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Legal-Regulatory and Ethical Framework for Securities Transactions

Legal-Regulatory and Ethical Framework for Securities Transaction

Insider trading refers to trading a company’s securities by people who have access to confidential or nonpublic company information. Insiders, in this case, can be a company’s officers, someone with at least 10% of a company’s securities, or directors (Ganti, 2021). Individuals who take advantage of their privileged access to such information to conduct trading are deemed to have breached a fiduciary duty. However, it is worth noting that insider trading may be legal or illegal, depending on when an insider trades. A company must notify the Securities Exchange Commission (SEC) whenever an insider trades to ensure they have no access to privileged company information.

Insider trading not only involves the ‘insiders’ mentioned above. If a company officer tips their friend to influence their trading choices, that also amounts to insider trading laws. There has been a debate about whether the tip recipient should be charged under the law or not. That is because the tipper gives trading secrets without being asked to. In that case, the Supreme Court has set the precedent that a tip recipient is culpable only if there is evidence to prove that they were aware such information violates insider trading laws (Ganti, 2021). Therefore, if they are caught, the company officer and the tip recipient are legally culpable.

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The Legality of Bob’s Predicament

There are instances when insider trading is legal. If insiders purchase the stocks of a company, they are required to report such a transaction to the Securities Exchange Commission (SEC) (SEC, 2013). Reporting is meant to help those monitoring stock movement. Such information is available to the public, so those who intend to buy stock from the same company can monitor stock performance and movement. That is, if insiders of a company are purchasing stock, then the company must be doing well. In the presented case, Bob’s decision to purchase stock was hurried, and he did not notify the Securities Exchange Commission (SEC).

The legality or illegality of insider trading is also pegged on material information. Material information, in this case, is the communication that can affect the value of a company’s shares (SEC, 2013). Such information is, therefore, expected to influence an investor’s investment decision. As an attorney to the New Drug Company, Bob had information that the company’s new cancer drug had just been patented. Patenting is a lengthy process; once a company gets it, many people are attracted to buy its shares. Bob not only used the information to purchase the drug company’s shares but also shared it with his stockbroker. There is also a chance that the stockbroker would use the information to invest unfairly and share it with his friends. Therefore, Bob committed an illegal act and violated insider trading laws by sharing the information with his stockbroker.

Also, Bob violated insider trading rules by sharing nonpublic information. One may argue that Bob only decided to invest after the communication about patenting had gone public; hence, he was justified, but that is not true. Insider trading laws demand that information be considered public once the public has sufficient time to process it (SEC, 2013). Besides, there must have been sufficient time for the information to spread to a wide audience. For instance, if the decision to patent a company happens today, most media stations will likely release such news the following day. By that time, the public will have access to it, thus no longer have insider information. Bob committed illegality by sharing information that had not met the threshold of being considered public information. He immediately shared it with his stockbroker when the patent review succeeded. Besides, the company’s website went down; hence, not many people had accessed the news about the company’s newly processed patent.

Ethical Implications of Bob’s Actions

One of the ethical implications of insider trading is that it drives negative investor sentiment. Once such information becomes public, investors will perceive the financial system as one that is rigged against them (McGee, 2007). The revelation that Bob had participated in insider trading lowered investors’ confidence. Inside trading also eliminates the inherent risk in stock investment. An insider who uses nonpublic information to purchase a company’s stocks has zero risk (McGee, 2007). That means they will make profits at the expense of sellers who sell a company’s stock without knowing the value of such a company is about to rise. That, too, makes the public lose confidence in markets associated with such a company. Such a company will get few to zero investors in the stock exchange market since they are convinced the company cheated. In the long run, insider traders cancel themselves out.


Ganti, A. (2021). Insider Trading. Investopedia.

McGee, R. W. (2007). Applying Ethics to Insider Trading. Journal of Business Ethics, 77(2), 205–217.

SEC. (2013). Insider Trading Policy.


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The purpose of this assignment is to examine the legal/regulatory and ethical framework for securities transactions.

Consider the following scenario. Bob Smith is a patent attorney who represents New Drug Company (“New Drug”). Bob’s role involves actively engaging with the United States Patent and Trademark Office to advance new drug patents through the complex United States patent system. In addition to his job as a patent attorney, Bob is also a father of nine children. Bob is well compensated, but he could always use extra funds to help support his family.

Legal-Regulatory and Ethical Framework for Securities Transactions

Legal-Regulatory and Ethical Framework for Securities Transactions

Bob has an extensive discussion with a patent examiner, after which the patent examiner decides to issue the latest New Drug patent. This patent is for an extremely promising drug for the treatment of pancreatic cancer, and the issuance of this patent will lead to a massive increase in the price of New Drug’s stock. The patent examiner informs Bob of this issuance over the phone and follows up with a public written notice.

All communications between patent attorneys and the United States Patent and Trademark Office are publicly available; however, the Office’s online document system goes down shortly after the examiner publicly releases the issuance of the patent. The document system is offline for approximately 24 hours.

Bob recognizes the value of the issuance of this patent, and he decides to use his life savings to buy New Drug stock immediately after he receives the good news from the examiner. Bob calls his stockbroker and asks her to buy New Drug stock the next day (i.e., once the issuance of the patent should have gone public). Per the facts above, the document system went down shortly after the issuance of the patent was posted, and no one in the public was able to access that information for 24 hours.

In 500-750 words, respond to the following:

Explain insider trading laws.
In view of insider trading laws (see the Securities Exchange Act of 1934), discuss the legality of Bob’s predicament.
Discuss the ethical implications of Bob’s actions.
You must include at least two academic references to support your ideas.

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