On Tuesday, the Insider Trading Prohibition Act passed the house by a pretty big bipartisan majority—350 to 75. Currently, there is no explicit statutory prohibition on insider trading and prosecutors have relied on general fraud statutes to pursue charges. The bill would add to the Exchange Act a new Section 16A that would define insider trading and make it illegal. In an interview with Reuters, the bill’s sponsor, Jim Himes, said that “the legislation does not expand insider trading law but simplifies and codifies the law as articulated by courts through decades of opinions.” A version of the bill passed the House in 2019 by an even stronger vote, but never made it through the Republican-led Senate. No,w with Democrats in charge, will the bill be passed and signed into law?
Generally, the bill prohibits trading in securities, as well as related communications to others, by a person aware of material, nonpublic information that was wrongfully obtained. More specifically, the bill would make it unlawful for any person, directly or indirectly, to trade in any security while aware of material, nonpublic information relating to that security (or any nonpublic information, from any source, that would reasonably be expected to have a material effect on the market price of the security) (MNPI) if the person knows, or recklessly disregards, that the information has been obtained wrongfully, or that the purchase or sale would constitute a wrongful use of the information.
The bill also makes it unlawful for any person whose own trade in a security would violate the prohibition above to wrongfully communicate MNPI relating to the security to any other person if that other person trades in that security or tips the information to another person who trades in that security, provided that the trade (while aware of the MNPI) is reasonably foreseeable.
The bill also prescribes when the conduct is to be considered “wrongful.” Trading while aware of MNPI or tipping MNPI under these prohibitions is
“wrongful only if the information has been obtained by, or its communication or use would constitute, directly or indirectly—
(A) theft, bribery, misrepresentation, or espionage (through electronic or other means);
(B) a violation of any Federal law protecting computer data or the intellectual property or privacy of computer users;
(C) conversion, misappropriation, or other unauthorized and deceptive taking of such information; or
(D) a breach of any fiduciary duty, a breach of a confidentiality agreement, a breach of contract, a breach of any code of conduct or ethics policy, or a breach of any other personal or other relationship of trust and confidence for a direct or indirect personal benefit (including pecuniary gain, reputational benefit, or a gift of confidential information to a trading relative or friend).”
Notably, the statute would retain a personal benefit requirement. However, it is not necessary that the person trading or making the communication know “the specific means by which the information was obtained or communicated, or whether any personal benefit was paid or promised by or to any person in the chain of communication, so long as the person trading while aware of such information or making the communication, as the case may be, was aware, consciously avoided being aware, or recklessly disregarded that such information was wrongfully obtained, improperly used, or wrongfully communicated.”
Reuters reported that Columbia Law School Professor John Coffee “said on Tuesday that the language limits the bill’s value by allowing Wall Street traders to exchange information on the expectation of future favors and viewed it as unlikely to gain traction in a Democratic-controlled Senate.”
There is no control person liability (unless the control person participates), and there are several affirmative defenses, including for directed trading or trades that satisfy Rule 10b5-1 (which the SEC is required to review and modify as necessary).
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