Insider Trading and IRC Section 6103(e)(1)(D)(iii)

Internal Revenue Code (hereinafter “I.R.C.” or “the Code”) provisions governing Regulated Investment Companies (RICs) or “mutual funds” predate the internet by nearly half a century. The Investment Company Act of 1940 (hereinafter “the ‘40 Act”) followed four years thereafter. Twenty years later, I.R.C. § 856 was added; it contains very similar qualification requirements to Section 851 but is only applicable to investments in Real Estate Investment Trusts (REITs). Computers were in their infancy when RICs and REITs changed the way individuals invested. At that time, no one could have predicted the impact the internet would have on the world. Even more recently, virtual currency has emerged as a lucrative new way for individuals to invest their real-world cash, but tax policy has not caught up. In 2014, the Internal Revenue Service (hereinafter “the Service” or “the IRS”) declared that virtual currency will be treated as property—not currency—for federal income tax purposes. Other administrative agencies have taken a markedly different stance, classifying virtual currency as a commodity, or a security, although the Securities and Exchange Commission (SEC) has not yet taken a public position on the regulation of virtual currency. None of these characterizations adequately define virtual currency for the RIC or REIT context. The Code does not yet allow a security which is not regulated by the ‘40 Act to constitute a security for the purposes of the RIC or REIT qualification requirements. To qualify as a tax-favored RIC or REIT, (1) the entity must derive a high percentage of its income from certain enumerated sources (hereinafter “good” income), and (2) a certain percentage of its assets must be represented by cash, securities, and, in the case of REITs, real estate (hereinafter “good” assets). This paper explores the origin and justification of the “good” income and “good” asset qualification requirements or “tests.” The tests’ complete dependence on the ‘40 Act to classify qualifying securities can hinder the Service’s ability to adjust the tax rules to technological advancements. The paradigm should be driven by the Service’s classification of securities and other income and assets, wherein the ‘40 Act supplements the Code’s RIC and REIT qualification requirements but does not dictate them. As new technologies manifest, the Service will be able to address them quickly, thereby fostering investment in new technologies without the confusion or abuse attendant when technological advancements and the Tax Code collide.

This article is directed to public companies that want to use the Internet for disclosure purposes. Because electronic media — including Internet Web sites — potentially allow for the rapid dissemination of information to investors and financial markets in a more cost-effective and widespread manner than traditional “paper-based methods,” issuers and other market participants have been requesting guidance from the Securities and Exchange Commission (SEC) on how to deliver mandated disclosure documents (e.g., annual reports and proxy statements) via electronic media in compliance with existing federal securities laws. The SEC has yet to promulgate a comprehensive set of rules and regulations to govern the electronic delivery of documents to the public. However, in an effort to respond to inquiries and to offer guidance to issuers (including corporations and mutual funds) and other market participants (including broker/dealers) with respect to the electronic delivery of man- dated disclosure documentation (e.g., Annual Reports and Proxy Solicitation Material), the SEC has issued two inter- pretive releases. In its October 1995 inter- pretive release, the SEC stated that “delivery of information through an elec- tronic medium generally could satisfy delivery or transmission obligations under the federal securities laws.” But simply posting a mandated disclosure document to its Web site does not satisfy a com- pany's disclosure obligations because it is not proper to presume that everyone has access to the Internet. The SEC's test is whether such distribution results in the delivery to the intended recipients of sub- stantially equivalent information to inves- tors as they would have had if the information were delivered to them in paper form. The SEC identifies four guidelines for effective electronic delivery — rather than paper delivery — of mandated disclosure documents in compliance with the securities laws.

This case is based on insider trading cases by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) against Martha Patricia (Patty) Bustos and Donald Blakstad. Bustos, a CPA employed as a business analyst for Illumina, Inc., passed confidential, nonpublic information of Illumina’s quarterly financial performance to Blakstad, who traded highly speculative Illumina securities before the company’s quarterly earnings announcement for a profit. In this case study, students explore how fraud theory explains the commission of a financial crime like insider trading. Students also explore the obligations related to keeping information confidential and weigh arguments for and against insider trading to develop ethical reasoning and decision-making skills. Students at accredited midwestern and Southern universities participated in this case assignment. We provide assessment information and implementation suggestions to interested instructors. JEL Classifications: M49.

Comment Letter to the SEC on Climate Change Disclosures

The Securities and Exchange Commission (SEC) and the New York Stock Exchange are concerned with the full disclosure of information insiders normally would be expected to possess about their company, including any facts that would materially affect the market's valuation of the firm's worth if they were publicly known. At present, the regulatory agencies have limited their activities to the collection and dissemination of historical information and facts. The motives of insiders, based in large part, presumably, on their knowledge regarding future operating results are hidden from the public eye. The SEC in compiling the Official Summary of Stock Transactions does not require insider to reveal his motivation for trading.

The Internal Revenue Service (IRS) collects more information on more individuals than any other government agency. The information is not only financial but personal, potentially including information about health care needs and decisions; the caregivers, disabilities and foreign birth of children; the educational progress and felony convictions of students; and one’s religious and charitable associations. In acknowledging the vast quantity of information held by the IRS, and the necessity of taxpayers trusting tax administrators with their information, Congress provided greater protection for taxpayer information under the Internal Revenue Code (IRC) than it was provided under the Privacy Act. Congress obligated IRS employees to keep taxpayer information confidential, and authorized felony charges and damages suits, including punitive damages for inappropriate disclosures of taxpayer information. These special protections were enacted almost 50 years ago, long before the spread of the internet and emergence of cybercrime. This Article proposes updating the IRC’s special protections for taxpayer information to reflect the cybersecurity objectives of the Federal Information Security Modernization Act (FISMA), and the frequent audits of the IRS by its Inspector General that show the IRS’s persistent failures to comply with FISMA guidance, such as failing to encrypt taxpayer data, secure mainframe platforms, regulate system access, remediate known vulnerabilities and assist victims of data breaches.

The Canadian Securities Administrators (CSA) has proposed new guidelines governing the annual reporting of oil and gas reserves for Canadian companies. The guidelines require disclosure of both Proved and Probable reserves and associated value; inclusion of Possible reserves information is optional. Reserve disclosures are key criteria to establish relative company stock value. It is thus instructive to compare the CSA regulations to existing U.S. Securities and Exchange Commission (SEC) rules and further to guidelines endorsed by the Society of Petroleum Engineers (SPE). The CSA mandates disclosure of Proved volumes and associated future net revenues using two economic criteria: a forecast cost and prices scenario ("forecast case") and a constant cost and prices sensitivity scenario ("flat case"). The SEC Proved reserve is comparable to the "flat case" Proved reserve quantities in most instances. The CSA guidelines for Probable and Possible reserves conform closely to the current SPE published criteria. While recognizing probabilistic reserve assessments, the CSA has adopted the SPE guidance that reserves should not be aggregated beyond the "field" level using probabilistic summations. The CSA may allow so-called "cross-border issuers", those Canadian companies also listed on USA stock exchanges, the option to solely follow SEC constraints. SEC regulations specifically prohibit disclosure of Probable and Possible reserves in 10K filings but many U.S. companies refer to additional resource potential in "forward looking statements" in their annual reports. Canadian "cross-border issuers" may not have similar latitude. Unique to the Canadian regulations are rules regarding establishment of an internal company reserves committee and use of a qualified independent evaluator to audit assessment procedures and assets. Will the new CSA rules improve, or impair, the ability of Canadian companies to compete for investment dollars? Further, the Sarbanes-Oxley Act on CEO/CFO certification requirements may have some unique implications for Canadian oil and gas companies.

Purpose – To explain a guidance update recently issued by the USA Securities and Exchange Commission (SEC) Division of Investment Management that furthers the SEC’s goal of clear and concise, user-friendly disclosure by focusing on certain specified requirements of Form N-1A and the rules under the Securities Act of 1933. Design/methodology/approach – Discusses five areas where the SEC staff had been providing significant numbers of comments related to mutual fund disclosure after the adoption of the amendments to Form N-1A in 2009 by summarizing the applicable instructions of Form N1-A and/or rule and the SEC staff’s observations with respect to such instruction or rule. Findings – Funds should ensure that during their next annual update they review their prospectus disclosure in light of this guidance update and make necessary changes so that the disclosure is clear and concise and not overly technical. Originality/value – A concise summary of the SEC’s guidance update from experienced investment management lawyers.

The Securities and Exchange Commission (SEC) is a federal agency established by the Securities Exchange Act of 1934. That act is a keystone in the regulation of securities markets and outlines the powers of the SEC to interpret, supervise, and enforce federal securities laws, principally those prohibiting fraud. The SEC has the authority to bring administrative proceedings against firms and persons the agency believes are violating securities laws; however, allegations of criminal violations of these laws are prosecuted by the Justice Department. The functions of the SEC should be considered quasi-judicial in nature because appeals from its decisions can be taken to federal courts. Figure 12.1 is an organizational chart of the SEC.

Share buybacks are back with a vengeance as economic confidence recovers from the COVID-19 pandemic.1 The average proportion of buybacks out of aggregate distributions in 2019–2021 was higher than the historical average during 2005–2019 in the USA and Europe.2 These developments have attracted broad criticism from academics and policymakers, with many seeking to curb share buybacks given the risks of insider dealing, market manipulation and the harm to long-term shareholder value, amongst other concerns.3 Such market conduct potentially constitutes insider dealing to the extent that the issuer—as the ultimate corporate ‘insider’—is purchasing shares from the market on the basis of price-sensitive non-public information.4 Nevertheless, share buybacks are covered by a safe harbour under the Market Abuse Regulation (MAR),5 which came into force on 3 July 2016 and was onshored into UK law on 31 December 20206 and amended by the Market Abuse (Amendment) (EU Exit) Regulations 20197 and Financial Services Act 2021.8 Under the safe harbour, issuers are exempt from the prohibition against insider dealing and market manipulation where the buyback programme and trades are disclosed to the public, and comply with the prescribed objectives, conditions and restrictions with respect to the timing, price and volume of shares purchased.9 This safe harbour, as derived from the Market Abuse Directive (MAD),10 has provided uniformity in the regulation of share repurchases amongst EU Member States.11 Share buybacks have accordingly been broadly regarded as a legitimate market practice in the UK and EU. A similar safe harbour exists in the USA under Rule 10b5-1, which establishes affirmative defences for insider dealing for issuers that repurchase securities pursuant to trading arrangements adopted in ‘good faith’ before becoming aware of material non-public information, and which comply with the prescribed price, volume and timing requirements.12 However, the US Securities and Exchange Commission (SEC) has observed that this safe harbour has been increasingly abused by issuers and has led to ‘real cracks’ in the US insider dealing regime due, in part, to the lack of mandatory disclosure requirements for such trading arrangements.13 In contrast, there is no similar safe harbour under the Australian insider dealing framework despite relatively stringent disclosure and price requirements for buyback programmes under the Corporations Act 2001 (Cth).

Insider Trading in India in Comparison With USA

This article examines ethical decision-making related to insider trading. Using case study scenarios, the authors shed light on differences in evaluating the use of material nonpublic information when the expected outcomes of insider trading benefit clients versus the investment professional trading on inside information. Participants perceive insider trading that is expected to benefit clients to be a less egregious ethical violation, even though it is as equally illegal as trading to benefit oneself directly. Although the judgment about insider trading should be independent of the benefit recipient, it is not. Given the increasing regulatory scrutiny of ethical behavior, this finding is important because professionals’ duties to (1) pursue clients’ best interests and (2) protect capital markets may represent conflicting obligations when evaluating whether to use material nonpublic information. In addition, the results show that individuals with a professional credential tend to view insider trading to be more unethical compared with others without a credential. <b>TOPICS:</b>Legal/regulatory/public policy, security analysis and valuation, risk management <b>Key Findings</b> ▪ In most jurisdictions, trading on material nonpublic information is prohibited, even when an investment manager is required to act in clients’ best interests. Instead, the requirement to maintain market integrity typically trumps clients’ interests. ▪ Our survey results show that trading on inside information for personal benefit is viewed as significantly more unethical than is trading on inside information for the benefit of clients. Professionals with a specialized investment credential are the most stringent in their views. ▪ Because protecting clients from potentially adverse market movements is desirable, and is viewed as somewhat ethical, our results suggest that the legal primacy of market integrity should be reexamined.

Passport Revocation and Denial for Seriously Delinquent Tax Debts: New IRS Procedures Signal More Stringent Enforcement

In compliance with the Philippine Securities and Exchange Commission (SEC) sustainability reporting guidelines, this paper aims to determine the financial institutions’ reporting formats, standards, and frameworks for sustainability reporting. It explores how they prioritize the 17 United Nations Sustainable Development Goals (UN SDGs) and contribute to the specific UN SDGs (Philippine Securities and Exchange Commission, 2019; United Nations [UN], 2015). The annual and sustainability reports were gathered from the Philippine Stock Exchange (PSE) and companies’ websites of 30 publicly listed financial institutions from 2019 to 2021. Using a descriptive research design, this study found that the SEC sustainability reporting template and standalone report are the most common reporting formats. The Global Reporting Initiative (GRI) Standards are the most widely used by Philippine publicly listed financial institutions. Although they support all 17 UN SDGs, the study denotes that SDG 1, no poverty, and SDG 8, decent work and economic growth, are the most important goals aligned with their business activities. This indicates that they comply with the requirements set by the Philippine SEC sustainability reporting guidelines. Their sustainability achievements show their commitment to the UN SDGs. The guidelines drive them to assess and manage their organization’s economic, environmental, and social aspects, encouraging transparency and accountability through public disclosures.

The SEC's September spike: Regulatory inconsistency within the fiscal year