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ITSFEAInsider Trading and Securities Fraud Enforcement Act
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The express right of action for contemporaneous traders, which ITSFEA codified at Section 20A of the Exchange Act, reflected another determination by Congress to depart from the fiduciary principle at the core of Chiarella and Dirks.
As with ITSA, the period leading up to the passage of ITSFEA evidences Congress's serious consideration of the costs and benefits of adding into the bill an express statutory prohibition against trading securities on the basis of material nonpublic information.
(176) Indeed, ITSFEA contained explicit findings that the SEC's rules regarding insider trading were "necessary and appropriate," and that it had "enforced such rules and regulations vigorously, effectively, and fairly." (177) As Steve Thel argues, these findings can be read as a congressional endorsement of the misappropriation theory.
Consistent with the primary objectives of the Securities and Exchange Commission Act of 1942 and ITSFEA, both papers interpret these results as an indication that insider trading prior to corporate events may not fully reflect insiders' intentions as insiders face significant penalties if they are found guilty of trading on private information.
Per ITSFEA, "[I]n situations in which the information is never fully disseminated to the public, the profit gained or loss avoided [will] be measured by the difference between the purchase or sale price and the value the security would have had at the time of the violation if the information had been publicly disseminated, based upon the facts and circumstances of the case."
In response to these (and other) scandals, Congress quickly enacted more sweeping regulation with the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA).
Garfinkel, J., New Evidence on the Effects of Federal Regulations on Insider Trading: The Insider Trading and Securities Fraud Enforcement Act (ITSFEA), Journal of Corporate Finance, 3, 2, 1997, pp.
Besides potential discipline by professional associations for lax controls, accounting firms may be liable as controlling persons for employee misconduct under ITSFEA. Employers who know or are indifferent to circumstances which suggest illegal employee trading are subject to penalties of up to the greater of three times the trader's profits, or $1 million.
Fraud Enforcement Act of 1988 (ITSFEA) grants to investors trading on
Note that four years later, Congress employed the same "possession" language in the Insider Trading and Securities Fraud Enforcement Act of 1988 ("ITSFEA"), Pub.
The principal laws that cover illegal insider trading include: 1) the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (the Exchange Act); 2) the SEC rules issued based on provisions of the Exchange Act; 3) amendments to the Exchange Act including the Insider Trading Sanctions Act (ITSA), and the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA); 4) laws unrelated to securities laws that are used against insider trading, e.g., the Racketeer Influenced and Corrupt Organization Act of 1970 (RICO); and 5) the extant case law and Supreme Court rulings.(2)
Further regulation was imposed by the Insider Trading and Securities Fraud Enforcement Act (ITSFEA) of 1988, which gave the SEC authority to impose even greater criminal penalties on illegal insider trading and required internal corporate policies against illegal insider trading.