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From Securities Regulation Daily, March 4, 2015

Congressional response to Newman would make insider trading a standalone crime

By Anne Sherry, J.D.

Representative Stephen F. Lynch (D-Mass) introduced a bill that would amend the Exchange Act to specifically prohibit trading on material inside information. The Second Circuit’s recent decision in U.S. v. Newman demonstrates the need for a clear, bright-line distinction between permissible and prohibited trading, he said in a press release. Lynch also introduced legislation that would require the SEC to carry out a pilot program to test an alternative to the maker-taker pricing model.

The press release emphasized that because insider trading is not a specific crime, the government must prosecute under general antifraud statutes and judge-made law. The Newman court’s “severely limited interpretation” requiring a personal, tangible benefit to the insider will obstruct federal prosecutions of even the most common forms of insider trading, according to Lynch. Clarity in this area is especially important with the increasing use of high-volume electronic trades that can make it difficult to detect illicit trades, he said.

Insider trading amendments. The Ban Insider Trading Act of 2015, H.R. 1173, would add a new paragraph (d) to Sec. 10 of the Exchange Act, making it unlawful to purchase or sell any security or securities-based swap on the basis of information that the trader knows or should know is material and inside information. The Act defines “inside information” as nonpublic information that is obtained either illegally, in violation of a fiduciary duty, or from an issuer (whether directly or indirectly) with an expectation of confidentiality or that the information will only be used for legitimate business purposes. “Material information” is defined as information that relates, directly or indirectly, to an issuer or a security and that would be likely to have a significant effect on the price of a security if it were made public.

The Act also would amend Sec. 20(e) of the Exchange Act to provide for aiding-and-abetting liability for the person who intentionally discloses material and inside information without a legitimate business purpose. Representatives Ruben Hinojosa (D-Tex) and Keith Ellison (D-Minn) are cosponsors.

Maker-taker pricing. Lynch also introduced the Maker-Taker Conflict of Interest Reform Act of 2015, H.R. 1216, which would require the SEC to carry out a pilot program to assess the impact of an alternative to the maker-taker pricing model. According to the press release, the maker-taker system, which provides rebates or payments to brokers to attract trades to particular stock exchanges, adds unnecessary complexity and creates conflicts of interest. The Act would require the SEC to identify a random sample of 50 of the 100 most heavily traded U.S. stocks and prohibit the payment of rebates with respect to those 50 for six months. Hinojosa and Ellison are also cosponsors, along with Rep. Michael Capuano (D-Mass).

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