THE FIDUCIARY CONCEPT AS APPLIED TO TRADING BY CORPORATE “INSIDERS” IN THE UNITED STATES*

Date01 January 1970
Published date01 January 1970
DOIhttp://doi.org/10.1111/j.1468-2230.1970.tb01250.x
THE FIDUCIARY CONCEPT AS APPLIED
TO TRADING
BY
CORPORATE “INSIDERS”
IN
THE
UNITED STATES*
BY now any essay
on
the regulation of securities that is directed by
an
American writer to British readers can presumably
start
with a
number
of
assumptions
:
First, British company lawyers-at least the academic variety-
know the Securities and Exchange Commission as something more
than a multi-tentacled monster with
its
head in Washington and
the oddly vinous initials, SEC.
Secondly, American corporation lawyers-at lertst the academic
variety-realise that the totality of the SEC’s regulatory apparatus
cannot be compared merely
to
the relevant provisions of the
British Companies Act, together with the Prevention
of
Fraud
(Investments) Act, but must include as well the Stock Exchange
regulation
and
the informal controls exercised by such institutions
as
the Issuing Houses Association-although,
now
that the
u
City
Code
has developed almost as many variations as Brahms did
on
a theme by Haydn, an American might be forgiven
for
wonder-
ing whether the British genius
for
unwrittem law that
is
so
admired
in the United States will in the end prove adequate to the task.
Thirdly, slavish imitation even between countries as alike in
their legal and hancial institutions as the United Kingdom and
the United States is
to
be avoided. There is little use, for example,
in talking of shareholder action as a major deterrent in a country
whose Bar views as anathema the contingent fee that has made
viable instruments out of both the shareholder’s derivative suit and
the non-derivative class action in the United States. This is simply
noted as a basic fact without implying
a
value judgment
on
either
the British
or
the American fee system.
If
the agitation with respect to takeover bids is put to one side,
it
seems clear that the critical complex of problems today
on
both
sides of the ocean is that conjured up by the phrases
insider trad-
ing
’’
and
‘‘
the fiduciary concept
’’
as
applied
to
management and
controlling shareholders.
It
is true that the keynote of the American
Securities Act
of
1988-disclosure-was borrowed from the British
Companies Act, though with some peculiarly American emendations
like advance examination
of
prospectuses.
It
is true also that the
Securities Exchange Act of 1984 expanded the disclosure philosophy.
From the beginning that etatute
(1)
has required securities that are
listed
on
a stock exchange
to
be registered with the SEC,
(2)
has
imposed annual and other reporting requirements (with certified
This
article
is
based
on
a talk given at the “Workshop
on
hrnpeny
Law
directed by Professors Gower and Wedderburn at the Institute of Advanced
Legal Studies,
July
14,
1969.
84
JAN.
1970
INSIDER
TRADING
85
financial statements)
on
their issuers,
(8)
has regulated proxy
solicitations with respect
to
those securities, and
(4)
has imposed
reporting and other restrictions
on
trading by directors, officers and
10
per cent. shareholders. Then
a
1964
ammdmemt extended all
those provisions to unlisted equity issues with
500
holders
of
record
when the issuer has at least
$1
million
of
gross assets. Nevertheless,
if
the
1984
statute has developed
a
dominant theme,
it
is not
so
much disclosure
as
market egalitarianism.
This
is
seen
in
two
aspects-the prevention of market mamipulatim and the regulation
of insider trading.
The matter of manipulation and stabilisation of the securities
markets may be left
to
another occasion.’
So
far as attitudes
toward insider trading are concerned, the basic change from the
turn of the century
to
1988
may be exemplified by
two
quotations.
In
1900
there was this
‘‘
far away
and
long
ago
exchange between
a
member
of
the so-called Industrial Commission-to which
Congress had given the not immodest task
of
investigating and
recommending legislation with respect
to
immigration, labour,
agriculture, manufacturing and business-and the President
of
American Sugar Refining Company
a
:
(‘
Q:
You think, then,, that when
a
corporation
is
chartered
by the State, offers stock
to
the public, and
is
one in which
the public is interested, that the public has
no
right
to
know
what its earning power is
or
to
subject them
to
any inspection
whatever, that the people may not buy this stock blindly
?
A: Yes, that is my theory. Let the buyer beware; that
covers the whole business. You cannot wet nurse people from
the time they are
born
until the time they die. They have got
.to
wade in and get stuck, and that is the way men are educated
and cultivated.”
Thirty-three years later, in the debates
on
the Bill that became the
Securities Act of
1988,
Representative Rayburn-then Chairman
of the Committee
on
Interstate and Foreign Commerce
of
the House
of Representatives, which had held hearings
on
the Bill, and later
Speaker of the House-stated
:
‘‘
The purpose of this bill is to place the owners of securities
on
a parity,
80
far as is possible, with the management
of
the
corporations, and to place the buyer
on
the same plane
so
far
as available information is concerned, with the seller.”
Even today there are discordant notes. A distinguished pm
fesm of law with a background in economics as well argues that
1
See
3
Loss,
Securities Regulation
(9d
ed.,
1961,
Supp.
1969),
Chap.
10.
2
Industrial
Corn.,
Preliminay Report
07~
Trwts and ZnduJt7ial Combinations,
H.R.Doc.
No.
476,
56th Cong.,
1st
Seas.
(1900)
Part
I,
p.
123.
77
Cong.
Rec.
2918
(1933).
The essential objective of securities legislation,”
according
to
high judicial anthority, “is
to
proteot
thow who do not
know
market conditions from the oveneachings of those who do.“
Charles
Huglres
d
Co.
Ino.
v.
SEC,
139
F.
2d
434, 437
(ad Cir.
194.3).
cert. denied,
321
U.S.
786;
see
also
SEC
v.
Texas
Wf
Sulphw
Co.,
401
F.
ad
833,848,
851
(Zd Cir.
1968),
cert. denied
sub nom. Coates
v.
SEC,
394
U.S.
976.

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