Defining and banning insider trading is the goal of two bills introduced in Congress in the past two weeks.
The bills are newsworthy in part because their existence underscores that current law on the matter is nonexistent, vague, and arbitrarily enforced — a patchwork of regulations, inferences, and footnotes (Dirks 14). Such an acknowledgement may be little solace for those who have endured professional purgatory, suffered jail time, had their once-flourishing businesses raided by the FBI and closed, or spent millions on legal fees as a consequence of prosecutions or even mere investigations or fishing expeditions under the current legal framework. But the development is welcome nonetheless. If it were already statutorily crystal-clear what insider trading is and that it is illegal, there'd be no need for the introduction of these laws.
Whether these particular two bills would help matters is another question. The Stop Illegal Insider Trading Act, introduced yesterday in the Senate by Senator Reed of Rhode Island and Senator Menendez of New Jersey, both Democrats, sets up what a Bloomberg View columnist, Matt Levine, a former investment banker and mergers and acquisitions lawyer, calls "a terrible rule" that could make it illegal even to read investment bank research.
The Ban Insider Trading Act of 2015, introduced late last month by Rep. Stephen Lynch of Massachusetts, a Democrat who just happens to be my own congressman, also includes provisions that worry Mr. Levine, including one that Mr. Levine writes could make a criminal out of a corporate lawyer who comes home and tells his wife about a deal he is working on, even if the wife doesn't trade on the information or tell anyone else about it.
Neither bill shows much sign of passing into law anytime soon. Both bills now have only Democratic sponsors in a Congress where both chambers are controlled by Republicans. The House bill has so far attracted cosponsorships from only two other members, Ruben Hinojosa of Texas and Keith Ellison of Minnesota. Bills bound for passage usually are introduced with a substantial list of co-sponsors, including some from the majority party.
Such weak support may be good news for those who fret that these particular bills are flawed. But in the absence of legislation, investors and money managers and market participants are left with the current unsatisfactory framework. Perhaps some Republican lawmaker will rise to the occasion with hearings that could help clarify the issue and lead the way to legislation that would help more than it would hurt. Alas, one of those scholars whose testimony could have been most helpful, Henry Manne, died in January. Let David Ganek and Michael Steinberg testify. Or Holman Jenkins and Gordon Crovitz. Or Todd Newman and Anthony Chiasson.
At best, Congress will come up with something plain, clear, and easily understandable that won't punish investors for doing research or impede the free flow of information. If, upon reflection, they find that task impossible, they may want the ban to apply not to insider trading but to overreaching criminal prosecutions infected by political motives such as a desire to combat income inequality or punish targets in the financial industry after a recession.
