Insider Trading Legislation Unlikely…At Least For Now

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Despite the fact that SCOTUS has declined to hear an appeal of the problematic Newman insider trading decision, Capitol Hill insiders say that Congress is unlikely to pass legislation to address this issue – at least for the near term.

Why an Insider Trading Bill Is Unlikely

A number of industry watchers (ourselves included) concluded that the Supreme Court’s refusal to hear an appeal of the United States v. Newman case would force Congress to pass legislation limiting the impact of the case.  However, Washington insiders explain that the SEC is accepting the new insider trading standard and that Congress is unlikely to pass any meaningful legislation on this issue for some time.

The most obvious reason policy analysts conclude that an insider trading bill is unlikely to be passed anytime soon is based on the politics of the issue.  Clearly, without significant support from Republicans, a bill won’t get very far.  At the present, Republicans really aren’t excited about this issue.  The only way this might change is if Presidential candidates like Hillary Clinton were to jump on this as an election issue prompting House and Senate Republicans to respond.

Another reason analysts doubt insider trading legislation has a high probability of being passed is due to tepid interest on the part of the SEC.  Participating in a recent panel discussion, SEC enforcement chief Andrew Ceresney admitted that the SEC is treating the Second Circuit Court of Appeal’s Newman decision as the law of the land, saying, “generally, we are treating that as the law”.  Ceresney argued that the Newman case was not a deal knell to the SEC’s insider trading enforcement efforts as the burden of proof is normally lower with civil insider trading prosecutions than it is with criminal cases.

Lastly, some suggest that the SEC is a little nervous about leaving the future of insider trading enforcement cases in the hands of Capitol Hill as the unintended consequences of the various bills that have been announced could be significant.

Previously Announced Insider Trading Bills

Currently, there are three insider trading bills that have been announced, two in the House and one in the Senate. The Senate bill, the Stop Illegal Insider Trading Act, co-sponsored by Jack Reed (D-RI) and Bob Menendez (D-NJ), two senior members of the Senate Banking Committee, takes a simplistic approach: if a person trades a security on the basis of material information that he or she knows or has reason to know is not publicly available, then he or she has engaged in unlawful insider trading.

The second bill, H.R.1173 was introduced by Stephen Lynch (D-MA), a member of the House Financial Services Committee, which makes it illegal to trade “based on information that the individual knows or should know is material inside information.”  However, as part of this bill it would be legal if you obtained non-public information provided you did not get it illegally (such as hacking), or from an issuer with an expectation of confidentiality or in violation of a fiduciary duty.

The third bill is the Insider Trading Prohibition Act introduced by Congressman Jim Himes (D-CT), also a member of the House Financial Services Committee, and co-sponsored by Reps. Steve Womack (R-AR), Carolyn Maloney (D-NY) and Emanuel Cleaver (D-MO).  This bill keys on the concept of ‘wrongfully obtained’ information which is defined as information that has been obtained through “theft, bribery, misrepresentation or espionage, a violation of any federal law protecting computer data or the intellectual property or privacy of computer users, conversion, misappropriation or other unauthorized and deceptive taking of such information, or a breach of any fiduciary duty or any other personal or other relationship of trust and confidence.”

Our Take

If Congress could pass an insider trading bill it would reverse the negative impact of the Newman case and eliminate a great deal of the grey area surrounding insider trading.  However, it looks unlikely that such legislation will gather the support necessary to pass both chambers of Congress.

The interesting aspect of this story is the fact that the Securities and Exchange Commission doesn’t seem to be aggressively trying to promote such legislation.  Perhaps it is because the SEC values the uncertainty surrounding insider trading that has been established by decades of case law.

 

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About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

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