The Case for Insider Trading
Insider-trading regulation had its primordial introduction in the muck of New Deal securities regulation, which was itself justified on the trumped-up theory that full disclosure was the best way to deal with corporate fraud and deception. Over the years, the benign-sounding idea of passive regulation in the form of full disclosure has morphed into a morass of active regulation. Full disclosure now wraps around -- and regulates -- corporate governance, accounting, takeovers, investment banking, financial analysts, corporate counsel, and, not least, insider trading.
Some history of insider-trading regulation is instructive in this regard. In 1934 Congress refused an early draft of the Securities and Exchange Act that contained a provision outlawing insider trading, perhaps because it would have covered members of Congress. But in 1961 the SEC, not to be denied, invented a new theory to force insiders either to "disclose or abstain from trading." In 1968 this unorthodox bit of lawmaking received judicial sanction, and subsequently Congress itself recognized fait accompli in what the SEC had ordained.
Prior to 1968, insider trading was very common, well-known, and generally accepted when it was thought about at all. When the time came, the corporate world was neither able nor inclined to mount a defense of the practice, while those who demanded its regulation were strident and successful in its demonization. The business community was as hoodwinked by these frightening arguments as was the public generally.
