> I wrote about it back in 2015, when it was proposed, and it hasn’t changed materially in the four and a half years between then and when it was passed by the House yesterday. What I said then was that this bill is more or less an effort to codify existing insider trading law: “It just keeps as much of current law as possible consistent with throwing out the controversial Newman conclusion,” I wrote, and since then the court decision in U.S. v. Newman has been pretty much reversed anyway, which means that this mostly keeps the law the same as it currently is.
> Now some people think that current U.S. insider trading law is too strict, and lots of other people think that it is too lenient, and if you think either of those things then you will probably have objections to this bill. In particular, many many many many people think that U.S. law should have a “parity of information” standard in which anyone who has material nonpublic information, no matter how they obtained it, should not be allowed to trade. If you want a parity-of-information standard, you will be disappointed in this bill, which maintains the current U.S. rule that trading on material nonpublic information is only illegal if “such information has been obtained wrongfully.” “Wrongfully” includes getting information by theft, bribery, computer hacking, or through “a breach of any fiduciary duty, a breach of a confidentiality agreement, a breach of contract, or a breach of any other personal or other relationship of trust and confidence.”
> [...]
> The real point here is:
> 1. the current law is what it is, but
> 2. it is uncertain and shifting and judge-made and not written down in any one place, so
Indeed, I don’t like it, but it was clear how the collective conscious and their representatives were perceiving this concept over decades
In the new bill I do like the automatic trading exemption, and ability for the SEC to exempt whole securities and transactions from being subject to any insider trading prohibition
Overall I think this can add confidence in the markets
It doesn’t address existing 10b5 violations, so its almost like the SEC can use both now
It seems weird if you were not allowed to trade on legally obtained information. Like let’s say a company claims they will manufacture chemical X from inputs Y and Z. You research the chemistry and discover it is impossible. Should it be illegal to short sell their stock, because your research is not public? That doesn’t seem right.
That is not quite the same as what people object to. They object to someone trading because they overhead two CEOs discussing a merger at the table next to them at a restaurant.
Sure, that is the sort of thing they have in mind, but what is the principle that is supposed to distinguish that intuitive case from the chemical one?
If you got the information from someone legally classified as an insider, then it's insider trading. If you developed it yourself from public sources, it's not.
Thanks, that's useful. By "public sources" do you mean "anywhere that's not an insider-as-currently-defined-by-law", rather than literally public? This is important because incentivizing the making public of non-public(-but-not-insider-obtained) info is a crucial job of markets.
I'd be interested in a link to further reading if you can recommend one.
I don't have a source handy but yes, that's my understanding.
An example I saw in one article was a hedge fund that bought satellite imagery, and counted cars in parking lots to estimate how well a business was doing. That's fine, because it wasn't information that came from an insider.
No amount of research can produce the same information.
That said "just overheard" is not a sure thing either, so it can be argued that it's possible to get similar quality of information from other sources. (Eg looking at their trash, looking at who goes to their office, which law firm offices do they visit.)
But this is what courts determine post hoc. If the overhearing was a baseless rumor/joke, or the merger simply went nowhere for some reason, no one will care about this proto-crime.
Also, it's up for debate for the courts which kinds of information can be determined from public sources. Is there a "holographic principle" for insider material information or not? (And even if there is the practical accessibility, computational requirements and so on make a big difference.)
My claim is that there isn't a remotely clear place to put a line between honest research and sifting through the garbage, and if you try and force the court to draw the line it will instantly become impossibly convoluted and inefficient, so that no non-lawyer could possibly know what's legal, and would not at all track the moral and efficiency principles we want. (The fact that courts have been put in this position in the past is not a good reason to do it again.) Like, shouldn't the legislators/regulators do as much line-drawing as possible beforehand, as part of the democratic process? Leaving things up to the court is defensible when the ambiguities are unforeseeable or impossibly numerous, but neither apply here.
No, it's not inconsistent, although I can see why it reads that way. Currently, you are proposing to draw a line between two cases, A and B. One is intuitively bad (to some people), the other is intuitively good. If we all agreed that the line absolutely needed to be drawn somewhere between them, and if we also agreed that there was no clear way to draw it, we'd have no choice but to pick some vague language and just trust judges to apply good judgement. (This is often the case when laws appeal to what a "reasonable" person would think.)
However, I am suggesting that we simply not draw the line between A and B and have them both be legal because:
(1) The "bad" one is actually not that bad, both morally and efficiency-wise, especially when we clearly announce "this behavior is going to be legal, so everyone needs to be careful and protect themselves"; and
(2) there are other places to draw the line that are not so hopelessly disputable.
Since I am suggesting we put the line somewhere else where it can be made unambiguous, we are not forced to rely (nearly as much) on court interpretation.
> I wrote about it back in 2015, when it was proposed, and it hasn’t changed materially in the four and a half years between then and when it was passed by the House yesterday. What I said then was that this bill is more or less an effort to codify existing insider trading law: “It just keeps as much of current law as possible consistent with throwing out the controversial Newman conclusion,” I wrote, and since then the court decision in U.S. v. Newman has been pretty much reversed anyway, which means that this mostly keeps the law the same as it currently is.
> Now some people think that current U.S. insider trading law is too strict, and lots of other people think that it is too lenient, and if you think either of those things then you will probably have objections to this bill. In particular, many many many many people think that U.S. law should have a “parity of information” standard in which anyone who has material nonpublic information, no matter how they obtained it, should not be allowed to trade. If you want a parity-of-information standard, you will be disappointed in this bill, which maintains the current U.S. rule that trading on material nonpublic information is only illegal if “such information has been obtained wrongfully.” “Wrongfully” includes getting information by theft, bribery, computer hacking, or through “a breach of any fiduciary duty, a breach of a confidentiality agreement, a breach of contract, or a breach of any other personal or other relationship of trust and confidence.”
> [...]
> The real point here is:
> 1. the current law is what it is, but
> 2. it is uncertain and shifting and judge-made and not written down in any one place, so
> 3. just writing it down is an improvement.