Senate Banking Committee Considers Insider Trading Prohibition Act
Commentary by Ilan T. Graff
At a hearing before the Senate Committee on Banking, Housing, and Urban Affairs, witnesses raised the pros and cons of the Insider Trading Prohibition Act. The Act aims at codifying insider trading laws and providing clarity to market participants.
Witnesses (and their submitted testimony) included: New York University Law School Professor Robert J. Jackson, Jr.; University of Chicago Law School Professor M. Todd Henderson; Senior Fellow in Economic Policy at the Heritage Foundation, David R. Burton; and Columbia Law School Professor John C. Coffee, Jr.
Those in support of ITPA argued the Act:
- provides market participants with a clear statutory definition of insider trading;
- codifies judicial decisions (Note: Ranking Member Pat Toomey stated that Congress should codify the large body of insider trading law that the courts have developed, but cautioned that it needed to be done with care to avoid "legislation that might cause confusion, uncertainty, or unintended consequences.");
- gives prosecutors flexibility because it does not claim to be the only source of liability for insider trading violations; and
- addresses key issues where the common law is outdated, such as: (i) clarifying that prosecutors can prove exchanges of material non-public information not just through monetary gain, but also through "direct or indirect personal benefit … including a reputational benefit," and (ii) plainly bans the use of information stolen through hacking and other cybersecurity breaches.
Those against ITPA argued the Act:
- uses catchall provisions that can lead to abuse, like the phrase "indirect personal benefit," which can encompass "virtually any human interaction" that provides some theoretical benefit;
- replaces the intent element needed to violate the common law with an overly broad mens rea — individuals who are "aware, consciously avoided being aware, or recklessly disregarded that the information was wrongfully obtained or communicated can have a case brought against them";
- lacks a clear mandate directing the SEC to close a loophole that exempts foreign companies from the "insider-trading disclosure rules" that U.S. companies are subject to under SEA Section 16 ("Directors, officers, and principal stockholders"); and
- allows prosecutors to "cherry pick" amongst different laws because it does not have an "exclusivity clause" and will not be the sole source of liability violations of insider trading.
Commentary
Insider trading law's ambiguities have hampered and unraveled prosecutions while increasing compliance costs for those trying to keep pace with an ever-evolving enforcement landscape. Clarifying legislation is overdue. However, as ITPA critics note, retaining the "personal benefit" test codifies one of the existing regime's biggest deficiencies, preserving uncertainty and undermining the prospects for meaningful prosecutions. The Bharara Task Force on Insider Trading - on which John C. Coffee, Jr. served - has offered a superior alternative: eschewing "personal benefit" in favor of focusing on whether the information at issue was taken, used, or communicated "wrongfully."
As Professor Coffee warns, enacting the ITPA as currently framed would "in its practical effect . . . be more a step backward than a step forward."