Journal article
Rereading Section 16(b) of the Securities Exchange Act
Georgia law review (Athens, Ga. : 1966), Vol.27(1), p183
01 Oct 1992
Abstract
This Article begins by briefly describing section 16(b) and reviewing the conventional statements of its purpose and its shortcomings. The provision is often described as a rigid, prophylactic rule created to deter insider trading. The inevitability of the provision's failure as a weapon against insider trading is demonstrated by comparing it to a clearly effective and readily apparent alternative. For if section 16(b) was to be a prophylactic rule to prevent insider trading, why was it not better designed to meet this task? The response comes from rejecting the unsatisfactory, yet largely unquestioned, view of the provision's goal and outlining the conception of section 16(b) as a device primarily concerned with price manipulation by insiders through stock trading. This outline is then compared with the empirical and theoretical work by finance economists (and a few legal scholars) on insider trading and market efficiency, the effects of asymmetric information, and signalling. The Article then looks at the history of section 16(b)'s adoption. While there is no claim that theory informed legislative intent, there is a remarkable coincidence in the phenomena studied by economists today and reacted to by Congress in 1934. The contention is that both as a matter of finance theory and of history, insiders have the ability to artificially move stock prices simply by trading. Section 16(b) addresses this opportunity for abuse. While there is little chance of changing sixty years of reading the statute as a response to trading on inside information, it is interesting to realize that we may have been wrong, all this time. In the end, the goal is to provide an alternative reading of section 16(b) that reveals the depth within the "flat rule."
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Details
- Title
- Rereading Section 16(b) of the Securities Exchange Act
- Creators
- Karl Okamoto
- Publication Details
- Georgia law review (Athens, Ga. : 1966), Vol.27(1), p183
- Publisher
- Georgia Law Review Association
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Thomas R. Kline School of Law
- Identifiers
- 991021866419404721