Document Type

Article

Publication Date

2025

Publication Title

Villanova Law Review

Abstract

The Supreme Court has recently weaponized the First Amendment to invalidate economic regulations. Consequently, the Court’s current analytical framework risks invalidating as unconstitutional certain speech compelled by Congress and the SEC to combat insider trading.

The government may compel speech to combat fraud, and many courts and commentators view insider trading as a fraud against the counterparty to the insider’s trade. Today, the government primarily resorts to Section 10(b) of the Securities Exchange Act of 1934 and its implementing regulations, including Rule 10b-5, to combat insider trading. Those regulations prohibit deceptive conduct and do not directly compel speech. Interestingly, in 1934, Congress did not craft Section 10(b) to combat insider trading (notwithstanding its current importance to that goal); Congress crafted Section 16 to do so. Section 16 compels directors, officers, and more-than-ten-percent stockholders of publicly traded corporations to disclose their holdings and trades in the company’s stock. The statute appears valid as applied to directors and officers, given their ready access to material nonpublic information and given their fiduciary duties. The statute’s applicability to more-than-ten-percent stockholders, however, presents different questions. Stockholders generally owe no duties to other stockholders unless they control the corporation, and Section 16 presumes that they do. While that presumption may have commanded court deference around the time of enactment, courts have determined, in the intervening decades, that minority stockholders generally do not control corporations. Even if some minority stockholders control corporations, the compelled speech is wildly overinclusive at the ten-percent threshold, which is constitutionally troubling. Moreover, federal law otherwise prohibits large stockholders from accessing material nonpublic information for purposes of trading: Section 10(b) prohibits insider trading and Regulation FD prohibits the selective disclosure of information to stockholders. Given those regulations, Section 16 imposes an undue burden on regulated stockholders, particularly given the commercially valuable information that such stockholders must disclose. Finally, the speech compelled of stockholders by the government is unnecessary because corporations may—via charters, bylaws, or poison pills—compel such disclosure without any governmental involvement.

This Article makes two scholarly contributions. First, though scholars have spilled much ink regarding compelled speech, relatively few drops address securities law, and, when addressed, scholars have uniformly concluded that the compelled speech of securities law is constitutional. This Article challenges that norm, arguing against the constitutionality of certain regulations that compel speech by non-controlling stockholders—as opposed to fiduciaries like directors or officers—due to the misguided congressional presumption of their access to (and usage of) inside information. In 1934, Congress acknowledged the overbreadth of its regulation as capturing stockholders that lacked access to such information but proceeded due to a lack of alternatives and the ease of administration of its arbitrary, bright-line rule.

Second, the Article plugs a gap in the scholarship regarding insider trading. Many scholars, particularly law and economics scholars, have long opposed the regulation of insider trading. Progressive scholars, on the other hand, commonly favor regulation to protect the counterparties to trades involving insiders, given insiders’ “unerodable informational advantage[].”1 Scholars, however, have failed to appreciate the First Amendment as a barrier to certain insider-trading regulations.

Volume

70

Issue

4

First Page

629

Last Page

678

Download

Share

COinS