A Critique of the Insider Trading Prohibition Act of 2021

Abstract

The Insider Trading Prohibition Act of 2021 has been passed by the House of Representatives and, as of this writing, is awaiting action in the Senate. The Act’s proponents claim that it simply codifies and clarifies existing law. In fact, the Act does neither. It likely will expand the scope of insider trading in undesirable ways and introduce new ambiguities into the law.

The ways in which the Act likely will expand the insider trading prohibition, coupled with the new ambiguities it introduces, threatens the central policy on which the insider trading prohibition rests. The Supreme Court has recognized that the work of market analysts and other investment professionals inherently entails seeking information advantages. In turn, as the Court also recognized, that work is an essential part of maintaining efficient stock markets. By increasing the risk of liability, especially in light of the Draconian penalties associated with insider trading, the Act likely will chill this vital activity, to the detriment of all investors.

When a very similar bill passed the House in the 116th Congress, the legislation died in the Senate. The Insider Trading Prohibition Act of 2021 now awaits Senate action. The Senate would be well advised to let this bill die as well.

Keywords: insider trading, regulation, vagueness