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Insider Action: Who Is an Insider?

When the U.S. Congress of 1934 legislated the Securities Exchange Commission ( SEC) into existence to protect individual investors, it realized that corporate executives had an unfair advantage when trading their own companies' shares. But these politicians also realized that they could not ban such transactions.

Even then, shares were used as incentives for employees, and who would start a public company if they couldn't participate in its success?

In lieu of banning insider transactions, the U.S Congress dictated disclosure. If insiders did trade, they would have to fill out a " Form 4" and tell the world about it.

Of course, Congress needed to define who an "insider" is. The SEC obviously had to know who to police, and the people being watched over needed to know that they were now expected to play by new rules.

According to the Securities Exchange Act of 1934 (the 1934 Act), an insider is an officer or director of a public company, or an individual or entity owning 10% or more of any class of a company's shares.

Basically, the definition of an insider is intended to cover the people who have the most knowledge of the inner workings and future prospects of a publicly traded company.

Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback; click here to send him an email.

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