Edited by Stephen M. Bainbridge
Chapter 2: Launching the insider trading revolution: SEC v. Capital Gains Research Bureau
Securities and Exchange Commission v. Capital Gains Research Bureau, Inc. marked the resurgence of the SEC in the Supreme Court, sparking a decade-long winning streak there. The Capital Gains decision, although turning on an interpretation of the Investment Advisers Act of 1940, also gave the green light to the SEC to push the boundaries of its power in other areas. Moreover, Capital Gains suggested that the SEC could expand its power through agency and judicial interpretation of existing statutes and regulation, without resorting to the cumbersome rulemaking process under the Administrative Procedure Act, or, still more daunting, seeking legislation. After its victory in Capital Gains, the SEC would push an aggressive interpretation of § 10(b) of the Exchange Act in the lower courts, particularly the Second Circuit, to crack down on insider trading. This chapter uncovers the seeds of the SEC’s insider trading crusade in Capital Gains and how that opinion influenced subsequent securities jurisprudence. I proceed as follows. Section I provides background on the SEC and its relationship with the Supreme Court prior to Capital Gains. Section II follows the SEC’s Capital Gains enforcement action as it made its way up through the district court and the Second Circuit. Section III explores how the case unfolded in the Supreme Court. Section IV then assesses Capital Gains’ long-term impact. A brief Conclusion follows.
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