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Theories for Prohibiting Insider Trading II
One of the arguments that were posed against fraud theory is the reasoning that in a market economy all of the businessmen use information that is unknown to the other businessmen in order to profit at the expense of his competitors. In a market economy all businesses that cannot compete would be forced to close-down. Businesses compete in terms of the cheapness and quality of their product. They also compete in terms of informational advantages. Those that have more information that is not known by other competitors are used to further profit the business and drive the competition out of business. Such use of the informational advantage is not deemed fraudulent. It is deemed as a natural way of life in a market economy. Why then that in a market economy any information used to exploit another competitor is allowed whereas in insider trading the information used to profit in trading securities is deemed a fraudulent practice and illegal? To answer this major criticism the proponents of prohibiting insider trading came up with a second theory. This is the fiduciary duty theory. According to this second theory the insider and the corporation has a fiduciary relationship. This means that insiders have an obligation to keep in trust and not to use or exploit any resources or information the corporation may have. In a fiduciary relationship the insider is trusted by the corporation and there is an expectation of loyalty from the insiders to the corporation. If the insiders engage in insider trading they use the non-public information they obtained from their fiduciary relationship with the corporation. Any insider trading they make would be a breach of that obligation.
The breach of this fiduciary duty comes in two forms: the narrow version and the more liberal version. The narrow version restricts the application of the fiduciary theory to only the traditional insiders in the corporation. These are the corporate employee, officers and directors. According to this view only the corporate employees can be liable for insider trading as they are the only one who has a fiduciary relationship with the corporation. The second view includes more people as insiders. According to the more liberal view, called the misappropriation theory, there are also other people that have a fiduciary relationship with the corporation. They are not employees but they are still trusted by the company. They are the company lawyers, accountants, consultants and the like. According to the misappropriation theory, these non-employees also obtained their information from the corporation in the exercise of their duty. If they use the information for their benefit they are both violating their fiduciary relationship as well as misappropriating the information that belongs only to the company.
The anti-insider trading laws argue that if the corporation owns the information, as postulated by the misappropriation theory, then the corporation should have the choice of whether to sell this information and let it be used by insiders. The corporation should have the choice of making the corporate information available to the insiders or not.
The breach of this fiduciary duty comes in two forms: the narrow version and the more liberal version. The narrow version restricts the application of the fiduciary theory to only the traditional insiders in the corporation. These are the corporate employee, officers and directors. According to this view only the corporate employees can be liable for insider trading as they are the only one who has a fiduciary relationship with the corporation. The second view includes more people as insiders. According to the more liberal view, called the misappropriation theory, there are also other people that have a fiduciary relationship with the corporation. They are not employees but they are still trusted by the company. They are the company lawyers, accountants, consultants and the like. According to the misappropriation theory, these non-employees also obtained their information from the corporation in the exercise of their duty. If they use the information for their benefit they are both violating their fiduciary relationship as well as misappropriating the information that belongs only to the company.
The anti-insider trading laws argue that if the corporation owns the information, as postulated by the misappropriation theory, then the corporation should have the choice of whether to sell this information and let it be used by insiders. The corporation should have the choice of making the corporate information available to the insiders or not.
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