What is liability under Section 16 of the 1934 Act?

Section 16 of the 34 Act governs the sale or transfer of securities by insiders of the corporation. An insider is an officer, director, or large shareholder (holding 10% or more of outstanding securities). Insiders must generally register with the SEC an indicate their ownership interest at the time of filing the registration statement or within 2 days of becoming an insider (i.e., acquiring a large ownership of shares). Section 16 prohibits insiders from making short-swing profits by trading their shares within 6 months of the registration or acquiring the shares. There is an assumption that insiders have material, non-public information during this period. As such, any trades during this period are per se illegal. Any profits derived from the sale are forfeited to the corporation.

• Note: The SEC does not enforce the short-swing profit rule; rather, this rule is enforced through civil action by the company or shareholders.