In Aftermath of Newman, Congress Attempts to Define Insider Trading

The 2013 Second Circuit opinion in United States v. Newman introduced four key elements that must be established in order to determine liability for illegal tipping:

  1. The tipper had a fiduciary or other duty to safeguard the confidential information;
  2. The tipper breached that duty by disclosing confidential information to a tippee in exchange for a personal benefit (i.e., a quid pro quo);
  3. The tippee was aware that the tipper breached his or her duty; and
  4. The tippee traded on the confidential information.

Believing that the Congress, not the judiciary, should be defining insider trading, two Senators and one member of the U.S. House of Representatives have introduced two separate bills that would amend the Securities Exchange Act to eliminate the personal benefit test established under Newman.

U.S. Senator Jack Reed (D-RI) and Senator Robert Menendez (D-NJ) introduced the Stop Illegal Insider Trading Act (S.702), which would make it illegal for any person to: “1) purchase, sell, or cause the purchase or sale of any security on the basis of material information that the person knows or has reason to know is not publicly available; or (2) knowingly or recklessly communicate material information that the person knows or has reason to know is not publicly available to any other person under circumstances in which it is reasonably foreseeable that the communication is likely to result in a violation of this prohibition.”

This bill sidesteps Newman and creates another cause of action for insider trading under a new section 10(d) of the Securities Exchange Act. It would eliminate the personal benefits test as well as the requirement that a tipper breach a fiduciary duty in disclosing confidential information.

U.S. Representative Stephen Lynch (D-MA) introduced the Ban Insider Trading Act of 2015 (HR 1173), which also creates a section 10(d) of the Securities Exchange Act to eliminate the personal benefit test.

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