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This wouldn’t work, but my hot take is that anyone with potential insider information can only buy/sell index funds.

autosharp 5y ago
This doesn't begin to address the issue. E.g. if you work at the fed you buy a 3x treasury index fund if you know rates will be lowered, or short 3x treasury index if you know rates will be raised. If you are a judge or legislator and you get to say if 30% charge on app stores is reasonable, this affects 20% of the Nasdaq 100 index. So you buy/sell that over a 24 hour period.
- ziml77 5y ago
  A couple possible solutions: Disallow them from being directly involved in investment decisions. Make them hand their money over to someone who will make investments on their behalf with influence limited to broad things like risk profile and the term they want returns over. Alternatively, implement a minimum holding period. It's much harder to trade on insider info if there must be a long period of time from purchase to sale. One place where I worked wouldn't let us sell until at least 3 months after we purchased any shares.
  - TheCondor 5y ago
    Almost seems like it could be a giant captive market for some specialized funds. Like if you’re in one of these positions you can invest with a new hedgefund without needing to be a qualified investor.
OJFord 5y ago
You do say it wouldn't work, but just to really spell out the obvious ones: - no more options/shares for employees; - significant insider buying/holding is generally considered a positive signal, alignment of incentives, etc. would need replacing with a more complicated compensation agreement linking bonuses to average share price over the year or something. Slightly less obvious one is that you still have inside information on the index fund, not just that your company might itself be a significant constituent, but inside knowledge of the industry, what's happening to a common supplier, etc. And by 'index fund' you probably actually mean/want 'significantly diverse pool of shares', an index can be small. Nothing (other than it being silly) stops it being just TSLA or whatever either, 'My Favourite 1' can be an index of my 1 favourite shares, and you can create a fund that tracks it. Obviously that's silly and doesn't happen to that extent, but it might if you incentivised it by making 'index fund' the rule.
- ianai 5y ago
  at least consider a ban on stock buybacks like was the case until that regulation was rolled back in the 80s.
  - ludamad 5y ago
    What why? Surely you mean stock buybacks in very specific scenarios such as after a bailout? Isn't it just the inverse operation of printing stock?
  - nradov 5y ago
    There's nothing really wrong with stock buybacks. They're just a tax efficient method for companies without strong growth opportunities to return value to shareholders.
    - OJFord 5y ago
      Presumably GP is worried that (with the company's inside information about itself) there is a strong growth opportunity, as it will turn out, and that the company might decide to reissue once it's realised that growth. Not saying I really agree, they typically offer a premium (which is just like rolling a dividend into it) and it would seem highly unusual to have a company that seemed growth/non-growth according to whether you had inside information. I suppose there might be examples like AMC or GameStop (not that, inside information wouldn't have helped you there!) that seemed on the outside to be dying, they absolutely should return or value to shareholders and cease operations; but actually they had ambitious plans to revitalise etc...
      - chii 5y ago
        > with the company's inside information about itself a company acts in the interest of its shareholders. If you're saying that a majority shareholder hides this info from the rest of the shareholders, triggers a buy back under a false pretense, then realize that growth (making the share worth more), then that's just financial fraud. If a company has an opportunity for growth, this information is unlikely to be private to the shareholders, and thus, the buyback would price in that possibility (discounted by the success rate and risk). So the scenario, where a company buys back shares (from current shareholders), then somehow improves it's performance/growth suddenly, is not likely.
aqme28 5y ago
What this would mean is that insiders with large holdings of stock (due to e.g. grants) would be forced to quit their jobs just so they could have some liquidity. That's a terrible incentive.
- sidlls 5y ago
  Most, if not all, insiders shouldn't be in a situation where they need that kind of liquidity in their company shares. I'd argue that if they are their incentives aren't aligned with their role as an insider and they should be removed anyway.
nova22033 5y ago
Matt Levine had an interesting take in his newsletter. Insiders can buy/sell but they have to announce it in public ahead of time. If you think he's selling to pay his kids tuition, you won't sell. If you think he's buying because he has insider information, you can buy too..
Jeff_Brown 5y ago
If that were the law, someone with inside information could still give valuable suggestions to their friends, or people they want to be friends with. The result would be as unfair as if they themselves were doing the trading.

This doesn't begin to address the issue. E.g. if you work at the fed you buy a 3x treasury index fund if you know rates will be lowered, or short 3x treasury index if you know rates will be raised. If you are a judge or legislator and you get to say if 30% charge on app stores is reasonable, this affects 20% of the Nasdaq 100 index. So you buy/sell that over a 24 hour period.

ziml77 5y ago
A couple possible solutions: Disallow them from being directly involved in investment decisions. Make them hand their money over to someone who will make investments on their behalf with influence limited to broad things like risk profile and the term they want returns over. Alternatively, implement a minimum holding period. It's much harder to trade on insider info if there must be a long period of time from purchase to sale. One place where I worked wouldn't let us sell until at least 3 months after we purchased any shares.
- TheCondor 5y ago
  Almost seems like it could be a giant captive market for some specialized funds. Like if you’re in one of these positions you can invest with a new hedgefund without needing to be a qualified investor.

OJFord 5y ago

You do say it wouldn't work, but just to really spell out the obvious ones: - no more options/shares for employees; - significant insider buying/holding is generally considered a positive signal, alignment of incentives, etc. would need replacing with a more complicated compensation agreement linking bonuses to average share price over the year or something. Slightly less obvious one is that you still have inside information on the index fund, not just that your company might itself be a significant constituent, but inside knowledge of the industry, what's happening to a common supplier, etc. And by 'index fund' you probably actually mean/want 'significantly diverse pool of shares', an index can be small. Nothing (other than it being silly) stops it being just TSLA or whatever either, 'My Favourite 1' can be an index of my 1 favourite shares, and you can create a fund that tracks it. Obviously that's silly and doesn't happen to that extent, but it might if you incentivised it by making 'index fund' the rule.

ianai 5y ago
at least consider a ban on stock buybacks like was the case until that regulation was rolled back in the 80s.
- ludamad 5y ago
  What why? Surely you mean stock buybacks in very specific scenarios such as after a bailout? Isn't it just the inverse operation of printing stock?
- nradov 5y ago
  There's nothing really wrong with stock buybacks. They're just a tax efficient method for companies without strong growth opportunities to return value to shareholders.
  - OJFord 5y ago
    Presumably GP is worried that (with the company's inside information about itself) there is a strong growth opportunity, as it will turn out, and that the company might decide to reissue once it's realised that growth. Not saying I really agree, they typically offer a premium (which is just like rolling a dividend into it) and it would seem highly unusual to have a company that seemed growth/non-growth according to whether you had inside information. I suppose there might be examples like AMC or GameStop (not that, inside information wouldn't have helped you there!) that seemed on the outside to be dying, they absolutely should return or value to shareholders and cease operations; but actually they had ambitious plans to revitalise etc...
    - chii 5y ago
      > with the company's inside information about itself a company acts in the interest of its shareholders. If you're saying that a majority shareholder hides this info from the rest of the shareholders, triggers a buy back under a false pretense, then realize that growth (making the share worth more), then that's just financial fraud. If a company has an opportunity for growth, this information is unlikely to be private to the shareholders, and thus, the buyback would price in that possibility (discounted by the success rate and risk). So the scenario, where a company buys back shares (from current shareholders), then somehow improves it's performance/growth suddenly, is not likely.

aqme28 5y ago

What this would mean is that insiders with large holdings of stock (due to e.g. grants) would be forced to quit their jobs just so they could have some liquidity. That's a terrible incentive.

sidlls 5y ago
Most, if not all, insiders shouldn't be in a situation where they need that kind of liquidity in their company shares. I'd argue that if they are their incentives aren't aligned with their role as an insider and they should be removed anyway.

nova22033 5y ago

Matt Levine had an interesting take in his newsletter. Insiders can buy/sell but they have to announce it in public ahead of time. If you think he's selling to pay his kids tuition, you won't sell. If you think he's buying because he has insider information, you can buy too..

Jeff_Brown 5y ago

If that were the law, someone with inside information could still give valuable suggestions to their friends, or people they want to be friends with. The result would be as unfair as if they themselves were doing the trading.