This paper will discuss the arguments for and against the federal regulation of insider trading. The first part of the paper will briefly examine the history of insider trading and its treatment by courts in the United States. The second part of the paper will examine the arguments in favor of the deregulation of insider trading, focusing upon the beneficial economic effects of insider trading. The third part of the paper will discuss the arguments in favor of retaining restrictive regulation on insider trading. The final part of the paper will rebut the pro-regulation arguments.
This paper general supports the argument that insider trading should be deregulated. As will be seen, there are several benefits to be gained by the allowance of insider trading. First, insider trading tends to be economically efficient. Stock prices will generally reflect their real value if insider trading is allowed. In addition, changes in stock prices will occur more quickly and frequently if insiders are allowed to trade on the information they possess. Second, insider trading is an economically efficient method of compensating insiders. Allowing them to trade on the information they possess will encourage them to work for the benefit of the corporation, since they stand to profit from the company's fortunes.
A Short History of Insider Trading Regulation
Before the enactment of the Securities Act and the Securities and Exchange Act were passed, insider trading was regulated by state corporate law. Three approaches were developed by state courts during this time period (the first three decades of the 1900s) for dealing with insider trading. Under the first approach, the insider had no duty of disclosure and was allowed to buy stock freely without regard to any informational advantage. Under the second approach, insiders were subject to no duty in the absence of "special circumstances" which justified the imposition of such a d...