Insider Trading in Promoting Fairness - Research Paper Example

Insider Trading College: Insider Trading Insider trading is one of t5he issues that sparked a lot of controversy withinthe security exchange market due to the complexity of the issue. Insider trading refers to trading of public company stock or any other form of securities by person who have access to non-public information about the company. While the security and exchange commission recognizes the fact that there may be both the legal and illegal conduct in the issue, it is apparent that insider trading has so far been linked with illegal conduct. The US Securities and Exchange commission handles over 500 cases on insider trading. While the is a concession that insider trading is evidence of lack of transparency within the security and stock exchange market, some economists have supported the idea that it allows for the increase in information access to the public which is crucial for competition in investment. However, there is evidence that use of such information by some few members propagates unfair trade and hence works only to the benefit of few in the society. On this note, there is need for more strict regulation of illegal conduct within insider trading. In the securities and stock exchange market, the issues of transparency have become matters of interest. Insider trading is concept that received a lot of controversy as the government seeks to draw a line between the illegal and legal conduct with respect to the use of information. The US Securities and Exchange commission defines the legal version of the concept refers to when members of a corporate such as managers, directors or even employees trade stock in their companies (Carlton & Fischel, 2000). However, in such a case, the commission requires that such investors report the issue to the commission for matters of transparency and equity. On the illegal perspective, the concept refers to where persons use non-public information while buying or selling a security against the fiduciary duty of trust and confidence. From another perspective, illegal conduct may occur where misappropriation of information within the public and where such information may be used in purchase of securities. In this light, the SEC advocates for transparency of information to ensure that investors have the same opportunity and that each person has a fair chance for investment (U.S. Securities and Exchange Commission, 2015). Therefore, the insider trading laws are meant to ensure that all members of the public have an equal chance of accessing information. Evidently, the insider trade leads undermines the role that information plays in the investment decision making process. One of the mandates of the government is to ensure that all people have equal chances of investment as one way of closing information gaps that have contributed wealth gaps within the country. Notably, undermining the role of informed trading is against the law and would negative impact fair investment within the public. There is evidence that one stakeholder of a company may use non-public information to make large profits. For instance, such a member may have information on the takeover of a company and purchase such shares with the knowledge that the share price may increase. The same way, a journalist from a certain media company may have a privilege in acquiring some sensitive information that may help them to invest and have advantage over other investors who have no access to such information (Hillier & Marshall, 2002). Therefore, promoting insider trade would pave way for unfair use of information and may give some persons investment advantages. Therefore, it is crucial that the regulation bodies focus on laws that will ensure equal access for information for all investors. This way, all investors will have equal chances of investing within the stocks market. The misappropriation theory is new view of insider trading that seeks to minimize abuse of non-public information. According to this theory, any person who steals information from their employer and uses such information for investment would be guilty of insider trading, and hence punishable through the law. For instance, companies such as journalism companies often have information that may assist them in making investment decisions. At times, they may have information prior to its release within the public. While such information may be considered to be within the public domain, such companies have a duty to protect such information and to use it only when it’s available to the public. Besides, some companies have used such information to tip off their friends and relatives as an investment incentive (Bris, 2005). While it is hard to establish liability for claims of misappropriation, it is clear that such abuse of information is unjustified and undermines virtues of fair investment. Secondly, such abuse of information may be against the shareholders interest and complains may arise over the use of such information. In a nutshell, the misappropriation theory provides a viable approach to handling the complex problems of insider trade. The US is among the countries that have given the issue of inside trading a priority in its efforts to curb investment irregularities. The statutory regulation of inside job dates back at the beginning of the 20th century. The US Supreme Court decided against a case where a company director bought stocks when he knew that they were likely to sell at higher. The court upheld that the manager was guilty of fraud for failing to disclose such information to the public to pave way for fare share’s competition. In 1933, the government established the Securities Act that prohibited company directors from making any share purchases before disclosure of information within the public domain (Ke, Huddart & Petroni, 2003). The SEC regulations provide the Fair disclosure clause that requires that information be placed in the public domain to ensure that all investors have fair access to such information. In various court proceedings, the court decisions have upheld the virtues of transparency consistently prohibiting misappropriation of information. For instance, in the Sec v. Texas Gulf Sulphur case, the court upheld that any person who possess inside information must intentionally disclose such information if they have to invest using such information. Alternatively, a person who holds such inside information should refrain from trade to avoid legal confrontations. Notably, there has been a challenge in regard to implementation of laws that prohibit inside trading. One of the challenges that the legal framework has faced is determining that there was misappropriation of information. In some instance, there cases when purchasing of stocks may not be a result of “tipping” but out of free choice. However, such individuals may be faced by accusations of insider trading while the court may face a challenge of determining whether an individual had the information before its release. Countries such as UK have put into consideration occasions when trade would have proceeded normally even if there was no such information. The difference in the application of the law in different countries has come as a point of controversy in the trade laws (Manne, 2011). While some countries such as UK have considered the connection of information user and the shareholders, some have ignored this duty. For instance, a lawyer representing in a company takeover may use such information to trade since they have no fiduciary duty to the shareholders. However, such cases may lead to unfair trading and jeopardize the equity of stakeholders. The proponents of deregulation of insider trade argue that companies should be set free to use the inside information as they wish and to influence investment in their own ways. One argument of traditional economists is that deregulation allows the securities to attain the projected value hence allowing for accuracy in share-price estimation. Therefore, the public and the company all profit from higher prices and this provide value to the stock market. Another justification follows the claim that inside managers needs to reward their efforts of generating such information. Therefore, such managers should be awarded the right to trade even before information disclosure as one way of rewarding such an effort. However, criticism has emerged as economists argue against such a selfish approach of reward, claiming that propagating such strategies would be shunning away investors. Secondly, such information use would result to abuse of information as managers use such information to enrich themselves as well as those close to them (Seyhun, 2000). In this perspective, there is need for firmer laws for regulation of the inside information to promote transparency and protect the information rights of shareholders. In conclusion, the insider trade laws play an important role in promoting fairness regarding information distribution in stock exchange market. Preferential use of nonpublic information promotes illegal conduct within the stock exchange makes and creates information gap within the market. The proponents of regulation of inside trade base their claims on the need for transparency within trade. On the other hand, the proponents of de-regularization argue that such a move would promote investment and provide a basis for rewarding managers. From a critical point of view, there is need for the government to refine laws in promoting transparency within the business market and to eliminate the controversies that have come up as a result of vagueness in the law. References Bris, A. (2005). Do insider trading laws work? European Financial Management, 11(3), 267-312. Carlton, D. W., & Fischel, D. R. (2000). The regulation of insider trading. Stanford Law Review, 857-895. Hillier, D., & Marshall, A. P. (2002). Are trading bans effective? Exchange regulation and corporate insider transactions around earnings announcements. Journal of Corporate Finance, 8(4), 393-410. Ke, B., Huddart, S., & Petroni, K., (2003). What insiders know about future earnings and how they use it: Evidence from insider trades? Journal of Accounting and Economics, 35(3), 315-346. Manne, H. G. (2011). Insider trading and the law professors. Vand. L. Rev., 23, 547. Top of Form Seyhun, H. N. (2000). Investment intelligence from insider trading. Cambridge, Mass. [u.a.: MIT Press. Bottom of Form U.S. Securities and Exchange Commission, (2015). Insider Trading. Retrieved from: < http://www.sec.gov/answers/insider.htm> Read More