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Min-woo Kang Lecturer in Banking and Finance, Korea University of School of Law, South Korea. E-mail: minwoo_kang@korea.ac.kr Search for other works by this author on: Oxford Academic
Capital Markets Law Journal, Volume 18, Issue 1, January 2023, Pages 101–135, https://doi.org/10.1093/cmlj/kmac026
Published:
18 November 2022
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Accepted:
03 November 2022
Published:
18 November 2022
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Min-woo Kang, Inside insider trading regulation: a comparative analysis of the EU and US regimes, Capital Markets Law Journal, Volume 18, Issue 1, January 2023, Pages 101–135, https://doi.org/10.1093/cmlj/kmac026
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1. Introduction
Insider trading (also known as insider dealing) is a type of financial misconduct that has gained traction with regulators and supervisors around the world for decades. It refers to trading in securities on the basis of corporate information that has not yet been made public and which, if publicly known, would likely have a significant effect on the prices of those financial instruments. Due to the rapid expansion of global capital markets, insider trading has continued to increase dramatically, and the spread of its prohibition has been commonly observed in most jurisdictions.1 Indeed, the 1990s witnessed ‘an explosion in the number of nations’ that have adopted laws banning insider trading, and by 2000, 87 countries had explicitly implemented their own insider trading regulations.2
The policy rationale behind the insider trading prohibition is intuitive and straightforward. When one party makes a purchase or sale of stocks while in possession of inside information that is not known to the investing public, he or she is exploiting informational advantages to the detriment of the counterparty.3 Further, information asymmetry between investors is most likely associated with the problem of market failure, which hinders the willingness to supply liquidity and raises the cost of capital, thereby resulting in inefficient market outcomes.4 For this reason, the majority of jurisdictions (including the EU and UK) require that any price-relevant corporate information should be promptly disclosed to the public and restrict insiders who fail to make full and fair disclosure from using (ie trading based on or communicating with outsiders) the confidential information. However, it should also be highlighted that there are some counterarguments claiming that such a notion is rather biased towards market egalitarianism or even those advancing that insider trading could improve informational efficiency in the stock markets and thus benefit general investors, because it would ‘more quickly introduce new information’ which is otherwise not available to the marketplace.5 This is why US securities law and courts’ interpretation thereof substantially narrows the scope of insider trading liability. That is, securities trading on the basis of material non-public information is banned in the USA, if and only if evidence proves the existence of fraud, namely that a fiduciary-like duty is breached.
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As a seasoned expert in the field of capital markets and financial regulation, I've delved deep into the intricate world of insider trading. My extensive knowledge is not merely theoretical but is grounded in practical understanding and analysis. In this realm, I've closely followed the developments in global regulatory frameworks, particularly the European Union (EU) and the United States (US) regimes.
Now, let's dissect the concepts presented in the article titled "Inside insider trading regulation: a comparative analysis of the EU and US regimes" by Min-woo Kang, published in the Capital Markets Law Journal, Volume 18, Issue 1, in January 2023.
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Insider Trading:
- Definition: The article introduces insider trading as a financial misconduct involving trading in securities based on non-public corporate information.
- Global Prevalence: It notes the increasing prevalence of insider trading on a global scale, with a particular emphasis on its growth in the 1990s and the subsequent adoption of laws by numerous nations.
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Regulatory Landscape:
- Comparative Analysis: The core focus of the article is a comparative analysis of insider trading regulations in the EU and the US.
- Historical Evolution: It alludes to the historical development of regulations, highlighting the explosive growth in the number of nations adopting laws against insider trading.
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Policy Rationale:
- Market Impact: The article delves into the rationale behind prohibiting insider trading, emphasizing the intuitive understanding that it exploits informational advantages to the detriment of other market participants.
- Information Asymmetry: It explores the concept of information asymmetry and its association with market failure, leading to increased costs of capital and inefficient market outcomes.
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Disclosure Requirements:
- Public Disclosure: The majority of jurisdictions, including the EU and UK, are mentioned as requiring prompt disclosure of price-relevant corporate information to the public.
- Restrictions: Insiders failing to make full and fair disclosure are restricted from trading based on or communicating with outsiders regarding confidential information.
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Counterarguments:
- Market Egalitarianism: The article acknowledges counterarguments, stating that the notion of insider trading prohibition might be biased towards market egalitarianism.
- Informational Efficiency: It mentions arguments suggesting that insider trading could potentially improve informational efficiency in stock markets by introducing new information more quickly.
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US Securities Law Approach:
- Narrow Scope: The article points out that US securities law and court interpretations substantially narrow the scope of insider trading liability.
- Fraud Requirement: Securities trading based on material non-public information is prohibited in the US only if evidence proves the existence of fraud, particularly a breach of fiduciary-like duty.
This comprehensive analysis provides a nuanced understanding of the complex landscape of insider trading regulation, drawing a sharp comparison between the EU and US frameworks. Min-woo Kang, as a Lecturer in Banking and Finance at Korea University School of Law, South Korea, contributes valuable insights to the ongoing discourse in the field.
