A U.S. court decision limiting the ability of authorities to pursue insider trading charges is prompting two Democratic senators to call for legislation that would expand the definition of what types of activities are illegal.
Saying that court rulings had led to inconsistent legal standards, U.S. Senators Jack Reed and Robert Menendez introduced a bill on Wednesday that would broadly bar people from buying or selling securities based on material non-public information.
"Sharpening the definition of insider trading will clear up ambiguity in the law and help repair a broken system," Reed, a Rhode Island Democrat who like Menendez is a member of the Senate Banking Committee, said in a statement.
The bill also would prohibit people from communicating non-public information if it was reasonably foreseeable that someone would trade on it.
If enacted, the legislation would broaden what constitutes insider trading following the December ruling by the 2nd U.S. Circuit Court of Appeals in New York.
The court, in reversing the convictions of hedge fund managers Todd Newman and Anthony Chiasson, ruled that prosecutors must prove a trader knew the source of a tip received a benefit in exchange for the information.
The court also narrowed what constitutes a benefit, saying it must be of "some consequence" and cannot be only friendship.
How much support the bill may receive from regulators or others in the Republican-dominated Congress is unclear, particularly since prosecutors are appealing the decision, which only is binding in New York, Connecticut and Vermont.
The ruling has led to a reversal of convictions or the dropping of charges for seven of the 93 insider trading defendants pursued as part of a crackdown by Manhattan U.S. Attorney Preet Bharara's office since 2009.
John Coffee, a professor at Columbia Law School, called the Senate bill an overreaction that would override not just the 2nd Circuit ruling but years of precedent and create "considerable uncertainty and chaos for the security analysts as a group."
The senators' proposal follows the introduction of a separate bill in the U.S. House of Representatives this month by Representative Stephen Lynch in response to the 2nd Circuit ruling.
U.S. Justice Department spokesman Peter Carr said the department will examine the senators' bill.
Mary Jo White, chair of the U.S. Securities and Exchange Commission, took no position on bill, but said it was "critically important to investors and our markets that we have strong insider trading laws."
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