The Genius of the Personal Benefit Test

Abstract

On October 5, when the U.S. Supreme Court hears Salman v. United States, it will focus on the role of the "personal benefit" test in insider trading law for the first time since the test was established in the now iconic 1983 case Dirks v. SEC Dirks reaffirmed the principle that trading on the basis of material nonpublic information is not a crime unless it involves a breach of a duty of trust and confidence to the owner of the information being traded. The Court in Dirks went on to establish the important principle, recently fortified in the notable Second Circuit case United States v. Newman, that a tipper has committed no breach of fiduciary duty unless he receives a personal benefit in exchange for the disclosure. This Essay maintains that the SEC has persistently sought to minimize the role of the personal benefit test in insider trading law, thereby stretching the limits of its delegated power under securities law. It also contends that the SEC categorically rejects the theory, embraced by the Supreme Court and the Second Circuit in Newman and reflected in the personal benefit test, that tipping by insiders is sometimes not just benign, but also decidedly curative for capital market imperfections.