Short-Swing Profits Rule

U.S. securities law contains a provision (in what is known as the Williams Act, §16b of the Securities Act of 1934, 15 U.S.C. §78p(b)), which prohibits a company insider from making a profit from transactions in shares of the company held for less than six months, i.e., the purchase and subsequent sale of shares or the sale and subsequent purchase of shares. Under the short swing profit rule the insider is usually required to disgorge any such profits to the company. The statute creates strict liability for insiders engaging in short-swing trading without regard to the trader’s intent and regardless also of whether the trading results in a profit or a loss. The statute aims to deter insiders from taking unfair advantage of confidential company information to realize short-swing profits on trades in the company’s stock.

Other jurisdictions have enacted similar rules and they are also sometimes written into insider’s employment agreements. Compliance with the rule has the advantage of immunizing insiders, to a degree, from accusations of insider trading, which can be particularly useful for executives who have a high proportion of their net worth “tied-up” in company stock. There is no short-swing profits rule in the UK, which for such executives can present a serious problem, as they may be disbarred from selling any stock, except in short, uneventful periods of time for the business.

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