Sunday, September 13, 2009
Identifying the Duty Prohibiting Outsider Trading on Material Non-Public Information, by Thomas Lee Hazen, University of North Carolina at Chapel Hill - School of Law, was recently posted on SSRN. Here is the abstract:
The federal securities laws do not contain a definition of insider trading. As a result, case law has developed in a common law fashion from the existing statutory broad anti-fraud prohibitions. The result has been a tortuous path in defining the reach of the prohibition against trading securities on the basis of non-public information. This article examines outsider trading which occurs when market participants who are not corporate insiders obtain material non-public information and whether they are permitted to enter into securities transactions on the basis of that information. SEC rulemaking adopted a relatively broad reading of the law’s reach to deal with outsider trading. In contrast, the trend in recent cases has been to question that breadth. This article examines recent developments and concludes that the SEC got it right. Namely, trading prohibitions properly extend 'outsider trading' to certain individuals even if they are not under a fiduciary duty to keep the information confidential. The article also explores the range of outsiders who should be covered by trading prohibitions. A final recommendation is that that the confusion in the cases demonstrates that Congress should recognize the need for a statutory definition of both insider and outsider trading.