The New Deal

Posted March 5, 2016; ©David Jargiello 2016 All Rights Reserved.

The notion that “all investors trading on [stock] exchanges [should have] relatively equal access to material information . . . . should be subject to identical market risks” was not always widely held. Rules restricting public trading by officers and directors of the issuer, by other employees privy to inside information of the issuer, and by persons “tipped” as to such information evolved in large part after the stock market crash of 1929 and the enactment of the Securities Act of 1933 and the Securities Exchange Act of 1934.

Consider the following . . . .

In 1899, an ad hoc “Industrial Commission” was empaneled by Congress to report of prevailing economic and social conditions in the United States.  Among the topics was whether corporations needed to tell their investors or prospective investors, well … anything.  The following exchange between Thomas Phillips, a representative from Pennsylvania, and Henry O. Havemayer, President of the then-formidable American Sugar Refining Company, is the stuff of legend:

Mr. Phillips:  “You think, then, that when a corporation is chartered by the State [and] offers stock to the public … that the public has no right to know what its earning power is or to subject them to any inspection whatever, that the people may not buy stock blindly?”

Mr. Havemayer:“Yes, that is my theory.  Let the buyer beware, that covers the whole business.  You cannot wet-nurse people from the time they are born until the day they die.  They have got to wade in and get stuck and that is the way men are educated and cultivated.”

Thomas K. McCraw, Prophets of Regulation (1984), at 166.

For the “disclose or abstain” rule noted above see SEC v Texas Gulf Sulphur, 401 F. 2d 833 (2nd Circuit, 1968), cert. denied, 394 U.S. 976 (1969).

For further information on the history of insider trading regulation in the United States, see also Speech by SEC Staff: Insider Trading – A U.S. Perspective, Remarks by Thomas Newkirk and Melissa Robertson, September 19, 1998.

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