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.
(Courtesy of Stuart Kaswell)
(Courtesy of Stuart Kaswell)
The virtual museum and archive is copyrighted by the SEC Historical Society. The Society reserves the right to restrict access to or use of the museum by any user at any time.
Users are prohibited from sharing or downloading any material for publication or commercial purposes without written permission from the Executive Director. Requests for permission must be submitted by email and specify the material requested and for what purpose.
Material used with the Society's permission should be credited to: www.sechistorical.org.