By Bill Flook
The House of Representatives on December 5, 2019, voted 410 to 13 to pass a bipartisan bill that would write a ban on insider trading into law. H.R. 2534, the Insider Trading Prohibition Act, is an effort to provide clarity to an area of law that for years has been marked by uncertainty due to the lack of a specific insider trading statute.
Rep. Jim Himes, a Connecticut Democrat, sponsored the bill. In floor remarks, Himes said creating criminal or civil liability for insider trading should be in the hands of lawmakers. Today, prohibitions against insider trading are based off years of case law and SEC guidance stemming from the broader anti-fraud provisions of the Securities Exchange Act of 1934.
Himes said “there is not a particularly good fit” between the concept of fraud and the concept of insider trading, which has led to a “vast body” of court-determined law.
Prior to passage of the measure, the Democratic majority agreed to one Republican amendment that made several tweaks to the bill’s language, an effort to preserve its bipartisan support. A second GOP amendment, which Democratic critics said would make insider trading more difficult to enforce, was defeated on a 196 to 231 vote.
Among other provisions, the Himes bill would bar a person from entering into a securities trade or certain derivatives transactions, or from causing someone else to enter into such a transaction, while aware of material non-public information, “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 failed amendment, from Rep. Bill Huizenga of Michigan, would have struck the phrase “aware of” and replaced it with “using.”
Calls for an explicit insider trading statute have intensified since 2014, when the Second Circuit Court of Appeals ruling in U.S. v. Newman set a higher bar for the government to prove personal benefit by the tipper, a necessary ingredient in establishing insider trading liability. Subsequent rulings by both the Second Circuit and Supreme Court have lessened the impact of the Newman decision, although critics still say a legislative fix is necessary.
The House did agree to an amendment, from Rep. Patrick McHenry, which he said was aimed at better demonstrating lawmakers’ intent of “codifying current insider trading law and not expanding it.” Those changes include including an explicit personal benefit test consistent with Supreme Court precedent and the clarification of “ambiguous words” to prevent judges and prosecutors from creating new insider trading liability, McHenry said.
McHenry, a Republican from North Carolina, is the ranking member of the House Financial Services Committee.
The House passage of the Himes bill signals continuing momentum for codifying insider trading restrictions in the 116th Congress.
Last year, former U.S. Attorney Preet Bharara and SEC Commissioner Robert Jackson announced the creation of the Bharara Task Force on Insider Trading.
In an October 2018 New York Times opinion piece, Jackson and Bharara criticized “legal haziness that leaves both investors and defendants unclear about what sorts of information-sharing or other activities by investors would be considered insider trading, and what are the acceptable forms of data-gathering and research that are part of any healthy, functioning financial marketplace.”
Columbia University Law Professor John Coffee, who sits on that task force, testified on the bill before a Financial Services Subcommittee during an April hearing.
In his written testimony, Coffee praised the Himes bill for being “comparatively easy to understand” and for extending “the criminal prohibition to reach certain clearly egregious forms of misbehavior that are largely beyond the powers of courts to reach because courts are constrained by the narrow wording of Section 10(b) of the Securities Exchange Act of 1934.”
Also during the April hearing, Tom Quaadman, executive vice president for the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, expressed a series of concerns with the measure, including that it would effectively outlaw Rule 10b5-1 trading plans, which allows company insiders to set up structured plans to trade stock within a set timeframe and protects them from insider trading liability.
The House Financial Services Committee passed the Himes bill in May by voice vote.
This article originally appeared in the December 6, 2019 edition of Accounting & Compliance Alert, available on Checkpoint.
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