Summary

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.