Just Do It! Specific Rulemaking on Materiality Guidance in Insider Trading

Insider trading has been in the news on a relatively constant basis in the new millennium. Raj Rajaratnam and associates, Mark Cuban, and Martha Stewart have been among the many subjects of legal actions involving insider trading since the Enron debacle in 2002. Some of these cases have been garden-variety insider trading cases; others have exposed confusing and evolving elements of U.S. insider trading doctrine. Most recently, the STOCK Act — a law providing for an express congressional prohibition on insider trading — has made headlines. Public reporting in connection with both recent legal actions and the introduction and passage of the STOCK Act also has brought to the fore long-debated questions about insider trading doctrine in the United States, including the unsettled nature of the system of regulation. This article urges the U.S. Securities and Exchange Commission (“SEC”) — or, absent action by the SEC, the federal judiciary — to adopt clarifying guidance on materiality — one unclear area of insider trading law.In support of this agenda, the article brings together and addresses in one place a number of disparate concerns with the issuance of materiality guidance in this context (including, e.g., potential effects of the guidance on SEC enforcement discretion, interactions of the guidance with judicial deference, and determinations of the most appropriate rule maker and the optimal form of rule making for the guidance). The article also offers substantive and procedural details on two examples of materiality guidance that could be issued based on common insider trading fact patterns, updating and expanding suggestions made by the author in an earlier work. These concerns and examples illustrate significant difficulties in fashioning materiality guidance while, at the same time, showing that these difficulties are surmountable