Section 16

DEFINITION

Section 16 of the Securities Exchange Act of 1934 applies to officers, directors, and beneficial owners of more than 10% of any equity security. It requires: (a) reporting of holdings and changes via Forms 3, 4, and 5; (b) disgorgement of any short-swing profits (profits from purchase-and-sale within 6 months) to the company; (c) prohibition on short sales of the company's stock.

WHY IT MATTERS FOR RETAIL INVESTORS

Section 16 is why corporate insiders cannot day-trade their own company's stock — the short-swing rule effectively forces a 6-month minimum hold. When an insider's filing pattern shows complex matched-pair transactions, they're typically navigating Section 16 mechanics. The short-swing disgorgement obligation also creates an interesting downstream effect: shareholder derivative lawsuits often target Section 16(b) violations as a way to recover money for the company.

RELATED TERMS

• Form 3
• Form 4
• Form 5
• Insider Trading