Insider Trading Sanctions Act

IN AN EFFORT to curb insider trading, the Insider Trading Sanctions Act (ITSA) was signed into law by President Ronald Reagan on August 10, 1984. ITSA amends the Securities Exchange Act of 1934 which reflects a longstanding concern with fair and equitable markets. According to the Securities and Exchange Commission's (SEC) Division of Enforcement, insider trading is the most difficult and most serious challenge they face. Curiously, neither the Securities Act (1933) nor the Exchange Act define insider trading, forcing the SEC to construct various legal theories on the basis of the general anti-fraud provisions of these acts.

Reflecting this longstanding perspective on flexibility in defining insider trading, Congress (in its deliberations for ITSA) took no action in defining the term but favored continuing to give the SEC the widest possible flexibility in dealing with potential new versions of insider trading schemes. Both ITSA and its 1988 counterpart, Insider Trading and Securities Fraud Enforcement Act (ITSFEA), are designed to curb trading on “inside information”—the use of confidential information entrusted to insiders and not available to the investing public.

ITSA increased the sanctions under the Exchange Act for insider trading violations with the possibility of a civil penalty equal to three times the profit gained or loss avoided against persons who unlawfully traded in securities while in possession of material non-public information, or who unlawfully communicated such information to others who then traded (that is, on the basis of that information or tip). ITSA also increased from $10,000 to $100,000 the maximum criminal fine for any violation of the Exchange Act (which was later moved to $250,000 by the Criminal Fine Improvements Act).