A House subcommittee yesterday unanimously reported out a bill substantially increasing the penalties for trading stocks on the basis of non-public information.
The Securities and Exchange Commission, which has cracked down on insider trading in the past year, argued in hearings that current sanctions were not sufficient to deter the practice. Under current law, a person cited for insider trading is obliged only to give up the illegal insider profits. The proposed penalty would be three times the gain or loss avoided. In criminal cases, the maximum fine would be raised from $10,000 to $100,000.
The penalty would apply only to those who actually trade on the basis of inside information or who pass it on to others who do so for profit. An amendment offered by Rep. Matthew J. Rinaldo (R-N.J.) would exempt from the triple penalties broker-dealers who execute such trades, even if they know the information is non-public. However, the SEC retains the power to take other disciplinary measures against brokers, including suspension for "aiding and abetting" such offenses.
The substitution amendment was added at the request of the securities industry and represented a compromise. The industry had also asked for a more precise definition of the term "insider trading" as a prerequisite for increasing the penalties for it.
Rep. Thomas J. Tauke (R-Ohio) repeated that position yesterday at the mark-up, saying that increasing the penalty for a violation one cannot fully define "offends my legal background." Chairman Timothy E. Wirth (D-Colo.) explained that the SEC feared that trying to set a new definition would simply lead to more litigation which would lead to more ambiguity.
Also, the SEC was anxious to get quick passage of the bill in the aftermath of the recent Supreme Court decision, Dirks v. SEC. Some legal analysts feel that this landmark decision, which overturned the agency's case against a broker, will make enforcement of insider trading laws more difficult.