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1 1 (February 28, 2024)

handle is hein.crs/goveolk0001 and id is 1 raw text is: Congressional ~ Research Service SEC's First Shadow Trading Case Slated for Trial February 28, 2024 Corporate insiders commit securities fraud when they trade their firms' shares on the basis of material nonpublic information (MNPI). A pending Securities and Exchange Commission (SEC) enforcement action raises a related but novel issue: is it unlawful for corporate insiders to use MNPI derived from their employment to trade the securities of similar companies? One recent study concludes that this practice- dubbed shadow trading-is widespread, meaning the case may have important implications for insider trading law and corporate compliance departments. The litigation may also be of interest to Congress in its oversight of the enforcement of the securities laws. This Legal Sidebar provides an overview of insider trading doctrine, the SEC's enforcement action, and considerations for Congress. Insider Trading: Doctrinal Background Insider trading is governed by several distinct legal schemes. For purposes of this Sidebar, the relevant provisions of federal law are Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule IOb-5, which prohibit specified forms of securities fraud. Neither provision explicitly mentions transactions by corporate insiders. The modern prohibition of insider trading that has emerged from Section 10(b) and Rule lOb-5 is instead the product of common-law decisionmaking by courts and the SEC. The scope of the prohibition has fluctuated over the years as competing theories-one grounded in the value of equal access to information, the other in fiduciary duty-have vied for supremacy. Origins: The Equal Access Approach The SEC deployed Rule lOb-5 to target open-market insider trading for the first time in 1961. In an administrative enforcement action-In re Cady, Roberts & Co.-the SEC concluded that a brokerage-firm partner violated Rule lOb-5 by selling shares of the Curtiss-Wright Corporation after learning of an impending dividend cut from one of the corporation's directors, but before the cut was announced to the public. In its opinion, the SEC articulated what came to be known as the disclose or Congressional Research Service https://crsreports.congress.gov LSB11119 CRS Legal Sidebar Prepared for Members and Committees of Congress

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