Why Insider Trading Data Exists
When the U.S. Congress of 1934 legislated the Securities Exchange Commission (SEC) into existence to protect individual investors, it realized that corporate executives had an unfair advantage when trading their own companies' shares. But these pols also realized that they could not ban such transactions. Even then, shares were used as incentives for employees, and who would start a public company if they could not participate in its success?
In lieu of banning insider transactions, the Congress dictated disclosure. If insiders did trade, they would have to fill out a form and tell the world about it.
"Disclosure is the fundamental principle of regulating securities markets at the Federal level," elaborates John Heine, Deputy Director of Public Affairs at the SEC. Mr. Heine also points out that the regulators who drew up the Securities Act of 1933 (the 1933 Act), and the Securities Exchange Act of 1934 (the 1934 Act) appear to have been greatly influenced by the thinking of Lewis Brandeis, a prominent securities lawyer at the turn of the 19th century who became a Supreme Court Justice. His view on combating securities fraud was summed up by his saying: "sunshine is the best disinfectant." Disclosure of transactions was seen as generating the desired enlightenment.
Section 16 of the 1934 Act is the specific part of the document where the U.S. Congress attempted to reign in some of the blatantly unfair trading practices used by some corporate insiders of the day. It was developed after what was apparently very candid testimony about trading abuses, as Congressional records from 1934 show:
"Among the most vicious practices unearthed at the hearings before the subcommittee was the flagrant betrayal of their fiduciary duties by directors and officers of corporations who used their positions of trust and the confidential information which came to them in such positions, to aid them in market activities. Closely allied to this type of abuse was the unscrupulous employment of inside information by large stockholders who, while not directors and officers, exercised sufficient control over the destinies of their companies to enable them to acquire and profit by information not available to others."
Disgruntled shareholders way back when did sue to try and stop insiders' abuses, but they rarely got justice. Shareholders didn't necessarily lose because of lack of proof of manipulation, either. There was just an entirely different mindset in the early 1900s about insiders using their unfair advantages. A court ruling from a dismissed insider-trading case in 1916 sums up the prevailing attitude of the day: "The officers are not bound to acquaint a stockholder willing to sell his shares with facts which would enhance the price of the stock. The officers are trustees for the shareholders only as to the management of the corporation and not in their private dealings."
Obvious abuses and growing public outcry after the 1929 crash forced the federal government to regulate this overly free market, however. Congress first passed the 1933 Act to set guidelines on registering securities for sale. One year later, the 1934 Act regulated how securities were traded once issued. The job of the newly-formed SEC was to develop rules to carry out the intent of the Acts, and then enforce them.
Overseeing the taming of the market was Joseph Kennedy, the SEC's first Chairman, future ambassador to England, and patriarch of what became a political dynasty. In the early 1930s, however, he was best known as a successful businessman who many felt had first-hand knowledge of (and benefit from) the stock-market abuses he was hired to combat.