House Passes "Insider Trading Prohibition Act"
Commentary by Steven Lofchie
In a vote of 410 to 13, the House of Representatives passed a bill to strengthen the ban against insider trading.
As previously covered, the bill amends the Securities Exchange Act of 1934 (the "Exchange Act") to explicitly prohibit:
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anyone from buying, selling or entering into a "security, security-based swap, or security-based swap agreement" while they are aware of material nonpublic information relating to the financial product, if that person knows, or recklessly disregards, that the information was obtained wrongfully, or that making that trade would constitute a wrongful use of that inside information; and
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anyone from communicating material, nonpublic information regarding a "security, security-based swap, or security-based swap agreement" that would affect the market price of the financial product if it is reasonably foreseeable that the recipient of the information will trade on that information or pass it along to others who will.
The bill also contains a "Standard and Knowledge Requirement" that elaborates on the ways in which trading or communications "while aware of material, nonpublic information" is "wrongful."
Commentary
The new definition of "insider trading" contained in the House bill may have the effect of broadening the prohibition as applied to "computer data." Firms that use algorithmic models may scrape or otherwise obtain data from various third-party websites. The law is, in many instances, not clear as to whether access to, or the use of, such information is permissible. If the use of the data is impermissible, then does inclusion of the data in an algorithm make trades effected pursuant to the algorithm improper? It should depend in part on whether any information improperly obtained was, in itself, "material" or the information was just one of numerous factors the algorithm took into account.