Financial Management presentation

1. Insider Trading Regulatory Rules and Implications
Master of Business Administration, University of the People
BUS 5111: Financial Management
Dr. Solomon Aborbie
October 26, 2022

2. THE CONTRIBUTIONS AND GROUP MEMBERS FOR THIS PROJECT ARE:
• Bernice Omolo- Introduction, Conclusion, Editing and Compilation
• Praneel Chand- General basics of the regulatory rules applying to insider trading
• Alex Chisala- Socio-Economic Implications
• Mario Revollo- Legal Implications
• Daneillia Cargill- Ethical Implications
PROJECT TASK:
Discuss the general basics of the regulatory rules applying to insider trading and its implications and
address the following:
1.Legal implications
2.Ethical implications
3.Economic-Social implications
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3. Introduction
• Insider trading can be defined as a malpractice whereby people who have access or knowledge of confidential information particularly
related to securities of the company use such information (that the public has no clue about) to their advantage to partake in trading (The
Economic Times, n.d.).
• Legal insider trading happens under the direction of the Securities and Exchange Commission. It occurs when directors of the company
or insiders disclose their transactions when planning to purchase or sell shares (Ganti, 2022).
• Those who perform illegal insider trading are deemed to have breached their fiduciary duties and this could have negative implications
on the integrity and stability of the financial system of their company (Barone, 2022).
• In the case study provided, we are analyzing the information that someone has concerning an impending merger between two companies
which will greatly benefit the shareholders of both companies. The market dynamics will change therefore we have to analyze the
implications and rules as it pertains to insider trading.
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4. Regulatory Rules Applying to Insider Trading
• Insider information is confidential corporate information which is not made public but is shared with anyone or an organization to get an unfair
advantage.
• The Securities Act of 1934 states that when stocks are sold or bought, the information must be disclosed to the Securities and Exchange
Commission which is thereafter made public knowledge (Sebastian, 2022).
• Rule 10b-5 places a prohibition on insider trading and it specifically states that inside employees, directors and corporate officers are prohibited
from using confidential information that would see them gain an unfair advantage over the public (SEC.gov., 2015).
• According to SEC.gov (2015), the consequences of insider trading violation are:
 Disciplinary action against insider including instant job termination
 The insider to pay for all costs associated with such liability
 Criminal felony prosecution in serious cases
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5. Legal Implications
• Insider trading may result in the following legal consequences:
 An individual or shareholder of the company could file a private lawsuit against the insider
 A civil enforcement action could be taken out against the insider by the Securities and Exchange Commission which would seek
either a monetary penalty, an order barring the insider from serving in any public office and a cease and desist order.
 Serious cases could attract criminal felony prosecutions. In US for example, a insider trader can face civil and even criminal
prosecution if found guilty. If convicted for insider trading, a maximum of $5 million in fines as an individual (up to $25 million for
a business entity), up to 20 years imprisonment, or both can occur.
• The company cannot however defends its employees if they have committed the felony of insider trading violation. The individual
responsible will foot the costs alone and he or she may cause not only the company’s reputation to suffer but also their own (SEC. gov.,
2015).
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6. Ethical Implications
• While insider trading may be beneficial to the two companies with an impending merger, there are conflicting rights at stake.
• Wenzel (2018) states that in financial markets, insider trading presents various ethical issues such as conflicting rights, differing cultural
norms and inequalities across market participants.
 Ethical implications may occur when it is time to determine which of the parties involved rights are more important and whether
granting such rights can lead to unethical action towards the disadvantaged party.
 Insiders with conflicting culture norms may be met with unethical practice especially in the case of mergers. The other party may act
against the other to ensure their culture norms are upheld.
 Both companies in the merger should have equal rights such as freely partaking in trading securities, having equal information, and
being safeguarded against their own naivety. This is where the insider trading may be considered unethical when all market
participants do not have an equal opportunity to exploit the information used to execute insider trades 6

7. Socio Economic Implications
Economic Implications
• Market efficiency- Markets are effective when all members have broken even with data. Insider exchanging unfavorably influences the
securities showcase and decreases a company’s value.
• Market participation- Stock cost vacillations increment financial specialist instability and companies financially endure from the lower
capital venture.
Social Implications
• Public perception- Insider exchanging harms a company’s notoriety, causing a negative reputation, and it is seen as social recklessness.
• Public trust- Insider exchange negates corporate culture and disintegrates open belief within the company’s keenness.
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8. Conclusion
• Insider trading can be very beneficial to those with close ties or those who have access to confidential information of a public corporation.
It is therefore prudent for the SEC to step in and provide guidelines that publicly traded corporations must adhere to in order to ensure
fairness in the market.
• The disclosure of material information will ensure investors have access to the same information and this will increase investor
confidence.
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9. References
• Barone, A. (2022, January 15). What investors can learn from insider trading. Investopedia.
https://www.investopedia.com/articles/02/061202.asp
• Ganti, A. (2022, March 7). What is insider trading? Investopedia. https://www.investopedia.com/terms/i/insidertrading.asp
• Sebastian, A. (2022, January 30). Arguments for and against insider trading. Investopedia. https://www.investopedia.com/articles/markets-
economy/092216/why-insider-trading-bad-financial-markets.asp
• SEC. gov (2015, November 11). Insider Trading Policy.
https://www.sec.gov/Archives/edgar/data/1164964/000101968715004168/globalfuture_8k-ex9904.htm
• The Economic Times. (n.d) What is insider trading? Definition of insider trading, insider trading meaning.
https://economictimes.indiatimes.com/definition/insider-trading
• Wallin & Klarich Criminal Defense Attorneys (2021, April 17). Insider trading. https://www.wklaw.com/insider-trading-charges
• Wenzel, S. (2018, January 14). Insider trading - Financial ethics - Seven pillars institute. Seven Pillars Institute.
https://sevenpillarsinstitute.org/case-studies/insider-trading-what-would-rawls-do/#_edn12
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