Third Congressional Proposal to Define Insider Trading
On March 25, 2015, U.S. Representative Jim Himes introduced the Insider Trading Prohibition Act. The bill is the latest in a series of efforts to define insider trading following the Second Circuit’s decision last year in United States v. Newman. We have blogged previously about similar legislation introduced by U.S. Senators Jack Reed and Bob Menendez and U.S. Representative Stephen F. Lynch.
The Himes bill would create a new Section 16A of the Securities Exchange Act. The new section would make it illegal for a person to trade securities on the basis of material, non-public information that the person knows (or recklessly disregards) was wrongfully obtained. The bill would also make it illegal for a person whose own trading would be illegal to wrongfully communicate material, non-public information to another person when it is reasonably foreseeable that the other person is likely to trade on it or pass it on to others.
The Himes bill defines several categories of “wrongfully obtained” information, including, (i) information obtained by theft, bribery, misrepresentation or espionage, (ii) information acquired in violation of federal laws protecting computer data, intellectual property, and the privacy of computer users, and (iii) information obtained via conversion, misappropriation, or other unauthorized and deceptive means, including information obtained in “breach of any fiduciary duty or any other personal or other relationship of trust and confidence.”
Like the Reed-Menendez and Lynch bills, the Himes bill has been positioned as a response to Newman. Thus, the bill would eliminate Newman’s requirement that a tippee who trades on the basis of material, non-public information (or who tips others) know that the tipper received a personal benefit for disclosing the information. The bill states that the tipper or trader need not “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 in possession of such information or making the communication, as the case may be, was aware, or recklessly disregarded that such information was wrongfully obtained or communicated.”
Going forward, practitioners should pay particular attention to the Himes insider-trading bill, as it is the first such proposal to garner bipartisan support.