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Oversimplification and the SEC's Treatment of Derivative Securities Trading By Corporate Insiders
Wisconsin Law Review (1993)
  • Karl Shumpei Okamoto

In 1991, the Securities and Exchange Commission completed a comprehensive revision of its rules under the short--swing profit disgorgement provisions of section 16 of the Securities Exchange Act of 1934. An important goal of these revisions was to remedy the often confusing and illogical application of the short--swing profit disgorgement rules to trading in derivative securities. By equating transactions in derivative securities with the analogous purchase or sale of the underlying stock, the SEC adopted a unifying and systematic regulatory regime for the treatment of derivative securities trading by corporate insiders.

The clarity and simplicity of the new regulations come, however, at some expense. First, the new rules overturn significant court precedent interpreting section 16(b) and its application to derivative securities trading. This raises the critical issue of the SEC's authority under the statute to adopt the new rules. Unlike the broad grant of authority under section 10(b) of the 1934 Act, section 16(b) offers little support for the SEC's wholesale rewriting of the statute's content, especially when the result is to expand the provision's scope. Furthermore, a close examination of the new rules' effect reveals a more fundamental challenge to both their wisdom and the SEC's authority to adopt them. While treating simple put and call transactions as equivalent to the purchase or sale of the underlying stock is compelling, more complex derivative strategies do not offer the same potential for the abuse of nonpublic information. In fact, some are inherently unable to benefit from any informational advantage. Therefore, in adopting the new rules, the SEC has oversimplified.

Publication Date
September, 1993
Citation Information
Karl Shumpei Okamoto. "Oversimplification and the SEC's Treatment of Derivative Securities Trading By Corporate Insiders" Wisconsin Law Review Vol. 1993 Iss. 5 (1993)
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