Identifying the Duty Prohibiting Outsider Trading on Material Nonpublic Information

The federal securities laws do not contain a definition of insider trading. As a result, case law has developed in a common law fashion from the broad statutory antifraud prohibitions. The result has been a tortuous path in defining the reach of the prohibition against trading securities on the basis of nonpublic information. This Article examines outsider trading, which occurs when market participants who are not corporate insiders obtain material nonpublic information.

The Article explores the distinction between outsiders who may not and those who may enter into securities transactions on the basis of that information. SEC rulemaking has adopted a relatively broad reading of the law's reach to deal with outsider trading. In contrast, the trend in recent cases has been to question that breadth. This Article examines recent developments and concludes that the SEC got it right.

Namely, trading prohibitions properly extend "outsider trading" to certain individuals even if they are not under a fiduciary duty to keep the information confidential. The Article also explores the range of outsiders who should be covered by trading prohibitions. A final recommendation is that the confusion in the cases demonstrates that Congress should recognize the need for a statutory definition of both insider and outsider trading.