Edited by Stephen M. Bainbridge
Chapter 7: Regulation FD: an alternative approach to addressing information asymmetry
Although commentators have identified various reasons to regulate insider trading, one rationale is to reduce the existence of information asymmetries in the securities markets. In its litigations in Chiarella and Dirks, the government attempted to use fraud-based theories of liability to address information asymmetries. The Supreme Court limited the effectiveness of this approach by requiring a predicate breach of duty for a violation of Rule 10b-5. The Securities and Exchange Commission (SEC) responded in August 2000, by adopting Regulation Fair Disclosure. Regulation FD took an alternative approach to information asymmetry that was not grounded in theories of fraud but, instead, in issuer disclosure obligations. Specifically the Rule focused on corporate issuers and corporate officials as the sources of such asymmetries, reasoning that if selective disclosures by corporate insiders could be prevented at the source, regulators would have less need to address trading by the recipients of that information.
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