The SEC, Administrative Usurpation, and Insider Trading

The history of insider trading law is a tale of administrative usurpation and legislative acquiescence. Congress has never enacted a prohibition against insider trading, much less defined it. Instead, the SEC has led in defining insider trading, albeit without the formality of rulemaking, and subject to varying degrees of oversight by the courts. The reason why lies in the deference that the Supreme Court gave to the SEC in its formative years. The roots of insider trading law are commonly traced to the SEC’s decision in Cady, Roberts & Co. Cady, Roberts was only made possible, however, by the Supreme Court’s decisions in SEC v. Chenery Corp., its first brush with insider trading under the federal securities laws. In Chenery I, Justice Felix Frankfurter, writing for a slim majority, rebuffed the SEC’s attempt to impose a crude insider trading ban in a reorganization proceeding of public utility holding company. The alleged insider traders in Chenery I were managers of a holding company who had acquired preferred stock during the course of the reorganization. As Justice Frankfurter characterized the SEC’s rule of decision, the managers “were fiduciaries and hence under a ‘duty of fair dealing’ not to trade in the securities of the corporation while plans for its reorganization were before the Commission.” The SEC rejected a plan put forward by the company that called for the managers’ preferred stock to be converted into common stock