S. 5320: Insider Trading Prohibition Act

This bill would create a new federal ban on insider trading under the Securities Exchange Act of 1934. In plain terms, it would make it illegal for a person to buy, sell, or otherwise trade certain financial instruments when they have material, nonpublic information and know, or deliberately avoid knowing, that the information is confidential and obtained or used wrongfully.

What counts as covered trading

The bill applies not only to stocks and other securities, but also to:

• security-based swaps
• security-based swap agreements

It covers direct trading as well as causing someone else to trade.

What kinds of conduct would be illegal

The bill would prohibit two main things:

• Trading on wrongful inside information: A person could not trade while aware of material, nonpublic information if that information was obtained through wrongdoing or if trading on it would itself be wrongful.
• Improperly sharing inside information: A person could not wrongfully communicate material, nonpublic information if they know, or consciously avoid knowing, that the communication will lead to a prohibited trade, and the recipient then trades based on that information.

What counts as “wrongful”

The bill says trading or sharing information is wrongful only if the information was obtained or used through things like:

• theft
• conversion
• bribery
• misrepresentation
• espionage, including electronic means
• other unauthorized access
• violations of federal laws protecting computer data, privacy, or intellectual property
• misappropriation from the source of the information
• breach of a fiduciary duty to shareholders for personal benefit

The bill also says a person does not need to know every detail of how the information was obtained or passed along, as long as they know, deliberately avoid knowing, or recklessly disregard that it was wrongfully obtained, traded on, or communicated.

Possible defenses and exceptions

The Securities and Exchange Commission would be allowed to exempt certain people, securities, or transactions by rule or order if it thinks that would further the purposes of the securities laws.

The bill also says transactions that comply with SEC Rule 10b5-1, or any later replacement rule, would not be covered by this new prohibition.

Other legal changes

The bill would make several conforming changes so that existing SEC enforcement powers and related statutory references also apply to the new section. It also says the new remedies would be in addition to any other legal remedies that may already exist.

Relevant Companies

None found