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Insider Trading in a Globalizing Securities Market: Who Should Regulate What?

Fox, Merritt B.

This article has addressed the question of who should regulate insider trading in transactions in this increasingly globalizing economy. Except in those instances where the policy underlying them is fundamentally unsound, an analysis of the various rationales as to why insider trading should or should not be banned all point to the same striking conclusion. A regulating country has a high degree of interest in imposing its insider trading regime on transactions in the shares of issuers of its nationality, wherever they occur and whomever they involve. The regulating country has, at most, a much lower degree of interest in imposing its regime on any other transactions, even if they occur on its exchanges and between its residents. This also, upon examination, turns out to be the best approach to regulatory reach in terms of maximizing global economic welfare.

This approach to regulatory reach is the best available for the medium-term future. It obviously represents a significant departure from the current emphasis on the place of the transaction and the country in which the outsider resides, an emphasis driven by concerns of investor protection. It is likely, however, that national governments will move in the direction recommended as it becomes more and more difficult to identify where a transaction actually takes place, and as policymakers' understanding of modern financial economics increases.

In the longer-term future, increases in transnational portfolio investment and transnational direct investment may render the recommended approach unworkable. An increasingly larger proportion of the world's production will be undertaken by issuers with no clear national center of gravity. Arrival at this point of unworkability, rather than indicating the need for a new principle to determine the reach of national regulation, will signal that the entire system of national-level regulation of corporate law and insider trading will have become obsolete.


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Law and Contemporary Problems

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Duke University School of Law
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October 15, 2015