On December 5, 2019, the U.S. House of Representatives approved (by a vote of 410-13) H.R. 2534, the Insider Trading Prohibition Act, to explicitly prohibit insider trading.
The U.S. federal securities laws currently do not expressly prohibit insider trading. The SEC and the Department of Justice (the “DOJ”) have built insider trading cases instead on the antifraud proscriptions of Section 10(b) of the Exchange Act and Rule 10b-5. Rule 10b-5 prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security. Case law has developed the theory over the years that Section 10(b) of the Exchange Act and Rule 10b-5 further prohibit trading (or ‘tipping’ information to someone who then trades) a security based on material nonpublic information (“MNPI”) about that security, in breach of a duty of trust or confidence that is owed directly or indirectly to the issuer of the security or the shareholders of the issuer, or to any other person who is the source of the MNPI.
If the bill clears the Senate and is signed into law by the President, the statutory prohibition will apply to municipal securities as well as corporate securities. Municipal securities issuers are already well-versed in their Rule 10b-5 anti-fraud responsibilities in the context of investor presentations and disclosure documents so the explicit prohibition will likely not make a practical difference in issuer’s practices. However, together with the recent OMS Staff Legal Bulletin No. 21 discussed here, issuers and obligated persons need to be mindful of whether their existing forms of public statements on their website, by prominent officials or officers, news releases or communications with investors are in compliance with the antifraud laws and regulations.
Click here to see the full text of the bill.