NEW YORK, NOV. 11 -- Securities and Exchange Commission Chairman David S. Ruder today endorsed a broad definition of illegal insider stock trading and said he supports an effort under way in Congress to codify the crime.
In a speech here, Ruder said the SEC should support an insider trading definition that would cover not only improper trading by corporate employes, but also by "persons associated with the market, by friends and relatives and by other persons who knowingly violate relationships of trust and confidence by utilizing inside information for their own benefit."
He added that any proposed legislation "containing such a concept is one that I would endorse." He stopped short of backing specific legislation that has been introduced in the Senate, saying that the SEC is still examining several proposals.
Insider trading, which refers generally to the misuse of nonpublic information while trading in stocks and other securities, has never been defined by Congress. The law has evolved sporadically over several decades through a series of court cases that have gradually expanded the crime's scope.
One important case is now pending before the Supreme Court. The court has agreed to review the validity of the so-called misappropriation theory under which former Wall Street Journal reporter R. Foster Winans was prosecuted for trading stocks based on advance knowledge of his newspaper columns.
The misappropriation theory is the broadest definition of insider trading to have been approved by the courts so far, and some securities lawyers expect the Supreme Court to refine or throw out the theory when it rules on the case. A decision is expected within the next several months.
Partly because of uncertainty generated by the Winans case, some members of Congress have become interested in writing a new insider trading definition. Senators Donald Riegle (D-Mich.) and Alphonse D'Amato (R-N.Y.) have sponsored one bill and the SEC proposed its own legislation before Ruder was sworn in as chairman in August.
But not everyone in Congress believes that a new insider trading law is necessary. While the Senate has been active on the issue, there has been virtually no movement in the House. Rep. John Dingell (D-Mich.), chairman of the House Commerce Committee, has expressed doubt about whether a new law would enhance insider trading enforcement by the SEC and the Justice Department.
Ruder's comments today will likely spur those who favor legislation.
The definition Ruder endorsed is far-reaching. He said the law should cover not only those who violate relationships of trust -- a concept at the heart of current insider trading theory -- but also should be designed to stop prospective bidders in a corporate takeover from tipping others about their plans in advance of an announcement.
"Even if no breach of trust or confidence would be involved, it is unfair to permit those planning a tender offer to spread that highly material information to others in advance of the tender offer," Ruder said.
The SEC chairman emphasized that while much attention has been focused recently on the stock market crisis, insider trading and the continuing probes of securities law violations arising from disgraced stock speculator Ivan F. Boesky's cooperation with the government remain a high priority.
"The commission is still investigating, and you may rest assured that it will bring additional enforcement actions if its investigation reveals that violations have occurred," Ruder said.
Responding to questions from reporters after his speech, Ruder also discussed his concerns about the relationship between recent market volatility and various computerized stock trading programs. Ruder said the SEC is "looking very carefully" this week at whether the New York Stock Exchange's decision to restart its computerized trading system, which helps speed stock trades to the exchange floor, has any effect on market volatility.