The United States regulated insider trading much earlier than the rest of the European jurisdictions. Not only did the United States adopt traditionally a more aggressive and successful pattern of enforcement than its European counterpart, but also the results brought by each side’s authorities verified the same reality. Many different opinions were expressed on the differences between the two systems, stemming from their diverging cultural behaviors towards insiders, towards regarding enforcement and finally, towards regulator expenditures to suppress insider trading. Nevertheless, Europe throughout the years began to follow the United States’ footsteps as it adopted more advanced prohibition measures to treat insider trading. Overall, both the United States and the European Union have evolved gradually in the area of insider trading, with each of them presenting unique characteristics due to their philosophical and historical differences. At the end, despite those differences, insider trading is enforced (maybe unequally) on both sides of the Atlantic, showing the United States’ and the European Union’s common desire to protect their particularities, while developing a common efficient ground through which to deal with future insider dealing prohibitions.
The United States began to regulate insider trading earlier than in the European Union. Not only has the United States adopted a more direct approach about dealing with insider trading issues, but also its enforcement tactics are more aggressive than those found in Europe.01In Europe, “insider dealing” is the more-commonly used term, while the United States more-commonly uses the term “insider trading.” The reason that these differences exist can be attributed to the different ways that the two counterparts developed their legislations throughout their history.02Edward Greene & Olivia Schmid, Duty-Free Insider Trading?, 2013
Differences in philosophical approaches, as well as variations on the understanding of insider trading and its enforcement, resulted in the parallel evolution of two different insider regulation systems. On the one hand, there is the American approach, proven to be a more specific and regulated approach on insider trading, which supports the ideas of “fiduciary duties” as an important element before determining the prosecution of those violating insider trading prohibitions. On the other hand, there is the European approach,03Id. where the protection of trading inside information is placed at the regulatory center.04Utpal Bhattacharya & Hazem Daouk, The World Price of Insider Trading, 57
To better understand the current debate over which of the two counterparts offers better protection for its citizens, this paper first discusses the evolution of insider trading both in the United States and in the European Union, before undertaking a comparative perspective to discuss the differences between substantive provisions of American and European rules dealing with insider trading issues.
1. Insider Trading Regulation’s Evolution in the United States and the European Union
1.1. Insider Trading in the United States
Insider trading in the United States has been extensively defined and limited by the United States court system. In particular, the insider trading rule has been applied either for disclosure or non-disclosure purposes in cases where a fiduciary duty was breached. This situation takes into account occasions where that breach refers to the source of the information or to the investors negotiating on the other side.05The United Kingdom and European Union regimes not only define the offense of insider trading by statute, but they also differ significantly from the United States antifraud framework. Under a European perspective the concept of parity information premises more the notion of offense. In particular, there is no need to there be any breach of fiduciary duty or any other equivalent relation or any misleading or deceptive conduct in general. The SEC urged more the parity-of-information approach; however, it was rejected as too broad in scope concept by the United States Supreme Court in Chiarella v. United States, taking into account 10b-5 rule’s explanation on fraud driven violations.
Overall, the concept of insider trading liability in the United States has been influenced by three general theories which have set the path for clear identification of this concept. To be more specific: (1) the “misappropriation” theory,06See, e.g., United States v. O’Hagan 117 S. Ct. 2199 (1997); Marc Steinberg, Insider Trading, Selective Disclosure, and Prompt Disclosure: A Comparative Analysis, 22
The above relationships have been identified by SEC’s 10b5-2 rule,10United States Securities and Exchange Commission, Insider Trading,
1.2. Insider Trading in the European Union
Doctrines describing egalitarian ideas regarding regulation of insider trading in Europe have been the trend for the last few years. In particular, if the society defines its pre-eminent goals as the well-functioning of the markets or the preservation of investors’ confidence, that could mean that the source of the inside information would not be so relevant. Nevertheless, the source of the information could be considered important if fiduciary duties are implicated in cases where this information is traded in a prohibited way.12Id. At the core, this is one of the principle differences between the United States and the European Union’s approaches to regulate insider trading.
The European Union, in order to set the legal standards on insider trading, adopted the Market Abuse Directive (hereinafter “MAD”), by which it defined the notion of the term “inside information.”13Directive 2014/57/EU, of the European Parliament and of the Council of 16 Apr. 2014 on Criminal Sanctions for Market Abuse (“Market Abuse Directive” or “MAD”), 2014 O.J. (L. 173) 179, 177–78, arts. 1(1), 2(4). The exact nature of the inside information must be confidential, and must not have been provided to the public, either directly or indirectly. It may refer to one or more securities or to one or more issuers.14See Committee of European Securities Regulators Public Consultation on the Market Abuse Directive Level 3 No. CESR/06-562 of Nov. 2006, arts. 1.15–16 at https://www.esma.europa.eu/sites/default/files/library/2015/11/06_562.pdf. In particular, based on the definition of the directive, the inside information is regarded as precise in cases where it signals the existence of current events or situations that may arise, or an act that has happened or is expected to happen, bearing such a precision based on which someone would conclude that the information affected the prices.15
2. Comparing Important Provisions Between the United States and the European Union
Based on the above, it is arguable that the United States and the European Union have taken important measures regarding insider trading’s development in both continents. Nevertheless, to further understand the existing particularities of each legal system, it is necessary to compare the substantive American and European provisions on insider trading, to clearly define those rules which better-satisfy the interests of each participant.
To begin, when comparing the American and European approaches, there are those who argue that the American prohibition conceptually embraces the violation of a fiduciary duty, whereas the European prohibition is based on the idea that everyone should have an equal opportunity to access the information provided.17
2.1. Access to Information Theory
2.1.1. Understanding Information Theory’s Concept in the United States
Insider trading in the United States is defined under rule 10b-5,18Deepa Sarkar, Securities Exchange Act of 1934, (April, 22, 2016, 6:21PM), https://www.law.cornell.edu/wex/securities_exchange_act_of_1934. which was developed through SEC’s regulations as well as legislative acts and other case law. A full understanding of the rule can be only achieved by examining its historical development throughout the years. When the rule was first enacted by the SEC, it was not evident that it made direct reference to insider trading, and was originally considered more of an antifraud provision. Of course, today, it constitutes the basis of insider trading under United States law, giving it high importance.1917 C.F.R. §240.10b-5 (1996), https://www.law.cornell.edu/cfr/text/17/240.10b-5.
2.1.2. Approaching the Access to Information Theory in Europe
The way that access to information is approached in Europe, which focuses on explaining either market abuse in the context of insider trading or disclosing obligations, has been at the center of the European Court of Justice on many occasions. However, one case that really touched significantly upon that issue was the Geltl v. Daimler AG, according to which disclosure is proposed as the solution when there are indications that information is relevant to a possible future event.20Case C-19/11, Geltl v Daimler, 3 C.M.L.R. 762 (2012). Moving further, European law stipulates that information’s disclosure should be delayed to the market, if there is valid cause for such an action. Otherwise, that would be contrary to the current understanding of MAD. Nevertheless, some of the most important differences between the two positions stem from a difference in understanding MAD Article 4.21Market Abuse Directive art. 4. This provision could be interpreted as an extension of the prohibitions found in both Articles 2 and 3 of MAD.22Market Abuse Directive arts. 1–2. Those prohibitions concern those who possess inside information and who are supposed to know that the information is, in fact, inside information.23Market Abuse Directive art. 4. It becomes clear, then, that the European prohibition approach on insider trading is not based upon fiduciary duties, as is more often the case in the United States, but upon an equally divided access to information.24Reinier Kraakman, The Legal Theory of Insider Trading Regulation in the United States, in
2.2. Duty to Disclose Information
Towards the same direction, the reporting obligations of corporations in the United States mirror those different approaches.25Roberta Karmel, Outsider Trading on Confidential Information – A Breach in Search of a Duty, 20
2.2.1. No General Duty to Disclose Material Nonpublic Information Under American Law
The continuous disclosure obligation for American corporations is most apparent under the Exchange Act. A major comparative difference between the current European and American approach has been the concept of “continuous disclosure.” Compared to the current European approach, under the American legal system, there is no general duty to disclose all material information under the Exchange Act.26Id. at 114. Although this statement is well defined under the terms of the Exchange Act, there are some prerequisites which must be satisfied.
Pursuant to Section 13 of the Exchange Act, extensive periodic reports must be published. Moreover, a duty to update the published information is assigned to corporations, which focuses particularly on significant (material) changes related to either the issuer’s operation or its financial condition.27Sarbanes-Oxley Act of 2002, Pub. Law 107-204, § 409 (2002). This leads to the conclusion that, practically speaking, the “duty to update” is based on a continuous and extensive disclosure obligation, since that duty is triggered by changes to the price or by inside exchanges of information. Furthermore, SEC’s Form 8-K has further clarified the items that need to be disclosed when the corporation is acting under an increased obligation to regularly disclose certain information.28
According to Section 10(b) of the Securities Act, a “disclose or abstain” duty is imposed to the corporations which, on the basis of inside information, deal with their own securities. There are occasions, however, in which corporations can keep their silence when a material development may occur, thereby satisfying their abstain duty without breaching their duty to disclose. Nevertheless, based on the demands of the stock exchanges, companies listed in the United States are required to make available to the public any material information requested by an investor.30American Stock Exchange Company Guide (CCH) ¶ 10,121; Sec.Exch.Act Rel. No. 34-8995 (Oct. 15, 1970). Although some may argue that these rules seem to inspire greater security, they are not enforced as actively as one would hope. Not only does the SEC lack sufficient resources to prosecute every violation of the listing requirements, but also the violations of these rules are severely sanctioned in general.31
As such, it is not always easy to establish that a corporation’s officer or director violated their fiduciary duty to not reveal their corporation’s private information. Although issuers could ignore market rumors before giving any public answer, they do sometimes engage in such situations since they are not prohibited from doing so.32James Koenig, The Basics of Disclosure: The Market for Information in the Market for Corporate Control, 43
All kinds of communication and information disclosed to analysts must be made available to the public as well. Both professional investors and the corporation’s board should comply with Regulation FD whenever they have to satisfy their disclosure obligation. Nevertheless, the provision does not always apply, especially where information needs to be disclosed to rating agencies or to the press. In these cases, different standards need to be satisfied. Regulation FD is important to further understand the comparison between the European Union’s and the United States’ application of the equal access to information, as it sets the basis for the acceptance of any existing fiduciary duties, without confusing each time the requirements for the fulfillment of each position.
2.2.2. Disclosure Obligation Under European Union Standards
The European Union has also set its standards regarding the disclosure obligations, found in MAD Article 6. More specifically, according to this provision, the European Member States need to provide to the public any inside information that has been communicated (used) by the issuers of the financial instruments for any transaction. Therefore, Europe’s default rule is that the market should be the place where inside information should be disclosed. Oddly enough, under European Union law the issuer does not own its own inside information, and thus, it cannot inappropriately use it with other insiders. Instead, the investing public should be given access to inside information, under the theory that it belongs to all investors.35Mathias Siems, The EU Market Abuse Directive: A Case-Based Analysis, 2
Like every rule, there are a few exceptions. In particular, MAD Article 6 clarifies those particularities and sheds more light on the current exceptions. First, any delay to disclose any public inside information to the public may be excused in cases where the issuer’s legitimate interests are not prejudiced, and are thus not seriously considered.36Market Abuse Directive art. 6. This is the case if the public is not misled as a result of such an omission, provided that the information’s confidentiality is ensured by the issuer.37
In addition, one may argue that MAD Article 6 acts as an analog to the United States Regulation.38United States Securities and Exchange Commission, Final Rule: Selective Disclosure and Insider Trading,
2.3. Other Substantive Differences
According to the American regulatory system, whenever the existence of a fiduciary duty or its breach is questioned, the plaintiff bears the burden of establishing the violation of such a duty.39Steinberg, supra 6, at 643. The European law, however, adopts a broader approach, under which enforcement does not follow the same patterns as under American law; this gives the European law more flexibility when arguing insider trading violations.
Despite the above theoretical differences, it could be argued that there are few similarities with respect to how insider trading laws are applied. There are occasions in which the American rules would not apply, while the European Union rules would be enforceable (and vice-versa), especially related to matters regarding tippees.40As discussed, the European Union and the United States approaches present many differences in the light of the tactics surrounding the prohibition on insider trading. However, due to the various European Member States, and the non-existence of an “Pan-European” Regulation on Corporate and Securities Matters (except of course of the Directives), each Member State could have its own individual and unique differences in comparison to the United States. Thus, the differences described so far have focused on the issues affecting all (or most) Member States.
Most likely, the biggest difference between the two legal systems could be summarized by the issues related to burden of proof questions. In particular, in the United States, a breach of fiduciary duty must be established in the majority of cases, and also, especially in the case of tippees, the awareness of that breach.41United States v. Whitman, 2012 WL 5505080, at *6 (S.D.N.Y. Nov. 19, 2012).
At the same time, although Section 16(b) of the Exchange Act42Securities Exchange Act of 1934, Pub. Law 73-291, § 16(b) (1934), https://www.sec.gov/about/laws/sea34.pdf. seems to be a rule of significant importance under American law, Europe has nothing which approaches it in equivalence. By interpreting this rule, private litigation is offered as a legal way for American investors to go against primary insiders for committing trading violations. In Europe, however, such enforcement is not that common and is rarely met; most European jurisdictions tend to make use of public enforcement as the principal tool to remedy insider trading issues.43Thomas Newkitk & Melissa Robertson, Insider Trading – A U.S. Perspective, Remarks at the 16th International Symposium on Economic Crime at Jesus College (Sept. 19, 1998), http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm.
To conclude, it is well known that the United States is regarded as the forerunner in the capital markets field, as it relates to introducing rules for better-regulated issuance of securities. Thus, as the country that proposes and implements these laws, it bears all the drawbacks and the benefits from such an action. One could certainly argue that the United States has been one of the very few countries distinguished as active in both private and public insider trading enforcements.
The United States attempt to satisfy its private and public promises for efficient enforcement enacted Section 10(b) of the 1934 Exchange Act and, later, Section 16(b) of the Exchange Act. By examining the first Section of the Act, it is obvious that it is a broader provision, covering may anti-fraud issues, including insider trading, although it is not mentioned directly. The second section is narrower, focusing more on insider trading information, based on the timing that the inside information is used (before or during the insider trading). Despite the difficulties in finalizing these rules throughout the years, in both cases, it has been the SEC, along with court decisions, which contributed to the evolution of these American rules.
Some may argue that Europe’s regulations follow the United States’ footsteps while adding its own insider trading tactics. As is the case when regulating most European issues, directives are enacted first, which makes the procedure more time-consuming compared to the United States, as the target of those directives is the adoption of cohesive and harmonized legal measures, incorporated by all European Member States. Overall, compared to the American rules, Europe is more direct when dealing with insider trading issues.
In short, despite their obvious differences, both the European Union and the United States seem to contribute immensely to laws related to insider dealing. Practically speaking, the reason that these differences exist are justified by differences in each counterpart’s evolutionary process and as well as different cultural understandings on the nature of insider trading. Overall, however, both the European and the American legal system deal efficiently in prohibiting insider trading. Only time will tell if these two different regulatory approaches will continue to converge, as the securities world becomes more globalized than ever before, meaning that actions of a United States corporation almost immediately affect other corporations in Europe, and vice versa.
References [ + ]
|01.||↵||In Europe, “insider dealing” is the more-commonly used term, while the United States more-commonly uses the term “insider trading.”|
|02.||↵||Edward Greene & Olivia Schmid, Duty-Free Insider Trading?, 2013 |
|04.||↵||Utpal Bhattacharya & Hazem Daouk, The World Price of Insider Trading, 57 |
|05.||↵||The United Kingdom and European Union regimes not only define the offense of insider trading by statute, but they also differ significantly from the United States antifraud framework. Under a European perspective the concept of parity information premises more the notion of offense. In particular, there is no need to there be any breach of fiduciary duty or any other equivalent relation or any misleading or deceptive conduct in general. The SEC urged more the parity-of-information approach; however, it was rejected as too broad in scope concept by the United States Supreme Court in Chiarella v. United States, taking into account 10b-5 rule’s explanation on fraud driven violations.|
|06.||↵||See, e.g., United States v. O’Hagan 117 S. Ct. 2199 (1997); Marc Steinberg, Insider Trading, Selective Disclosure, and Prompt Disclosure: A Comparative Analysis, 22 |
|07.||↵||Id. at 641.|
|08.||↵||Id. at 669.|
|09.||↵||Greene, supra note 2, at 102.|
|10.||↵||United States Securities and Exchange Commission, Insider Trading, |
|11.||↵||Gloria Esteban De la Rosa, The Insider Trading in the European Union Law, |
|13.||↵||Directive 2014/57/EU, of the European Parliament and of the Council of 16 Apr. 2014 on Criminal Sanctions for Market Abuse (“Market Abuse Directive” or “MAD”), 2014 O.J. (L. 173) 179, 177–78, arts. 1(1), 2(4).|
|14.||↵||See Committee of European Securities Regulators Public Consultation on the Market Abuse Directive Level 3 No. CESR/06-562 of Nov. 2006, arts. 1.15–16 at https://www.esma.europa.eu/sites/default/files/library/2015/11/06_562.pdf.|
|16.||↵||The meaning of the American notion towards price-sensitive matters seems to approach the meaning of Article 1(2) of MAD. Here, an investor, before taking any decision to act or invest, must first be advised of this information. See also Id.; Inc. v. Levinson, 485 U.S. 224, 231–32 (1988).|
|18.||↵||Deepa Sarkar, Securities Exchange Act of 1934, (April, 22, 2016, 6:21PM), https://www.law.cornell.edu/wex/securities_exchange_act_of_1934.|
|19.||↵||17 C.F.R. §240.10b-5 (1996), https://www.law.cornell.edu/cfr/text/17/240.10b-5.|
|20.||↵||Case C-19/11, Geltl v Daimler, 3 C.M.L.R. 762 (2012).|
|21.||↵||Market Abuse Directive art. 4.|
|22.||↵||Market Abuse Directive arts. 1–2.|
|23.||↵||Market Abuse Directive art. 4.|
|24.||↵||Reinier Kraakman, The Legal Theory of Insider Trading Regulation in the United States, in |
|25.||↵||Roberta Karmel, Outsider Trading on Confidential Information – A Breach in Search of a Duty, 20 |
|26.||↵||Id. at 114.|
|27.||↵||Sarbanes-Oxley Act of 2002, Pub. Law 107-204, § 409 (2002).|
|30.||↵||American Stock Exchange Company Guide (CCH) ¶ 10,121; Sec.Exch.Act Rel. No. 34-8995 (Oct. 15, 1970).|
|32.||↵||James Koenig, The Basics of Disclosure: The Market for Information in the Market for Corporate Control, 43 |
|33.||↵||17 C.F.R. §§ 243.100–243.103, https://www.law.cornell.edu/cfr/text/17/243.101.|
|35.||↵||Mathias Siems, The EU Market Abuse Directive: A Case-Based Analysis, 2 |
|36.||↵||Market Abuse Directive art. 6.|
|38.||↵||United States Securities and Exchange Commission, Final Rule: Selective Disclosure and Insider Trading, |
|39.||↵||Steinberg, supra 6, at 643.|
|40.||↵||As discussed, the European Union and the United States approaches present many differences in the light of the tactics surrounding the prohibition on insider trading. However, due to the various European Member States, and the non-existence of an “Pan-European” Regulation on Corporate and Securities Matters (except of course of the Directives), each Member State could have its own individual and unique differences in comparison to the United States. Thus, the differences described so far have focused on the issues affecting all (or most) Member States.|
|41.||↵||United States v. Whitman, 2012 WL 5505080, at *6 (S.D.N.Y. Nov. 19, 2012).|
|42.||↵||Securities Exchange Act of 1934, Pub. Law 73-291, § 16(b) (1934), https://www.sec.gov/about/laws/sea34.pdf.|
|43.||↵||Thomas Newkitk & Melissa Robertson, Insider Trading – A U.S. Perspective, Remarks at the 16th International Symposium on Economic Crime at Jesus College (Sept. 19, 1998), http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm.|