Information and International Insider Trading
Robert Conroy
While there are many issues that arise in inter national finance, the most persuasive has to do with the use of information. Information is a valuable commodity. Generally, information in a financial context is of two types. The first is public information. This is information that is in the public domain. This does not mean that it is known to everyone, but that it is available to anyone. There may be a fee to obtain the information but the key is its availability. Broadly, in an international context there is no issue about using this information to formulate and execute financial transactions.
The more important distinction has to do with non public or insider information. This is information that is not available to everyone. The issue in this context is whether this information can be used to formulate and execute financial transactions. There is a great deal of evidence both in the United States and inter nationally that this type of information can be used to generate profits in financial transactions. This profit comes at the expense of those individuals or institutions that do not have access to the information. A key question is whether this is fair, and whether trading on such information should be barred either legally or ethically. Regrettably, this is viewed differently in different cultures.
The international view is the central issue which financial managers face when operating in different countries. In general, standards which apply to the use of non public information come in three forms. The first is legal restrictions or prohibition. The second are rules governing the standards of practice of professional societies. Thirdly, there are individuals’ own ethical standards that are the result of the individuals’ cultural identity. In those cases where any or all of these conflict, the actions of the individual should be governed by the highest standard. This is true both domestically and in an international context.
The United States has taken the position that insider trading is inappropriate and has established legal prohibitions against using insider information. Moreover, prohibitions against using material non public information are included in many professional societies’ standards of practice. As such, in the United States there is a clear prohibition against such trading.
In an international context, the laws and customs in different countries can be quite varied. An individual can find that the local laws and customs are at variance with the established norms that had governed their actions in the past. Usually the dilemma is that the laws and customs allow practices that would be prohibited in their normal operating environment. The logical question is, what norms should the individual follow? In the case where the individual subscribes to a set of standards of practice that specifically prohibits insider trading, this prohibition should supersede the local law and customs.
In the absence of such guidelines the individual must make his or her own determination. If an individual believes that insider trading is wrong, then the local law and customs cannot relieve that individual of the responsibility to act in a way that is consistent with his or her own internal value system. On the other hand, if an individual does not hold the opinion that activities such as insider trading are wrong, then to the extent that the individual operates within the guidelines of local law and customs, such activities would be reasonable.
See insider trading