May 1, 2017

Insider Trading Reform: Could 2017 Be the Year?

While Congressional efforts at financial regulatory reform may end up languishing this year, this McGuire Woods blog speculates that 2017 may be the year that finally sees Congress act to sort out the mess that is the law of insider trading:

House Judiciary Committee Chairman Bob Goodlatte announced the committee’s agenda for the 115th Congress. Rep. Goodlatte observed that he and Ranking Member John Conyers were “committed to passing bipartisan criminal justice reform.” Rep. Goodlatte considered it “imperative [to] continually examine federal criminal laws” in conjunction with this effort.

Although past Congressional efforts to codify insider trading laws have failed, these remarks suggest that there may be an opportunity to try again. And some observers are optimistic that a reform bill could pass this year.

What might a statute addressing insider trading look like?  The blog points to recent comments from Judge Jed Rakoff as providing a possible model:

Judge Rakoff spoke approvingly of the EU’s approach that focuses on equal access to market information rather than U.S. law’s focus on the insider’s fiduciary duty. Specifically, the EU prohibits anyone from trading on information “that person knows, or ought to have known, [is] insider information.” Thus, the focus is on the information itself, rather than the source.

Such an approach would eliminate disputes over the “personal benefit” test. It would also reverse Newman’s requirement that the tippee know of the tipper’s benefit. While the question of whether a trader “should have known” a tip to be insider information might be problematic, the insider trading statute – like other federal statutes – could define knowledge to include deliberate indifference or reckless disregard.

A clear and uniform federal insider trading standard would benefit everyone – prosecutors, traders & the markets.

Update: Keith Bishop notes that California has enacted an insider trading statute that, in contrast to federal law, actually defines what constitutes unlawful insider trading. Check out Keith’s blog on the statute.

Compliance Programs: Building a Risk Assessment Methodology

This “Compliance & Enforcement” blog provides advice on how to create the cornerstone of an effective compliance program – a well-constructed risk assessment methodology. Here’s an excerpt from the intro:

A deliberate, iterative self-assessment methodology is crucial to obtaining the benefits of both mitigating enforcement risk and achieving a high-efficiency compliance program. This post describes a four step process foundation for a self-assessment methodology: (1) get a detailed picture of what your company actually does, (2) map the potential compliance risk “contact points” that exist in your company, (3) assess the current controls in place to prevent, detect, and correct violations, and (4) determine and prioritize the compliance enhancement measures you undertake.

Reg FD: One Stat Says It All on Need for Training

The next time your Reg FD compliance training budget comes up for review, be sure to cite this recent study on the role of the IR officer in providing disclosure – and this finding in particular:

IROs indicate that private phone calls are more important than 10-K/10-Q reports, on-site visits, and management guidance for conveying their company’s message, and more than 80% of IROs report that they conduct private “call-backs” with sell-side analysts and institutional investors following public earnings conference calls.


John Jenkins