Securities and Exchange Commission Historical Society

Fair To All People: The SEC and the Regulation of Insider Trading

Old Debate and New Rules: SEC Regulation of Insider Trading in the Global Marketplace

Part of the reason for the SEC's success in enforcing its rules against insider trading is how the SEC, which in its early years battled with the stock exchanges, developed a cooperative relationship with the stock exchanges, particularly on disclosure and investor confidence issues. Officials of the New York Stock Exchange tightened their own rules in response to the major insider trading scandals, designed to monitor and flag suspicious trading. While there is still disagreement on how far the stock exchanges must go to regulate their own traders, SEC officials and NYSE officers have worked together to create a more transparent system to identify and disclose transactions that appear to violate the law. Both organizations have agreed that wide-spread investor confidence is a priority.(55)

The SEC's ability to adapt played a prominent role in the agency's success in regulating insider trading. In 2000, the SEC adopted Rules 10b5-1 and 10b5-2 to deal with new devices for automatic and computer- programmed securities purchases and sales. In addition, Rule 10b5-2 was intended to provide a guide to investors as to what constituted the kinds of duties which would make the misappropriation theory applicable. Regulation FD was yet another response by the SEC to concerns by investment managers, who often shared confidential information with clients, as to how they might avoid insider trading liability yet continue to perform their duties. The Sarbanes-Oxley Act of 2002 extended the SEC concerns about insider trading by requiring "real time disclosure", increasing penalties and lengthening the statute of limitations for fraud, requiring prompter reporting for trades by insiders, and prohibiting trading by insiders during a pension fund blackout.(56) The SEC continues to respond to new situations with rules meant to provide additional instruction to investors and securities professionals as to how the SEC would apply the misappropriation theory to new and changing securities practices.

Even as the 21st century revealed new insider trading scandals involving Enron, Martha Stewart and Imclone, the SEC has continued its steady push for more disclosure, more fiscal transparency, and more regularity in financial reporting and accounting in order to ensure that every investor has access to equal information about regulated companies.(57) But the path of insider trading enforcement becomes increasingly complicated as SEC regulations are applied to the global market. The story of insider trading regulation to the present has involved the SEC's use of administrative and common law and institutional competence to react to challenges, and to reshape legal theories in order to promote fair markets and investor confidence. Whether those methods can successfully work to regulate insider trading in the global marketplace will prove to be the challenge for SEC officials as the future history of insider trading unfolds.

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Footnotes:

(55) Philip Koslow, The Securities and Exchange Commission, (Chelsea House Publishers: New York, 1990), 99.

(56) The American Competitiveness and Corporate Accountability Act of 2002 (commonly known as "Sarbanes-Oxley Act of 2002"), Public Law 107-204, (July 30, 2002)

(57) Kurt Eichenwald, Conspiracy of Fools (Broadway Books: New York, 2005).


Related Museum Resources

Papers

December 22, 1978
Report of the SEC's Special Study of the Options Market

(Courtesy of Stuart Kaswell)

May 1983
document pdf (Courtesy of Mrs. Storrow Sommer)
July 27, 1987
Internationalization of the Securities Markets, Report of the Staff of the SEC to the Senate Committee on Banking, Housing and Urban Affairs, and the House Committee on Energy and Commerce

(Courtesy of Stuart Kaswell)

March 5, 1996
document pdf (Courtesy of Richard Rowe)
December 11, 1996
document pdf (Courtesy of Richard Rowe)
April 5, 1999
document pdf (Courtesy of Richard Rowe)
Winter 2003
document pdf (Courtesy of Theodore Levine)
June 2, 2004
document pdf (prepared for the museum by Arthur Levitt)
March 2006
document pdf (Courtesy of the Financial Services Authority)

Photos

December 12, 1995

(seated) Steven Wallman and Arthur Levitt; (standing, left to right) Victor Tynes, Nancy Smith, Paul Maco, Michael Mann, William McLucas, Linda Quinn, Barry Barbash, Simon Lorne, James McConnell, Carrie Dwyer, Lori Richards, Walter Stachnik, Michael Schlein, Michael Sutton, Jonathan Katz, Richard Lindsey and Richard Walker

Oral Histories

19 April 2006

Ethiopis Tafara

Programs

22 May 2007

Fireside Chat - Insider Trading

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Presenter(s): Donna Nagy, Mark Radke

28 March 2006

Fireside Chat - Online Fraud

Moderator: Theresa Gabaldon

Presenter(s): John Reed Stark

20 September 2005

Fireside Chat - Cross-Border Regulation

Moderator: Theresa Gabaldon

Presenter(s): Louis Bevilacqua, Richard Booth

08 June 2004

The SEC - A New Era

Presenter(s): Paul Sarbanes

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