What Does the Securities Exchange Act Regulate?

Purpose of the Securities Exchange Act

According to Article 1 of the Securities Exchange Act (hereinafter referred to as the "Securities Exchange Act"), the purpose of this law is “to develop the national economy and protect investment.” This initial legislative intention emphasizes two key points: the national economy and investment protection. According to Article 142 of the Constitution of the Republic of China, “the national economy shall be based on the principles of people's livelihood, implement land equalization, and control capital to achieve a balance between national resources and people’s livelihood.” In other words, the Securities Exchange Act aims to achieve the goal of economic equality for citizens by managing and regulating the securities market. As for investment protection, it does not guarantee investment profits but emphasizes the fairness and transparency of the investment market to prevent it from being manipulated by interested parties.

Main Function and Role of the Securities Exchange Act in the Financial Market

The primary function of the Securities Exchange Act is to regulate trading behavior in the securities market and prevent improper behavior, such as insider trading and market manipulation. As previously mentioned, one of its core values is to protect the investment market, ensuring transparency in market operations and increasing stability in the financial market. The Securities Exchange Act covers a wide range of areas, from the issuance of corporate stock and information disclosure to the management and conduct guidelines for market participants. For instance, it requires listed companies to regularly disclose important information, such as financial reports, to the public, allowing investors to make decisions based on transparent information, thereby reducing the risk of information asymmetry. Additionally, the Securities Exchange Act has established a regulatory mechanism that grants financial supervisory authorities, such as the Financial Supervisory Commission (FSC), the authority to manage market participants, ensuring that both companies and investors operate within a legal framework, which is significant for market stability and investor confidence.

Definition of Insider Trading

Insider trading refers to the act of individuals with specific statuses or access to special information who, using undisclosed major information, engage in buying or selling stocks or other securities. This type of trading is illegal in the securities market, as it undermines market fairness, giving insiders an undue advantage in investment decisions while placing other investors at a disadvantage.
As mentioned, the main characteristics of insider trading are “undisclosed major information” and “specific status,” typically involving corporate executives, major shareholders, supervisors, or others privy to internal company information due to their positions. Furthermore, insider information must be “significant,” meaning that if disclosed, it could influence investors’ decisions. Examples include corporate financial reports, major investments, acquisitions, or mergers, all of which could qualify as major information. If such information is undisclosed and used by insiders for trading, it constitutes insider trading.
It is important to note that conviction for insider trading does not require that profits were made; as long as specific behavioral elements are met, even if the individual did not gain financially, they may still be found guilty of insider trading. The Securities Exchange Act strictly regulates such behavior to prevent profit from information asymmetry and to protect investors' rights. Additionally, this Act empowers financial regulatory authorities to investigate and penalize insider trading to maintain market order and stability.

Constituent Elements of Insider Trading

According to the Financial Supervisory Commission's announcement, the constituent elements of insider trading are roughly as follows:

1. Acting Subjects：

Only individuals with specific statuses can be deemed to have engaged in insider trading, including internal corporate personnel such as directors, supervisors, managers, and major shareholders holding more than 10% of the company’s shares, as well as individuals with access to internal information due to their profession or relationship with the company, those who left the above-mentioned positions within six months, and others who learned of the information from these individuals.

2.  Definite Information：

The information must have a factual basis, meaning it has already occurred or been determined, rather than being speculation or unverified rumor. Generally, the information’s “occurrence date,” “agreement date,” or “signing date” is considered a specific point of determination.

3. Undisclosed Major Information：

 Insider information must be both “significant” and “undisclosed.” Such information typically has a substantial impact on stock prices, affecting investors' decisions. Common examples of significant information include financial reports, major investments, and merger plans.

4. Timing of Trading：

Insider trading must occur before the information is disclosed or within 18 hours after disclosure, a period known as the “information settling period,” to prevent insiders from trading using recently disclosed information.

5. Subject of Trading as Securities：

The target of insider trading must be listed, OTC, or emerging stock securities of a company, or other securities with equity characteristics, such as corporate bonds.

Is Violating the Securities Exchange Act and Engaging in Insider Trading Serious?

Violating the Securities Exchange Act, especially in cases involving insider trading, can lead to serious legal consequences. The table below provides a detailed breakdown of civil, criminal, and administrative liabilities:

Can Insider Trading Ever Be Legal?

Generally, insider trading is strictly prohibited by the Securities Exchange Act. However, insiders may still legally conduct transactions under certain conditions. The key is adherence to the regulations of the Securities Exchange Act to ensure transaction transparency and information disclosure. The legality of insider trading depends primarily on the following conditions:

1. Information Has Been Fully Disclosed

When the information held by company insiders or those with privileged knowledge has been disclosed to the public and has passed the "information settling period" (18 hours), any transaction conducted afterward does not constitute insider trading. This is because once information is disclosed, all investors have an equal opportunity to access it, eliminating information asymmetry.

2. Compliance with Mandatory Reporting Obligations

Before conducting transactions, company insiders must report their trades to regulatory authorities, such as the Financial Supervisory Commission (FSC), in accordance with the Securities Exchange Act. For example, specific insiders of listed companies, such as directors and major shareholders, are required to declare details of their trades, including quantity and timing, before buying or selling the company’s stock. This reporting system ensures that insiders' trades are regulated and allows other investors the chance to understand insiders' trading intentions.

3. Transactions Not Based on Undisclosed Insider Information

Insiders may also trade based on publicly available information or for personal financial planning, rather than using undisclosed information. For example, a company executive may sell shares due to personal financial needs. As long as the reason for the transaction can be proven unrelated to insider information and the trade complies with reporting obligations and company policies, it is considered a legal transaction.

Reference: Financial Supervisory Commission Global Website