Insider trading law has remained a subject of significant debate and attention, including with a recent Second Circuit decision addressing the use of 18 U.S.C. §§ 1343 (wire fraud) and 1348 (securities fraud) in insider trading cases[1] and a new insider trading bill that passed the U.S. House of Representatives in December by an overwhelming majority. Yesterday, a blue ribbon task force headed by Preet Bharara, the former U.S. Attorney for the Southern District of New York, published a report studying the history and current state of insider trading law and proposing reforms that would bring greater clarity and certainty to the law.
The Task Force – made up of experts from the judiciary, academia, and private practice, and including former senior officials at the Department of Justice and Securities and Exchange Commission – and including Cleary partner and former acting U.S. Attorney for the Southern District of New York Joon H. Kim, concluded that current U.S. insider trading law suffers from a lack of clarity and certainty, and has failed to keep up with changing times. Because there is no statute specifically codifying the elements of insider trading, the law has developed through a series of court decisions applying the general anti-fraud provisions of the U.S. securities laws. The rules of the road have thus been drawn and redrawn around these judicial decisions, and not always consistently across the country or over time. As a result, the current state of the law 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.
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 determined that the following principles are advisable to bring a greater degree of clarity and fairness to the law.
- 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.
As a guide to implementing the above recommendations and principles, the Task Force’s Report also includes certain proposed language that could be used as a template for potential legislation. The full Report and other information is available at www.BhararaTaskForce.com.
[1] For an in-depth discussion of that decision see Cleary Gottlieb Alert Memo, Second Circuit: Criminal Fraud Statutes Do Not Require Prosecutors to Show that Tippers in Insider-Trading Cases Received a “Personal Benefit,” Jan. 13, 2020, available at https://www.clearygottlieb.com/-/media/files/alert-memos-2020/second-circuit-criminal-fraud-statutes-do-not-require-pdf.pdf.