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Abstract

Determining when the selective disclosure of material nonpublic information should trigger insider trading liability is a deeply problematic aspect of insider trading doctrine.

The current rule is that a selective disclosure can only trigger insider trading liability if “the insider [making the selective disclosure] personally will benefit, directly or indirectly, from his disclosure.” Dirks v. SEC introduced this “personal benefit” test in 1983 to balance four competing rationales for determining when a tip should trigger insider trading liability. Two developments since Dirks have made problems with this personal benefit test insurmountable. First, the SEC’s enactment of Regulation Fair Disclosure in 2000 supplanted federal common law regulation of selective disclosures by public companies and, more pointedly, prohibited public companies from making precisely the types of selective disclosures to Wall Street analysts that the Dirks personal benefit test was designed to protect. Second, in United States v. O’Hagan the Supreme Court adopted the misappropriation theory, which greatly expanded the types of deceptive conduct that could trigger insider trading liability.

After Regulation FD and O’Hagan, only a test for when a selective disclosure triggers insider trading liability based directly on the statutory prohibition against deceptive conduct makes sense. Receipt of a personal benefit should be a sufficient, but not necessary, condition for finding that a selective disclosure is deceptive enough to trigger insider trading liability.

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