For too long, insider trading law has lacked clarity, generated confusion, and failed to keep up with the times. Without a statute specifically directed at insider trading, the law has developed through a series of fact-specific court decisions applying the general anti-fraud provisions of our securities laws across a broadening set of conduct. As a consequence, the law has suffered—and continues to suffer—from uncertainty and ambiguity to a degree not seen in other areas of law, with elements of the offense defined by—and at times, evolving with—court opinions applying particular fact patterns. The rules of the road have been drawn and redrawn around these judicial decisions, and not always consistently across the country or over time. Although there have been attempts in the past to codify the law to bring greater certainty and clarity to the offense of insider trading, none has succeeded. This has left market participants without sufficient guidance on how to comport themselves, prosecutors and regulators with undue challenges in holding wrongful actors accountable, those accused of misconduct with burdens in defending themselves, and the public with reason to question the fairness and integrity of our securities markets.
The Bharara Task Force on Insider Trading (“Task Force”) has brought together a group of experts on insider trading—from academia, private practice, and the judiciary as well as former Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) officials—to review and assess the current state of insider trading law and to explore proposals to improve it. This Report reflects the culmination of the Task Force’s work and the unanimous conclusions of its members.
After studying the history and current state of insider trading law, reviewing the different legislative proposals that have been presented over the years, and receiving input from various interested groups, the Task Force has reached the following conclusions.
- Reform that simplifies, clarifies, and modernizes insider trading law is necessary and long overdue.
- A legislative solution, in the form of a new statute expressly setting out the elements of an insider trading offense, would be the best vehicle for such reform. While other measures, including regulatory rule-making, could provide incremental benefits, any steps short of a new statute will continue to be burdened by the uncertainty that accompanies existing common law.
- To improve upon the current insider trading regime and to confront its most significant problems, the Task Force believes any new legislation should seek to apply the following key principles:
- The language and structure of any statute should aim for clarity and simplicity.
- The law should focus on material nonpublic information that is “wrongfully” obtained or communicated, as opposed to focusing exclusively on concepts of “deception” or “fraud,” as the current case law does.
- The “personal benefit” requirement should be eliminated.
- The law should clearly and explicitly define the knowledge requirement for criminal and civil insider trading enforcement, as well as the knowledge requirement for downstream tippees who receive material nonpublic information and trade on it.
The Task Force believes that new legislation applying these principles would help eliminate areas of uncertainty and confusion in insider trading law and provide greater clarity for courts, practitioners, and market participants. Applying these principles, the Task Force has drafted certain proposed language that could be used as a template for potential legislation.
The members of the Bharara Task Force on Insider Trading are: Preet Bharara (chair), a distinguished scholar in residence at NYU School of Law and the former U.S. attorney for the Southern District of New York; Joon H. Kim (vice-chair), a partner at the law firm of Cleary Gottlieb Steen & Hamilton LLP and the former acting U.S. attorney for the Southern District of New York; John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia Law School and director of its Center on Corporate Governance; Katherine R. Goldstein, a partner at the law firm of Milbank and the former chief of the U.S. Attorney’s Office for the Southern District of New York’s Securities and Commodities Fraud Task Force; Joseph A. Grundfest, the William A. Franke Professor of Law and Business at Stanford Law School and a former commissioner of the United States Securities and Exchange Commission; Melinda Haag, a partner at the law firm of Orrick, Herrington & Sutcliffe and former U.S. attorney for the Northern District of California; Joan E. McKown, a partner at the law firm of Jones Day and former chief counsel of the SEC’s Division of Enforcement; and Jed S. Rakoff, senior U.S. district judge for the Southern District of New York.
The task force’s full report was issued on January 27, 2020, and is available here.