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Abstract

While developments in the law of insider trading usually attract significant scholarly interest, far less attention has been paid to the design and effects of the Securities and Exchange Commission’s complementary Regulation Fair Disclosure. Yet, this Article argues that the SEC’s current quandaries relating to insider trading enforcement are largely self-inflicted and could have been avoided if it had better aligned its Reg. FD with the Supreme Court’s insider trading jurisprudence.

Introduced sixteen years ago to prevent senior officers of public firms from leaking material information to preferred investors and financial analysts, Reg. FD was designed to function as a backstop for undesirable favoritism that insider trading law, as developed by the Supreme Court, could not reach—in particular, the situation where a corporate manager divulges valuable information to a preferred investor not for any obvious personal benefit (which would trigger insider trading law) but for the ostensible benefit of the firm.

This Article analyzes Reg. FD through the lens of private investor meetings—personal conversations between corporate managers and investors they select—to find that Reg. FD should not be expected to deter selective disclosure. The regulation was disjointed from the outset and professional market participants rationally appear to have taken advantage of its permissive design to obtain preferential access to inside information. For example, through one recently introduced service offering, “corporate access,” selected investors spend billions of dollars on private access to corporate managers in return for the opportunity to lawfully trade on valuable information before it is released to the public.

This Article argues that the design of Reg. FD causes undesirable effects and that the SEC should redraft the regulation to follow the Supreme Court’s classification of corporate information as firm property. The SEC could then regulate selective disclosures as transactions in this property that require public disclosure, similar to how insiders must report their personal transactions in firm stock. By increasing transparency to inform investors of selective disclosure events, concerns recently expressed by the SEC and the Department of Justice relating to insider trading enforcement could be alleviated and their requests for Supreme Court intervention in insider trading law reconsidered.

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