A member of the U.S. House of Representatives Financial Services Committee introduced a bipartisan insider trading bill, the third offering on the topic introduced in Congress in recent weeks. The latest version is more balanced than the Senate version and benefits from a Republican co-sponsor.
Congressman Jim Himes (D-CT) introduced the Insider Trading Prohibition Act which is co-sponsored by Reps. Steve Womack (R-AR), Carolyn Maloney (D-NY) and Emanuel Cleaver (D-MO). Himes’ district in Connecticut includes Greenwich and Stamford, the epicenter of the U.S. hedge fund industry.
The proposed legislation keys on the concept of ‘wrongfully obtained’ information. The law would make it unlawful for a person to trade on material, nonpublic information when the information was wrongfully obtained, or when the use of such information to make a trade would be deemed wrongful.
The bill defines ‘wrongful’ 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.”
Like the other proposed insider trading bills, the impetus behind the legislation is to remove the personal benefit requirement outlined in the U.S. Second Circuit Court of Appeals ruling on United States v. Newman. The bipartisan bill would make anyone receiving ‘wrongful’ information liable so long as they were aware, or recklessly disregarded, that the information was wrongfully obtained or communicated.
The bipartisan legislation has a more narrowly defined definition of inside information than the blunderbuss approach of the Senate bill which deems all material non-public information illegal. In this House version, inside information would need to breach a fiduciary duty or “any other personal or other relationship of trust or confidence.” This definition is not far from the definition of inside information in the other House bill introduced by Representative Stephen Lynch (D-MA) a fellow member with Himes of the Financial Services Committee.
The phrase “any other personal or other relationship of trust or confidence” widens the scope of confidential information, creating some headaches for anyone doing primary research, but it is common practice to have controls which filter out information which breaches fiduciary duties. These controls can be tightened, a far preferable outcome than having to toss primary research altogether.
As we have noted previously, it is still too early to know which of the three flavors of insider trading bills will prevail, or whether any bill will make it out of committee before the Supreme Court weighs in on Newman. The bipartisan nature of the latest bill increases the odds that Congress will pass insider trading legislation. We hope it also increases the odds that a more balanced insider trading definition than the Senate’s would succeed.
The text of the legislation is available here.