The issue with Insider Trading
“Insider trading” in itself is not illegal, although it is usually used with an implication that
it is. The term “insider trading” can simply mean the trading of corporations stocks by
insiders in that company. It is legal for corporate insiders to purchase and sell stocks of
their own company, as long as they follow the guidelines of the SEC, the most important
of which is to report that transaction. This ensures that the information is public and
anyone can look at a corporate insider’s opinion of the company (1). The SEC has been
put in charge to make sure that everyone looking to trade in the stock market is on a level
playing field. Taken directly from the SEC website, “the mission of the U.S. Securities
and Exchange Commission is to protect investors, maintain fair, orderly, and efficient
markets, and facilitate capital formation.“ (2)
History of Insider Trading
Insider trading has been a prevalent problem ever since the Revolutionary war and the
birth of U.S. investment markets. The first “insider trader” in America can be traced back
to William Duer, the assistant secretary of the US Department of Treasury in 1792. He
used his position in office and affiliation with Alexander Hamilton, the Secretary of the
Treasury, to make substantial returns off of issued debt and is also considered one of the
reasons for the first stock market crashes (1). Although insider trading has been around, its
emergence as a constant issue of debate can be more directly followed after the stock
market crash of 1929. The stock market crash made it apparent that more rules were
needed in dealing with investments and securities. This resulted in several new regulations.
In 1933, the Congress passed and the President signed the Securities and Exchange Act of
1933(1). The purpose of this legislation was to, “to ensure more transparency in financial
statements so investors can make informed decisions about investments, and to establish
laws against misrepresentation and fraudulent activities in the securities markets.” One
year later, the Securities and Exchange Act of 1934 was passed. This act created the
Securities Exchange Commission (SEC) and gave it the power to set rules and laws to
regulate the US Securities markets. This Act, although it has been revised throughout the
years, is still the supreme law governing insider trading(1). Prior to this wave of
legislation, the power to regulate the securities market rested dominantly on the individual
