Thursday, March 30, 2023

Lawmakers are building momentum towards codifying our insider trading laws to clarify which kind of trading is illegal. In May 2021, the United States House of Representatives passed the Insider Trading Prohibition Act for the second time in two years. In January 2020, a Securities and Exchange Commission-sponsored Task Force on insider trading released a report containing proposed legislation. Both the House Bill and the Task Force proposal would prohibit trading while in possession of “wrongfully obtained” information and prohibit trades that involve a “wrongful use” of information. This Article explains why the concept of “wrongful” trading is too ambiguous to improve insider trading law and explores the requirements of effective legislative reform. Further, this Article demonstrates that the confusion in insider trading law is neither caused by a tension between fairness and efficiency nor by a tension between investor protection and the public interest.

This Article is the first to identify the confusion in insider trading doctrine as a symptom of fatal ambiguity. The doctrine is fatally ambiguous because officials consistently attempt to simultaneously invoke two conflicting concepts of “fairness.” One is a property-based fairness that protects exclusive-use rights in inside information. The other is an equal-information-based fairness that fosters equal access to all material information for all market participants. Conflating these incompatible moral concepts causes officials to oscillate sporadically between protecting private rights and fostering specific forms of economic equality. Moreover, the problems caused by fatally ambiguous moral concepts are systemic and concomitant with similar confusion about the definitions of “economic efficiency,” “investor protection,” and the “public interest.”

This Article recommends clarifying insider trading law by specifying whether consent is a defense against liability. Making consent a defense against liability is in harmony with a property-based fairness doctrine, and barring consent is in harmony with an equal-information-based fairness doctrine. Enforcing only one fairness doctrine allows everyone to attempt to privately adhere to both principles while successfully applying one of the principles through law.

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