"Insider trading" is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. Every day, investors have the opportunity to put their money into more than 15,000 U.S. stocks. It should come as no surprise to anyone that insider trading occurs every day in the stock market. In 1934 the U.S. Congress enacted the Securities and Exchange Commission (SEC) to protect corporate investors, it realized that corporate investors had an unfair advantage when trading there own companies shares. What might surprise investors is that insider trading is done every day with full knowledge and sanction of the U.S. Securities and Exchange Commission. The activity we are referring to is the trading by directors and executives in their own companies' shares. However, obvious abuses by corporate insiders such as purchasing large amounts of shares just before their company is acquired at a premium, is still considered illegal. Insider trading allegations cause the general public to lose faith in what they thought was a stable and secure financial industry. If large investors can act on information that smaller investors do not have, the playing field is not level.
The first step for the U.S. Congress of 1934 was to develop a definition of "insider." "The SEC had to know whom to police, and the people being watched over needed to know that they were now expected to play by new rules"(Moreland, 3).