As I wrote here last month, the Second Circuit's decision in U.S. v. Newman has resulted in a flurry of recent pleas from people such as Mark Cuban, James Stewart and others for Congress to, finally, define the law of insider trading.
On Monday, Congressman Stephen F. Lynch (D-Mass.) became the first member of Congress to offer such legislation in the post-Newman era with his introduction of the Ban Insider Trading Act of 2015. In short, Rep. Lynch's proposed legislation would amend Section 10 of the '34 Act to make it unlawful to
purchase or sell any security, or any securities-based swap agreement, based on information that the person knows or, considering factors including financial sophistication, knowledge of and experience in financial matters, position in a company, and amount of assets under management, should know is material information and inside information.
The proposed legislation further defines the term "inside information" as information that is nonpublic and obtained (a) illegally; (b) directly or indirectly from an issuer with an expectation of confidentiality or that such information will only be used for a legitimate business purposes; or (c) in violation of a fiduciary duty. It also provides that tippers of inside information (not just the trader) are in violation of the statute, as well, if they knew or should have known it was inside information.
In a statement this week accompanying the proposed legislation, Rep. Lynch observed that under Newman's "severely limited interpretation of what constitutes illegal insider trading," federal prosecutors will be significantly obstructed in their efforts to "combat and prosecute even the most common forms of insider trading...." He added that "it is obvious from the Newman case that we need clarity in this area in order to create a bright-line distinction between what is permissible and prohibited."