Insider Trading, Shadow Trading, Rule 10b-5, Rule 10b5-2, Fiduciary, Securities Law, Securities and Exchange Commission (SEC), Loophole, Investors, Nonpublic Information


Shadow trading is a lucrative way to exploit a loophole in insider trading law. Insiders abuse this loophole to make six-figure profits and escape liability when done at the right companies. Those who shadow trade use material, nonpublic information to trade not in the securities of their own company, which would be illegal, but in the securities of a closely related company where the information is just as impactful. Efforts to close this loophole rely on the individual insider trading policies of the involved companies. These policies vary in language, making liability for shadow trading dependent on specific language or “magic words” within any given company’s policy. This leaves half of insiders free to shadow trade while the rest will be liable for insider trading. A clear rule prohibiting shadow trading is needed to adequately protect investors and the market as a whole.

Insider trading is regulated to protect investors from ending up on the wrong side of an unfair trade due to insiders possessing material, nonpublic information. This regulation, in turn, promotes confidence in the market, keeping investors from refusing to participate in what would be a rigged game without it. Amending Rule 10b5-2 to create an additional circumstance where a duty of trust and confidence exists when possessing material, nonpublic information affecting a closely related company is necessary to uphold the protection of investors and market integrity which is the basis of insider trading law.



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.