?

As stated in Section 16b of the Securities and Exchange Act of 1934, the Short-Swing Rule requires that corporate insiders who engage in any short-swing transactions  involving a security (purchasing and subsequently selling at a higher price within six months), or security-based swap agreement, surrender any profits gained from the transactions.

2) To whom does the Rule apply?

The Rule applies to DirectorsOfficers, and Beneficial Owners of more than 10 percent of any class of equity security of the company whose stock is involved in the transaction.

3) Why was the Short-Swing Rule created?

The Rule was implemented to prevent the unfair use of non-public information by directors, officers, and other “insiders” to produce personal returns on equity transactions. In 2005, the SEC amended Section 16b to include several exceptions to the Rule (see link below).

4) How is the Rule Enforced?

Enforcement of the Rule relies on Sections 16a and 16b of the Securities and Exchange Act of 1934. Section 16a requires that designated insiders disclose any purchases or sales of stock to the SEC. Section 16b allows the issuer of the security transacted to file a lawsuit against the insider in order to appropriate the gains from the transaction.

Note: The insider does not have to be in possession of non-public information to be held in violation of the Rule. Violation is dependent on the nature of the transaction, regardless of whether or not the insider holds information pertinent to stock movement.

For more detailed information on Short-Swing transactions, please refer to this guide.

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