[Congressional Record Volume 168, Number 59 (Monday, April 4, 2022)]
[Senate]
[Pages S1937-S1938]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. REED (for himself and Mr. Menendez):
  S. 3990. A bill to amend the Securities Exchange Act of 1934 to 
prohibit certain securities trading and related communications by those 
who possess material, nonpublic information, and for other purposes; to 
the Committee on Banking, Housing, and Urban Affairs.
  Mr. REED. Mr. President, today, I am joined by Senator Menendez in 
introducing the Insider Trading Prohibition Act, a bill that will 
finally define the offense of insider trading. This legislation is 
desperately needed because, in the absence of a statutory definition, 
the courts have cobbled together a dizzying array of interpretations of 
anti-fraud statutes, creating what is an inconsistent and complicated 
body of common law for deciding insider trading cases. What should be 
simple has become unnecessarily complex.
  Indeed, Judge Jed Rakoff, who has presided over many insider trading 
cases before the Southern District of New York, wrote in a recent 
opinion that ``the crime of insider trading is a straightforward 
concept that some courts have somehow managed to complicate.''
  Consider the following hypothetical example. A financial analyst 
receives information about XYZ Corporation's earnings from a company 
insider, like an executive or board member, before this information is 
publicly released. The analyst then shares this inside information with 
her portfolio manager who subsequently trades in XYZ stock. I suspect 
most Americans would agree that the portfolio manager was given an 
unfair advantage. But the courts are not so sure. They have left an 
open question whether this very trade would constitute illegal insider 
trading. Experts agree that this kind of judicial uncertainty is one 
reason among many of why Congress must clarify the law of insider 
trading.
  Former SEC Commissioner Robert J. Jackson and former U.S. Attorney 
Preet Bharara have written that ``[t]he shoddy state of American 
insider-trading law affects everyone. Prosecutors

[[Page S1938]]

and regulators are stuck enforcing laws that are ill-suited to 21st-
century misconduct. Lawyers struggle to tell their clients what they 
can and cannot do within the bounds of the law. And ordinary Americans 
are left asking whether financial markets are stacked in favor of those 
who skirt the rules.''
  Columbia Law School Professor John C. Coffee, Jr., noted that 
``[t]here is general agreement today that the law of insider trading 
has grown overly complex and technical. As a result, it is hard for the 
public to understand its logic or for practitioners to give advice with 
respect to the scope of the prohibition. Moreover, to the extent that 
insider trading is judge-made law, disparities and inconsistencies 
among the U.S. circuit courts becomes inevitable because there is 
little in the way of a definitive statutory text to provide precise 
guidance.''
  State regulators agree, too. For example, Maryland Commissioner of 
Securities Melanie Senter Lubin recently stated on behalf of the North 
American Securities Administrators Association that ``[d]efining the 
standards for insider trading liability by statute would add greater 
clarity and consistency to this important area of the law.''
  This is precisely what Senator Menendez and I are doing in our bill. 
We are seeking to finally distill the offense of insider trading to 
clear bright line rules. Simply put, if a person trades a security on 
the basis of information that the person is aware is material and 
nonpublic and is aware was wrongfully obtained, then that person has 
engaged in unlawful insider trading.
  Under our legislation, insider trading would be prohibited if a 
trader knows or has reason to know that her information was wrongfully 
obtained, for example, through theft, bribery, hacking, 
misappropriation, or a breach of a fiduciary duty for a personal 
benefit. We do not intend to restrict those who take the time to 
independently develop their own information from publicly available 
sources from trading on the independently developed information.
  By cracking down on those who rig securities markets to favor the 
well connected, our legislation provides everyday investors with a fair 
shot at seeing some returns after investing their hard-earned savings. 
Incidents of insider trading, and the perceived pervasiveness of the 
practice, have for years served to validate the public's worst 
assumptions about Wall Street culture. It is time we clearly define 
what is appropriate under the law and take this meaningful step towards 
improving the integrity of our securities markets for professional 
traders and retail investors alike.
  I would like to thank Senator Menendez for working with me on this 
legislation, and I urge our colleagues to join us in supporting the 
Insider Trading Prohibition Act.

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