Comparing Insider Trading in the US and Europe

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday June 19, 2014 at 9:24 am
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Editor’s Note: The following post comes to us from Marco Ventoruzzo of Pennsylvania State University, Dickinson School of Law, and Bocconi University.

In the European Union insider trading has been regulated much more recently than in the United States, and it can be argued that, at least traditionally, it has been more aggressively and successfully enforced in the United States than in the European Union. Several different explanations have been offered for this difference in enforcement attitudes, focusing in particular on resources of regulators devoted to contrasting this practice, but also diverging cultural attitudes toward insiders. This situation has evolved, however, and the prohibition of insider trading has gained traction also in Europe. Few studies have focused on the substantive differences in the regulation of the phenomenon on the two sides of the Atlantic.

My recent paper, Comparing Insider Trading in the United States and in the European Union: History and Recent Developments, contributes to the debate by contrasting and comparing insider trading regulation in the U.S. and in Europe, putting them in an historical perspective (essential in particular to understand the U.S. approach), but also considering some recent developments in this area on both sides of the Atlantic: the 2009 Dorozhko decision in the U.S., which seems to expand the notion of misappropriation; the reform of the Market Abuse Directive in Europe; and the very recent case Grande Stevens v. Italy decided by the European Court of Human Rights in March 2014, which deeply affects the European approach to insider trading.

The overly complex structure of the regulation of insider trading in the United States under section 10(b) of the 1934 Exchange Act and Rule 10b-5 is largely the product of case law and administrative regulations enacted by the SEC. Its defining feature is the questionable theory embraced by the Supreme Court in the seminal U.S. v. Chiarella decision, pursuant to which insider trading requires the violation of a fiduciary duty. This notion has not only enormously complicated this important area of the law, but has also hindered enforcement actions and has led to the enactment of convoluted regulations to cover conducts that clearly conflict with the rationale of prohibiting insider trading. A more simple, elegant, and effective regulation would simply provide that anyone who obtains material non-public information concerning an issuer or a security because of his professional activity, or misappropriates it, should either disclose it (when allowed) or abstain from trading, and that tippees aware of the material and non-public nature of the information received should also disclose it or abstain from trading. This regulatory approach, generally referred to as “parity-of-information” theory, is the foundation of the prohibition against insider trading in the European Union. Interestingly enough, the parity-of-information theory was originally adopted also in the United States in the 1960s, only to be rejected by the Supreme Court in favor of the current fiduciary-duty based approach.

Some scholars have argued—and this Article concurs—that the U.S. should reconsider the virtues of the parity-of-information theory and enact a more straightforward and easily enforceable regulation of insider trading based on this theory. The U.S. shows both the advantages and disadvantages of the “first comer” in this area. Comparatively speaking, the European approach, based on the “equal access to information” theory is more clear and broad, even if some scholars, such as John Coffee, have questioned the effectiveness of actual enforcement of these rules in some European countries. In the light of more recent data, it can be argued that the level of enforcement of the prohibition in Europe is on the rise.

The full paper is available for download here.

 

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