The Evolving Role of Section 16(b)

The evils which section 16(b) of the Securities Exchange Act of 1934 was enacted to prevent are well known. As expressed in one of the committee reports, this so-called “shortswing trading” provision was intended “to protect the interests of the public against the predatory operations of directors, officers, and principal stockholders of corporations by preventing them from speculating in the stock of the corporations to which they owe a fiduciary duty.” To curb such speculation, section 16(b) provides for recovery by the corporation, or by one or more stockholders acting in its behalf, of any “profit realized” from purchases and sales of equity securities within a six-month period by directors, officers, or beneficial owners of more than ten percent of any class of equity security of the corporation registered on a national stock exchange. The corporation is thus provided with a method of recouping from insiders profits realized either through purchase of an equity security followed by its sale at a higher price, or from sale of an equity security followed by a purchase at a lower price within the six-month period. Once the statutory conditions have been fulfilled, it is irrelevant that the insider either did not make unfair use of inside information or that he might not have intended, at the time he purchased the security, to sell it within six months.