Securities Regulation:

Efforts to Detect, Investigate, and Deter Insider Trading

GGD-88-116: Published: Aug 5, 1988. Publicly Released: Sep 27, 1988.

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Pursuant to a congressional request, GAO reviewed the Securities and Exchange Commission's (SEC) and self-regulatory organizations' (SRO) efforts to detect, investigate, and deter insider trading.

GAO found that the securities markets are vulnerable to insider trading because of the: (1) large number of corporate events, such as mergers and acquisitions; (2) large number of individuals with knowledge of those events; (3) potential for huge profits; and (4) continuous growth and expansion of the markets. GAO found that: (1) SRO identified thousands of trades that required analysis, but referred only a small percentage to SEC, and few of those resulted in SEC investigations; (2) SRO have improved their existing insider trading detection systems; and (3) SEC and SRO have improved their coordination of referrals and investigations. GAO also found that: (1) the lack of automated data gathering and analysis systems delayed the development of evidence for investigations and jeopardized the government's chances of proving violations; and (2) in 1984, SEC and SRO began the Electronic Blue Sheet Project, which was designed to automate their data processing, but, as of July 1988, only two SRO were receiving data in automated form. In addition, GAO found that: (1) SEC had difficulty identifying inside traders who traded through foreign financial institutions, since other countries protect trader identities; and (2) Congress was considering legislation that would strengthen criminal sanctions, authorize SEC to pay for information leading to the detection and prosecution of insider trading, and define insider trading.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The House and Senate passed a bill authorizing a bounty program to reward informants. Public Law 100-704, enacted November 19, 1988, authorizes SEC to pay bounties to informants who provide information leading to the imposition of penalties for insider trading.

    Matter: The Subcommittee should pursue with SEC, the Department of Justice, and other appropriate law enforcement agencies, the feasibility of using key investigative leads from informants to identify and prosecute insider traders.

  2. Status: Closed - Not Implemented

    Comments: Public Law 100-704, enacted subsequent to the issuance of this report, did not exempt information obtained by SEC from foreign governments from the Freedom of Information Act.

    Matter: The Subcommittee may want to explore insider trading further with SEC to determine the extent of the problem and whether legislation is needed to exempt information obtained by SEC from foreign governments from the act.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: SEC established a date, February 8, 1989, for completion of the electronic blue sheet project.

    Recommendation: Because of the importance of timely information to the successful detection of insider trading, the Chairman, SEC, in conjunction with SRO, should establish a timetable for completion of the Electronic Blue Sheet Project. This timetable should be used by SEC to monitor progress to ensure that unwarranted delays do not occur.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: SEC strengthened its negotiations with other countries to secure information on suspected insider trading occuring through foreign financial institutions.

    Recommendation: The Chairman should strengthen negotiations with other countries for the release of information on suspicious trades executed through foreign financial institutions. The Chairman should: (1) establish a policy that when blue sheet data showing trends and patterns of suspicious trades executed through foreign institutions become available, the data will be used in an attempt to persuade foreign governments to release the names of the beneficiary owners involved; and (2) determine the feasibility of foreign financial institutions routinely disclosing the size of every trade emanating from each account.

    Agency Affected: United States Securities and Exchange Commission

 

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