Abstract

Should the same legal principles that prohibit insider trading require corporations to disclose their political spending as well? The question seems particularly important in light of the increasing dominance of corporations in the political realm, the lack of transparency regarding corporate political activity, and the inherently suspicious motives of corporate executives who use corporate treasuries to advance their personal political preferences. This Article examines how the fiduciary principles of trust that underpin prohibitions on insider trading could inform and enhance the content of the general fiduciary duties that corporate officers and directors owe to their shareholders. Although insider trading prohibitions rest on the statutory foundation of federal securities law, the U.S. Supreme Court extrapolates the content of insider trading doctrine from the overarching common law fiduciary duties that govern the daily decisions of corporate managers. In the insider trading context, however, the Supreme Court has articulated a special disclosure obligation based on those fiduciary duties that is not currently recognized in other areas of corporate law. In particular, the Supreme Court requires that to avoid liability for illicit insider trading, a corporate insider who possesses material nonpublic information must either disclose that information to shareholders prior to trading or abstain from trading altogether.

A fiduciary breach due to secret use of corporate assets for personal gain marks the essential concern in both the insider trading realm and in the context of corporate political spending. Therefore, adopting a similar common law fiduciary rule that corporate managers must disclose the amount and target of political expenditures or refrain from engaging in political activity does not seem like much of an intellectual leap. Not only would such a common law disclosure duty fit neatly within existing corporate governance principles, but the compelled transparency would not offend corporations’ First Amendment rights. In the end, prohibiting political insider trading through a “disclose or abstain” rule for corporate political spending would promote greater efficiency in the capital markets, ensure corporate accountability and political legitimacy, and sustain the growing market for corporate social responsibility.