The first rule about insiders is that there are stiff penalties for trading on inside information. If you know that the company is about to buy a half-interest in IBM, and you think that will raise the price of the stock when it becomes known, you'd better not buy chunks of the stock to profit from the rise. This rule applies not only to officers and directors, but to anybody who has access to interesting information that isn't public yet. To help people resist temptation, the SEC requires all officers and directors of the company to report all their transactions in its stock. These reports are a matter of public record for every busybody and corporate gadfly in the country to study.
If two rules are good, three are better; therefore, the SEC isn't content just to levy fines for trading on inside information and to require reporting of transactions. It's also illegal for insiders to profit in any way, though in perfectly good faith, on short-term transactions in the company's securities. This is the egregious Rule 16(b): if an insider buys and sells a security in any six-month period, he must hand over his profit to the company! In any doubtful case this rule gets the most unfavorable interpretation possible; for instance, you take the losses and the company takes the gains, and you can't balance off losses and gains in a six-month period.
It's not entirely clear to me who is an insider under this rule, but it seems to apply to more than just the officers and directors. In fact, I have the impression it's not clear to anybody.
What if the company fails to claim the profit from an insider's trading? Then any stockholder can require it to do so. Remember the bit about the reports being public record?
Of course, none of us would trade on inside information or do short-term trading in the company's stock (much less sell it short, which is also illegal), but the rule can make real trouble. Exercising an option, for instance, counts as a purchase of stock; so don't sell any within six months before or after--there goes the idea of selling some stock to cover AMT, unless you exercise in the first half of the year. (It's said that there's even a way for an exercise to count as both a purchase and a sale, causing instant confiscation, but this appears to be just a trap for people without lawyers.) Or suppose you buy some stock, and three months later General Motors comes along to buy the company--bye bye, profit. Remember, though, this just applies to insiders, if you can find out what an insider is.
This note has taken a fairly negative tone in places; in writing about regulatory matters one's attitude varies from heavy sarcasm to blind fury. It's as well to remember that people go through these things every day and come out with large bundles of money at the other end. If we can ace out Computervision, Autotrol, and IBM, not even the SEC can protect us against succeeding.
Editor: John Walker