Is a Federal Insider Trading Law Coming?

Section 10(b) of the 1934 Act, and Rule 10b-5 thereunder, generally proscribes fraudulent and deceitful practices in the purchase or sale of securities. Courts have relied primarily on Rule 10b-5 in holding that insider trading is an impermissible fraudulent practice. Starting in the 1960s, courts began to develop the "classical" theory of insider trading. The classical theory is generally used to prosecute a corporate insider who, as a result of that position, has access to the corporation's material, nonpublic information to trade the corporation's securities. The theory relies on the "special relationship" and fiduciary duty between the corporate insider and the corporation's shareholders. In choosing to trade on the material, nonpublic information, the corporate insider violates a duty not to disclose the confidential information. A second theory of insider trading developed later — the "misappropriation" theory — has been used to prosecute outsiders such as lawyers and accountants, who, through a position of trust with a corporation, gain access to material information and breach that duty of trust to trade. Each theory is premised on the idea that the corporate insider or outsider breaches a duty and engages in a fraud when they trade and fail to disclose this breach.