Judge Jed S. Rakoff (S.D.N.Y.) recently made headlines after urging lawyers to draft and advocate for a more straightforward insider trading statute to replace judicially-created insider trading law. During his keynote speech at the New York City Bar’s annual Securities Litigation & Enforcement Institute, Judge Rakoff explained that the law has become overly-complicated since courts were forced to define insider trading by shoehorning the concept into the fraud provisions of the Securities Exchange Act of 1934. As a result, increasingly suspect theories have been developed to address potential insider trading in an expanding variety of scenarios.

In promoting a statutory solution for insider trading law, Judge Rakoff pointed to the Europe Union (“EU”) as an example. He explained that the EU defined insider trading by statute in simple and broad terms, and avoided relying on the framework of fraud.  Considering Judge Rakoff’s influence and expertise in securities law, inquiry into the EU’s approach to insider trading is warranted.

Overall, the EU’s approach is more concerned with promoting fair markets, than with punishing insiders who breach their fiduciary duties. The EU’s Market Abuse Regulation (“MAR”) prohibits “insider dealing,” which it defines in part as “the unlawful disclosure of inside information.” An “unlawful disclosure” arises when “a person possesses inside information and discloses that information to any other person, except where the disclosure is made in the normal exercise of an employment, a profession or duties.”  MAR defines “inside information” as “information of a precise nature, which has not been made public, relating directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments.”  In addition, MAR prohibits recommending or inducing a person to engage in insider dealing “where the person using the recommendation or inducement knows or ought to know that it is based upon inside information.”

In contrast to our common law focus on fraud and trading, MAR’s framework is centered on the disclosure itself. The EU’s approach makes it clear that the law’s intent is promote and maintain fair markets by making it unlawful to disclose inside information that may have a significant effect on the price of a financial instrument.  Moreover, MAR addresses tipper-tippee liability by prohibiting individuals from recommending or inducing a person to engage in insider dealing based on inside information.  These straightforward approaches avoid the intellectual somersaults that U.S. courts often engage in to address nuanced issues of insider trading and tipper-tippee liability through the lens of fraud.  Adopting a similar statute in the U.S. could lead to more predictable results both in terms of business conduct, and in jurisprudence.  Time will tell whether Judge Rakoff’s suggestions make their way through Congress.