U.S. House passes insider trading bill

4 minute read

Representative Jim Himes (D-CT) gestures as he speaks during a House Intelligence Committee hearing on worldwide threats, in Washington, D.C., U.S., April 15, 2021. Al Drago/Pool via REUTERS

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  • U.S. House of Representatives passed a bill that would explicitly prohibit insider trading
  • The bill's sponsor told Reuters its aim is to codify existing judge-made law

(Reuters) - The U.S. House of Representatives voted on Tuesday to pass a bill that would explicitly prohibit insider trading in lawmakers' latest attempt to address the issue after recent setbacks in courts in trading cases.

The chamber passed the Insider Trading Prohibition Act and other measures together in a procedural vote. In an interview with Reuters on Tuesday, the bill's sponsor, Democratic Representative Jim Himes of Connecticut, said the legislation does not expand insider trading law but simplifies and codifies the law as articulated by courts through decades of opinions.

The bill passed the House last session but was not acted on by what was then a Republican-controlled Senate. Himes said he expects to be better able to make his case to the current Senate Banking Committee, now chaired by Democratic Senator Sherrod Brown of Ohio.

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The legislation introduced last month would make it illegal for a person to trade while aware of non-public information that could reasonably affect the price of a stock if that information was obtained by wrongful means including deceit, breach of an insider's fiduciary duty or hacking.

Without a law explicitly banning insider trading, the U.S. Securities and Exchange Commission and federal prosecutors have policed it using general fraud statutes including the Securities Exchange Act, forcing courts to confront increasingly complicated questions of what makes the conduct fraudulent.

Congress' attempts to explicitly outlaw insider trading date back more than 20 years. Lawmakers renewed their efforts after the 2nd U.S. Circuit Court of Appeals overturned the convictions of hedge fund managers Todd Newman and Anthony Chiasson in 2014, ruling that prosecutors had to prove a trader knew the source of their tip had received a benefit in exchange for the information.

Himes' bill would prohibit insiders from trading or tipping in exchange for a "direct or indirect personal benefit." However, it says the government need not prove that the ultimate trader or tipper knew the information was obtained for a benefit, only that they recklessly disregarded its improper origin.

John Coffee, a professor at Columbia Law School, said on Tuesday that the language limits the bill's value by allowing Wall Street traders to exchange information on the expectation of future favors and viewed it as unlikely to gain traction in a Democratic-controlled Senate.

Read more: Two Senate Democrats push insider trading bill after court ruling U.S. court reverses fund managers' insider trading convictions

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Jody Godoy reports on banking and securities law. Reach her at jody.godoy@thomsonreuters.com