What is the six-month short-swing profit rule?

What does the statute say?

The rule sits in subsection (b) of Section 16 of the Securities Exchange Act. Its stated purpose is preventing the unfair use of information which may have been obtained by a beneficial owner, director or officer by reason of the relationship to the issuer. To do that, it provides that any profit realized by such a person from any purchase and sale, or any sale and purchase, of any equity security of the issuer within any period of less than six months is to inure to and be recoverable by the issuer, irrespective of any intention on the part of the insider in entering into the transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months.

The phrase "irrespective of any intention" matters. The rule does not ask whether the insider had inside information or meant to profit quickly. It sets a mechanical test based on timing and covered status.

Who can bring a claim?

The statute names two possible plaintiffs. The issuer can sue to recover the profit. If the issuer fails or refuses to bring the suit within sixty days after a request, or fails diligently to prosecute it, the owner of any security of the issuer can sue in the name and on behalf of the issuer. No suit may be brought more than two years after the date the profit was realized. The money goes to the company, not to the person who sues.

This makes Section 16(b) different from the insider trading prohibition in Rule 10b-5, which is enforced by the SEC and by prosecutors and turns on material nonpublic information (see is insider trading legal). Section 16(b) is a company-recovery rule and is not a charge of wrongdoing.

Who is covered, and when?

The rule covers a beneficial owner of more than 10 percent, a director or an officer of the issuer, which is the same group that files Forms 3, 4 and 5 (see who counts as an insider). The statute also says the subsection does not cover a transaction where the beneficial owner was not such at both the time of the purchase and the sale, or the sale and purchase. It excludes an equity security acquired in good faith in connection with a debt previously contracted, and exempted securities. The SEC has rules that exempt or modify the treatment of various transactions, which this article does not cover.

How does it relate to what you see on a Form 4?

The two pieces of data the rule turns on, dates and prices of purchases and sales, are exactly what a Form 4 reports. Because Forms 4 are public, anyone can see a purchase and a sale by the same insider close together. The bulletin from the SEC describes the form's purpose as making the public aware of insider transactions (see Forms 3, 4 and 5).

For example, if an officer buys shares in March and sells shares in May of the same year, the filings will show both. Whether that pair produces a recoverable profit depends on how the pair is matched and valued under the rule and the SEC's regulations, which are not set out in the statute's own text and which this article does not try to apply.

What does the statute leave unsaid?

It helps to separate what the text of the statute says from what it does not. It says that profit from a purchase and sale, or sale and purchase, within less than six months is recoverable by the issuer, whatever the insider intended. It says who may sue, after what request and within what time. It says the subsection does not reach a transaction where the person was not an insider at both ends. It does not say how to pair a particular purchase with a particular sale when there are many of each, how to calculate the profit, or which transactions are exempt by rule. Those details are in SEC regulations and in court decisions, and they are why a reader should not try to compute a Section 16(b) figure from a list of trades.

For a reader of filings, the practical lesson is narrow: the dates on the forms are public, and the six-month window is why some insiders' purchases and sales are spaced as they are.

What this does not tell you

Seeing a purchase and a sale within six months on Forms 4 does not mean there is a Section 16(b) claim: the statute has exclusions, the SEC rules have exemptions, and the calculation is not a simple subtraction of two prices. It also does not mean anyone broke a law, since the rule is about recoverable profit and holds regardless of intent. OQRO does not calculate Section 16(b) profits and does not say whether any pair of trades is covered.

If you want to see which insiders bought on the open market, the insider trades page lists purchases and sales as filed.