Insider trading focuses on the impropriety of obtaining and trading on material nonpublic information, or providing such information to another person in breach of a duty of trust and confidence. Recently, however, Eric T. Schneiderman, the New York State Attorney General, vowed to expand that definition to include what he calls "insider trading 2.0."  By cracking down on brokerage firms that provide early market-moving information to preferred clients, Mr. Schneiderman hopes to limit the "road-rigging, market-manipulating" conduct that is prevalent in the market.

Last week, BlackRock Inc., the world's largest money manager, agreed to end an analyst survey program that Mr. Schneiderman claims could be used to execute trades based, in part, on nonpublic information.  As part of the program, BlackRock conducted regular surveys of analysts at brokerage firms to assess their views on companies they followed.  BlackRock then pooled the information and analyzed it to determine whether it generated any signals as to the future performance of stocks.  Mr. Schneiderman contends that the survey program was designed to not only capture previously published analyst views, but also "nonpublic analyst sentiment that could be used to trade ahead of market reaction to upcoming analyst reports."

This begs the question of whether the prohibition of insider trading is focused on the misuse of information or the maintenance of equitable markets so that one investor does not gain an impermissible advantage over others.  As Peter Henning of the New York Times points out in his article Push to Combat Insider Trading May Go Too Far:

There are many advantages that are not improper, even if they give some investors a chance to profit on information not available to others.  Warren E. Buffett certainly has an advantage over other investors – his decision to buy a company's shares usually drives up its price once his trading is revealed, but no one would claim he acted improperly.

To establish insider trading the violator must obtain material nonpublic information and trade on it.  Whether "gleaning a tidbit of information regarding possible changes in an analyst's sentiment about a company" rises to the level of materiality seems to be a stretch.  And clearly, BlackRock did not engage in insider trading in the traditional sense. So perhaps the more appropriate question is whether BlackRock "obtained" material nonpublic information or "created" it.

Unfortunately, the BlackRock settlement did not answer this question.  In the end, BlackRock did not admit or deny the insider trading allegations.  Instead, it agreed to pay $400,000 to cover the cost of the investigation and discontinue its analyst survey program.  Meanwhile, analysts and investment firms are left with yet another regulatory uncertainty: whether "insider trading 2.0" is an impermissible securities law violation or yet another misguided attempt by the government to "level the playing field."