MBE Rules · Business Associations
Short-Swing Profits
Securities Exchange Act § 16(b)
The rule
Directors, officers, and 10% shareholders of registered companies disgorge to the corporation all profits from any purchase-sale pairing within six months — strict liability, computed to maximize recovery, no intent required.
In plain English
Short-swing profits refer to the profits made by directors, officers, and significant shareholders (10% or more) from buying and selling their company's stock within a six-month period. These individuals must return any profits from these transactions to the corporation, regardless of intent, as the law imposes strict liability to ensure fairness and transparency in the market.
Worked example
A company director buys 1,000 shares of their company's stock for $10 each and sells them for $15 each just four months later. The director must return the $5,000 profit to the corporation, as the transaction falls within the six-month window for short-swing profits.
Memory hook
If you swing short, you must give back the profit!
The trap
Exams may include scenarios where candidates misinterpret the time frame or the definitions of who qualifies as a director, officer, or 10% shareholder, leading to incorrect conclusions about liability.
How examiners test it
Questions often present fact patterns involving rapid stock transactions by corporate insiders and require candidates to identify potential short-swing profit liabilities, emphasizing the strict liability nature of the rule.
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