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Could New Insider Trading Law Make the Practice Worse?


Yes, says Yale Law Professor Jonathan Macey in an article in today’s Wall Street Journal.

From WSJ:

On closer examination, it appears that what Congress really wants is to keep making the big bucks that come from trading on inside information but to trick those outside of the Beltway into believing they are doing something about this corruption. For one thing, the rules proposed for Capitol Hill are not like those that apply to the rest of us. Ours are so broad and vague that prosecutors enjoy almost unfettered discretion in deciding when and whom to prosecute.

Congress’s rules would be clear and precise. And not too broad; in fact they are too narrow. For example, the proposed rules in the Stock bill are directed only at information related to pending legislation. It would appear that inside information obtained by a congressman during a regulatory briefing, or in another context unrelated to pending legislation, would not be covered.

Professor Macey believes that the way to remedy the problem is to clearly define the parameters of what is and isn’t considered insider trading and to then apply the rules universally. Failure to do this, writes Macey, will mean that:

If the law passes in its current form, insider trading by Congress will not become illegal. I predict such trading will increase because the rules of the game will be clearer. Most significantly, the rule proposed for Congress would not involve the same murky inquiry into whether a trader owed or breached a “fiduciary duty” to the source of the information that required that he refrain from trading.

Professor Macey’s commentary comes a day after former Alaska Gov. Sarah Palin outlined additional deficiencies in the proposed legislation before offering her four-part solution to end congressional insider trading.

No response yet from lawmakers on Macey’s critique or Palin’s proposal.


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