The SEC's Neglected Weapon: A Proposed Amendment to Section 17(a)(3) and the Application of Negligent Insider Trading

University of Pennsylvania Journal of Business Law, Vol. 19, No. 2, 2017

SMU Dedman School of Law Legal Studies Research Paper No. 352

45 Pages Posted: 28 Apr 2017

See all articles by Marc I. Steinberg

Marc I. Steinberg

Southern Methodist University - Dedman School of Law

Abel Ramirez

Southern Methodist University (SMU), Dedman School of Law, Alumnus

Date Written: 2017

Abstract

Section 17(a)(3) has been widely neglected as a weapon in the Securities and Exchange Commission’s (SEC) arsenal against insider trading. Section 17(a)(3) carries the potential of providing the SEC with an advantage that is not afforded by Section 10(b), Rule 10b-5, or Rule 14e-3 — the authority to prosecute insider trading claims premised on the lesser mental state of negligence, thus casting a wider net to enforce insider trading regulations against a new category of defendants — negligent inside traders as well as negligent tippers and tippees. Currently, when pursuing insider trading violations, the Securities and Exchange Commission (SEC) primarily relies on the authority granted by Section 10(b) and the corresponding Rule 10b-5. Although these provisions have become the standard in prosecuting insider trading enforcement actions, the level of culpability that the SEC must prove under these provisions is rigorous and has created a void in the spectrum of liability for insider trading causes of action.

The objective of this article is to propose a method that will allow regulators to bridge the gap that currently exists in the context of insider trading liability, and to discuss how the SEC’s task of proving liability would be significantly lessened (and presumably more successful) if it could pursue insider trading claims that require proof of a lesser mental state. In order to accomplish this task, this article addresses: 1) the potential untapped resource of Section 17(a)(3) with respect to SEC enforcement of insider trading abuse; 2) the theoretical concept of negligent insider trading; and 3) the manner in which to remedy this disparate treatment — namely, a legislative amendment to Section 17(a)(3) that will broaden the scope of this statute to apply to negligent sellers as well as negligent purchasers.

Keywords: Insider Trading, Financial Regulation, Securities and Exchange Commission, SEC, Negligent Insider Trading, Section 17(a)(3)

Suggested Citation

Steinberg, Marc I. and Ramirez, Abel, The SEC's Neglected Weapon: A Proposed Amendment to Section 17(a)(3) and the Application of Negligent Insider Trading (2017). University of Pennsylvania Journal of Business Law, Vol. 19, No. 2, 2017, SMU Dedman School of Law Legal Studies Research Paper No. 352, Available at SSRN: https://ssrn.com/abstract=2959665

Marc I. Steinberg (Contact Author)

Southern Methodist University - Dedman School of Law ( email )

P.O. Box 750116
Dallas, TX 75275
United States

Abel Ramirez

Southern Methodist University (SMU), Dedman School of Law, Alumnus ( email )

Dallas, TX
United States

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