Meaning and scope: Section 16(b) is a liability rule under the federal securities laws that captures any profit earned by an insider from a purchase and sale (or sale and purchase) of the issuer's equity securities within a six-month window. The central goal is to deter quick, profit-driven trading by people with access to nonpublic information.
Who is covered: Insiders include officers, directors, and beneficial owners of more than 10% of any class of registered equity securities. The company’s securities must be registered under the Securities Exchange Act for Section 16(b) to apply. Insiders typically file disclosures under Section 16(a) and Form 4 to report holdings and changes, which helps establish eligibility and enforcement context.
How it works in practice: If a covered insider engages in a purchase and sale (or sale and purchase) within six months and profits from the pair of trades, the profit is disgorged to the issuer. The liability is automatic and does not require proof of intent, manipulation, or wrongdoing. Enforcement is handled by the issuer and, in some cases, the Securities and Exchange Commission. In practice, Section 16(b) acts as a market governance tool by creating a formal mechanism to recapture windfall gains from rapid trading by insiders.
Context: The rule is part of insider-trading regulation and is often discussed alongside reporting requirements under Section 16(a) and related forms, which provide transparency about insider holdings and changes.
Example: An officer executes a purchase of 1,000 shares on January 3 and a sale on June 28; the profit from that trade pair would be subject to disgorgement under Section 16(b).
Insider trading · Disgorgement · Section 16(a) of the Securities Exchange Act · Form 4 · Securities Exchange Act of 1934 · Short-swing profits