Representative Jim Himes (D-CT), along with co-sponsors Steve Womack (R-AR), Carolyn Maloney (D-NY) and Emanuel Cleaver (D-MO), introduced legislation, titled the “Insider Trading Prohibition Act” (the “Bill”), that is intended to strengthen the ban on insider trading by defining the act and effectively overturning U.S. v. Newman.
The Bill would amend the Securities Exchange Act of 1934 (the “Exchange Act”) by adding a new Section 16A to include language that would, among other things, make it expressly “unlawful for any person, directly or indirectly, to purchase, sell, or enter into, or cause the purchase” of any financial product while in possession of material nonpublic information relating to the financial product.
The Bill also prohibits trading on nonpublic information if such a trader “knows, or recklessly disregards” that such information has been obtained wrongfully, or that such purchase, sale or entry would “constitute a wrongful use of such information.” Additionally, the Bill contains a “Standard and Knowledge Requirement” that specifies the ways in which the nonpublic information may be obtained and communicated.
The Bill has been referred to the House Committee on Financial Services.
Previously, the Senate proposed its own version of a bill to define insider trading: the “Stop Illegal Insider Trading Act” (S. 702). As of March 11, 2015, the S. 702 bill has been read twice and referred to the Senate Committee on Banking, Housing and Urban Affairs.
Lofchie Comment: The House version of the bill seeking to expand the scope of the insider trading prohibition is more precisely drafted than the Senate version. In the Senate version, liability for insider trading is predicated on information being obtained from sources other than “publicly available sources”; however, that apparent term itself was not defined, nor is it obvious that a source of information that is not otherwise publicly available is, or should be, an inherently illegal source. By contrast, in the House version of the bill, liability is predicated on the fact that the information was “wrongfully obtained or communicated,” thus basing liability under the bill on a violation of existing law. The House version of the bill also is more extensive in its consideration of when an entity may be liable for the conduct of its employees, and when an agent may rely on the authority of its principal.
Although the Senate version contains a provision allowing the SEC to grant exemptions from the prohibition in the bill, this provision should not be necessary, since the SEC generally has exemptive authority under Section 36 of the Securities Exchange Act and thus does not require particular authority with regard to this provision.