Former SDNY U.S. Attorney Preet Bharara and SEC Commissioner Jackson recently announced, via NY Times op-ed, the creation of the Bharara Task Force on Insider Trading. Based on the premise that U.S. insider trading laws are unclear and hopelessly out of date, the task force intends to propose new insider trading reforms to help clarify the laws and protect American investors.
Jackson and Bharara recognize that individuals facing liability should have more clarity about what the law is. For those of us who regularly advise fund managers on compliance with insider trading rules, more clarity would be a welcome development.
One of the hardest questions to answer is when seeking information through diligent research potentially moves into a gray area of improper material non-public information. Under current US law, the answer is often: maybe, it depends. And much of that determination depends on information that a fund analyst may not control or even have access to – for example, whether information was initially shared in violation of some duty of trust or confidence, whether there was a “benefit” to an insider, etc. While ignorance of the law is not a defense, even experienced securities law practitioners can get tripped up by the complicated patch-work that is the current insider trading law.
Fund managers have an obligation to their clients to make the best investment decisions that they can. Their job is to make the right investment decisions for their clients, and conducting diligent research is a large part of that job. With that in mind, we welcome the task force’s efforts to clarify the insider trading laws. In our experience, when managers have clear guidance on what is and isn’t allowed, they will stay on the right side of the law.