Monday, May 11, 2015
Anderson on Insider Trading
John P. Anderson has posted Solving the Paradox of Insider Trading Compliance on SSRN with the following abstract:
Regulators demand the impossible when they require issuers to design and implement an effective insider trading compliance program because insider trading is a crime that neither Congress nor the SEC has defined with any specificity. This problem of uncertainty is then compounded by the threat of heavy civil and criminal sanctions for violations. Placed between this rock and hard place, issuers tend to adopt over-broad insider trading compliance programs that come at a heavy price in terms of corporate culture, cost of compensation, share liquidity, and cost of capital. The irony is that, since all of these costs are ultimately passed along to the shareholders, insider trading enforcement under the current regime has precisely the opposite of its intended effect. This is the paradox of insider trading compliance for issuers, just one more symptom of a dysfunctional insider trading enforcement regime that is in need of a dramatic overhaul.
There are a number of conceivable paths to resolving this paradox. The most obvious solution would be for the SEC to issue a rule or for Congress to promulgate a statute defining insider trading with greater specificity. But while simply fixing definitions to the elements of insider trading under the current regime would improve matters, this Article calls for a more radical solution. It is suggested that the current enforcement regime be liberalized to permit insider trading where the issuer approves the trade in advance and has disclosed that it permits such trading pursuant to regulatory guidelines. It is argued that such reform would lead to a more rational, efficient, and just insider trading enforcement regime. Moreover, by aligning the interests of issuers, shareholders, and regulators, it would also offer the most effective solution to the paradox of insider trading compliance.