Use and Knowing Possession: An Old Debate Gains New Relevance Amidst the Government's Latest Insider Trading Enforcement Push
February 15, 2023 | The Review of Securities & Commodities Regulation
An open question in insider trading law is whether the government must prove that an insider actually used material nonpublic information to trade, or whether the government merely must prove that the insider knowingly possessed material nonpublic information at the time of the trade. The SEC’s Rule 10b5-1, which was recently amended in late 2022, still sets out a “knowing possession” standard, but this rule is in tension with previous decisions by federal courts of appeals and has received only inconsistent deference from the courts. In this article, the authors describe the “use” versus “knowing possession” debate, go over the recently amended version of Rule 10b5-1, and discuss how new enforcement initiatives may lead to renewed scrutiny of the “knowing possession” standard by the courts amidst the broader trend towards reduced deference to agency interpretations of the law.