The Regulation of Insider Trading in the European Community

The European Community (EC), as part of its mandate under the Treaty of Rome to create a single internal market by 1992, has enacted an EC-wide prohibition on insider trading. The EC’s “Council Directive Coordinating Regulations on Insider Dealing” is a mandatory model act setting forth the minimal regulatory prohibition that must be implemented by national legislation in all EC member states. The directive prohibits two defined groups of persons, referred to as primary and secondary insiders, from taking advantage of nonpublic, price-sensitive information relating to issuers or their securities; it prohibits primary insiders from disclosing that information to others; and it mandates prompt public disclosure of all price-sensitive information by firms whose securities are publicly traded in a regulated market. It is intended to level the playing field for market participants and to promote investor confidence in the newly integrated securities markets of the member states. However, the EC does not fully succeed in these purposes. The directive merely assists the EC in its promotion of a dangerous imagery of regulation: the directive’s denunciation of insider trading conveys the false impression of a comprehensively-regulated marketplace. Given the historical complacency toward insider trading against which this directive was implemented, the Insider Trading Directive faces a set of widely-held attitudes that likely will prove resistant to behavioral modification.This article focuses first on the legislative background of the Insider Trading Directive, from its origins in the European Code of Conduct to the several drafts from which it emerged. Then, it examines the doctrinal basis underlying the directive’s adoption. After discussing the directive’s legislative development, the article provides a detailed analysis of the directive’s substantive prohibitions on trading and tipping, with particular emphasis on the definitions of “insider information” and “primary” and “secondary insiders.” The analysis also focuses on the other elements of, as well as the various exclusions from, the trading and tipping offenses. Then, the issues of penalties, enforcement and multistate cooperation are addressed. Finally, the article reiterates the primary strength of the directive, as well as its deficiencies, as the EC continues its quest for a harmonized securities regime for the common market.