The Hidden Contradiction Within Insider Trading Regulation

Abstract

Regulation of insider trading in the United States centers around two types of rules. The first and most publicized is the set of rules prohibiting “illegal” insider trading—trades based on material, nonpublic information. These laws are designed to increase investor confidence in the stock market by making the market seem fair and honest. However, the roughly 475,000 insider trades executed each year consistently net higher returns than the trades of ordinary investors. And the vast majority are simply ignored by the Securities and Exchange Commission, either because the trades were made for reasons other than the insider’s confidential knowledge, or because the government simply could not prove otherwise. Nevertheless, the second set of rules mandates that each of these trades be posted within two days on the Securities and Exchange Commission website, where they are quickly made available for perusal by the investing public. This Comment proposes that mandatory disclosure, by flaunting the ubiquity of these profitable trades to ordinary investors, most likely works against the stated goal of bolstering investor confidence. Instead, the author proposes a more persuasive justification for mandatory-disclosure rules—promoting market efficiency.

About the Author

Senior Editor, UCLA Law Review, Volume 53. J.D. 2006, UCLA School of Law; B.A. 2000, Dartmouth College.

By uclalaw