Short-Swing Profit Rule

Regulators really look down on insider trading. An SEC agent would rather see you picking your nose while preparing their dinner than they would like to learn that you've pulled off some insider trading.

The short-swing profit rule plays into this aggressive stance against insider trading. But, just as a lead-in, here's how insider trading works in a nutshell:

You are an executive at a company (an insider). You hear through the corporate grapevine that this quarter's earnings report is going to be stellar. In response, you buy some stock the day before the news gets released. The earnings numbers are announced the next day. The stock goes up; you sell the shares soon after, and get a tidy profit.

That series of events epitomizes insider trading. It is very illegal. So illegal that the SEC doesn't even want the whiff of potential criminality. They don't want you profiting from your own company's stock even by accident.

Hence, the short-swing profit rule. It states that if a company insider makes a profit from the quick buying and selling of the firm's stock, they have to return the cash they gained. They have to give up their profit. If a company insider buys and then sells the firm's stock (at a profit) within six months, the short-swing profit rule goes into effect. With a half-a-year timeframe, it becomes difficult to trade on any juicy insider info. The chances of insider trading becomes more remote.