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New Laws for Insider Trading?

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July 12, 2019 | Jennifer Namazi

New Laws for Insider Trading?

If someone asked you how to define “insider trading,” what would you say? Chances are, it would be something along the lines of “trading a stock for personal gain on the basis of material, non-public information.” I know that’s the loose definition that has bounced around in my head for years, and that seems to align with the language in insider trading policies and actions taken by the SEC to enforce trading violations. If someone then asked you how to prove that insider trading has occurred, how would you define that?

Even with an idea about what may trigger an insider trading violation, there aren’t actually laws that define the nuances of how to prove it has occurred. On the plus side, this has allowed the SEC a broad range of flexibility to interpret situations that arise and take action. On the flip side, not having a specific statute on the books leaves a lot of gray area in nailing down actual violations.

We may see some action in this area, as The House Financial Services Committee of Congress recently passed a bill (The Insider Trading Prohibition Act) aimed at setting forth the specifics on proving insider trading.

The current state of identifying and prosecuting insider trading cases largely centers on material information that was obtained before broad public availability, in which the transfer and use of it breaches a fiduciary duty, or a duty of trust and confidence. One typical scenario of this type of duty breach would include a company employee who comes into contact with material, non-public information through the course of their job and uses that information to tip others or to personally trade for gain. Another example is that of a husband who overhears his wife’s conference call (this actually happened in a real case) and places trades accordingly, profiting from the information he overheard.

With the proposed regulations, the focus for insider trading expands from a “fiduciary or trust” duty concept to include scenarios where “if such person knows, or recklessly disregards, that such information has been obtained wrongfully, or that such purchase or sale would constitute a wrongful use of such information.” The bill would trigger a violation for someone to “wrongfully to communicate” material, non-public information if it was “reasonably foreseeable” that the recipient of the information would trade on it. A New York Times article on the topic (“Will Congress Expand the Insider Trading Prohibition?” Peter J. Henning, May 24, 2019) explains that “The legislation also would move insider trading law away from its focus on a duty to keep information confidential by more broadly describing what constituted “wrongful” trading or transmission of confidential information. There would be four ways to show that the information had been obtained wrongfully: by theft, bribery or espionage; by violation of any federal law protecting computer data; by conversion, misappropriation or unauthorized and deceptive taking of information; and by breach of a fiduciary duty or breach of “any other personal or other relationship of trust and confidence.”

All of the above come together to create an environment for the SEC that makes it much easier to prove that violations have occurred.

This bill is in the early stages and would need to successfully make its way through both the House and Senate in order to become a statute. We’ll be keeping an eye on the bill’s progress.



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