Solving the Paradox of Insider Trading Compliance

Regulators demand the impossible when they require issuers to design and implement effective insider trading compliance programs because insider trading is a crime that neither Congress nor the Securities Exchange Commission has defined with any specificity. This problem of uncertainty is then compounded by the threat of heavy civil and criminal sanctions for violations. Placed between this rock and hard place, issuers tend to adopt overbroad insider trading compliance programs, which comes at a heavy price in terms of corporate culture, cost of compensation, share liquidity, and cost of capital. The irony is that, since all of these costs are ultimately passed along to the shareholders, insider trading enforcement under the current regime has precisely the opposite of its intended effect. This is the paradox of insider trading compliance for issuers, just one more symptom of a dysfunctional insider trading enforcement regime that is in need of a dramatic overhaul. There are a number of conceivable paths to resolving this paradox. The most obvious solution would be for the Securities Exchange Commission to issue a rule or for Congress to promulgate a statute defining insider trading with greater specificity. But while simply fixing definitions to the elements of insider trading under the current regime would improve matters, this Article calls for a more radical solution. It suggests that the current enforcement regime be liberalized to permit insider trading where an issuer approves a trade in advance and has disclosed that it permits such trading pursuant to regulatory guidelines. It argues that such reform would lead to a more rational, efficient, and just insider trading enforcement regime. Moreover, by aligning the interests of issuers, shareholders, and regulators, this reform would also offer the most effective solution to the paradox of insider trading compliance.