Hastings Law Journal


Steve Thel


Section 16 of the Securities Exchange Act is conventionally viewed as a measure for preventing corporate insiders from trading stock on the basis of nonpublic information. This Article argues that section 16 should instead be understood as a measure to prevent corporate managers from manipulating corporate affairs for their own ends, and more generally as a measure for promoting the efficient operation of publicly held corporations. Based on the conventional conception of section 16, many commentators have argued that the provision is an extremely crude and needlessly arbitrary insider trading statute. Through an examination of the incentive system section 16 creates, the legislative history of the section, the broader historical context in which it was enacted, and previously unexplored archival material, the author concludes that section 16 is a sophisticated tool for regulating the way publicly held corporations are managed, suggesting that these commentators have simply misunderstood the purpose of the section.

This view of section 16 has important implications. It suggests a different understanding of the legislative intent to which courts and the Securities and Exchange Commission look in construing and administering federal securities laws. Because this legislative intent often has not been realized, this view also offers lessons on the way statutes are written and understood. Finally, it sets forth a new standard by which section 16 is judged as a deceptively simple provision that has fundamentally changed the way publicly held corporations operate.

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