On Dec. 5, the U.S. House of Representatives passed the Insider Trading Prohibition Act. Here are a few highlights from the bill and some observations as to how its provisions might change the legal landscape.

No Misrepresentation Requirement

First, the bill omits the misrepresentation/omission requirement historically required for insider trading liability. At present, there is no specific insider trading statute, so the government uses anti-fraud laws that have been judicially interpreted to prohibit trading based on information derived from a misrepresentation or an omission—a prosecution theory that, some say, leaves regulatory gaps.

For example, under the Supreme Court's 1997 decision United States v. O'Hagan, a lawyer who wants to trade on information that a client has shared in confidence might have a defense to a prosecution if the lawyer had previously told the client of his intention to trade on the client's information—that is, if the lawyer does not "misrepresent" anything to the client. Similarly, as the Second Circuit explained in its 2009 Securities and Exchange Commission v. Dorozhko decision, a computer hacker who steals and trades on inside information might also have a defense, where the hacker's methods did not require a misrepresentation.

The bill apparently tries to close such gaps by not requiring fraud for liability—that is, by banning buying or selling securities "while aware of [wrongfully obtained] material, nonpublic information," regardless of whether the misconduct was disclosed to the source of the information. If that standard becomes law, the aforementioned hacker could be guilty, regardless of how he acquired the information.

Expansion of "Wrongfulness"

For a long time, the "misappropriation theory" of insider trading has prohibited trading in breach of a duty of "trust and confidence" owed to the source of the information. The bill, however, prohibits trading while in possession of material, nonpublic information when that information has been obtained or used "wrongfully."

Along with that standard, the bill defines a bevy of scenarios as "wrongful," including any instance in which an individual commits theft or bribery; violates certain federal data privacy laws; or breaches any fiduciary duty. Similarly, the bill broadens the category of breached relationships that can form the basis for liability, imposing liability for "a breach of any fiduciary duty, a breach of contract, a breach of any code of conduct or ethics policy, or a breach of any other personal or other relationship of trust and confidence."

The bill thus stands to reach beyond breaches of a duty of "trust and confidence" to impose liability for insider trading in a variety of scenarios not covered by existing prohibitions.

The "Personal Benefit" Element

The bill also makes several important changes to the much-debated "personal benefit" element that courts have imposed for tipper-tippee liability, beginning with the Supreme Court's Dirks v. S.E.C. decision in 1983.

Interestingly, the bill originally omitted the "personal benefit" element entirely, though a last-minute amendment championed by Rep. Patrick McHenry, R-North Carolina, resurrected the language. As passed, the bill requires that, to establish tipper-tippee liability, the information must have been tipped "for a direct or indirect personal benefit (including pecuniary gain, reputational benefit, or a gift of confidential information to a trading relative or friend)."

Although the words—"personal benefit"—remain, there are a few differences from the current state of the law. First, Dirks held that the requisite "personal benefit" needed to be the sort that could "translate into future earnings" to qualify. The bill, however, contains no such future earnings requirement, which may spark litigation over how concrete a reputational benefit must be for liability to attach.

Second, the bill arguably scales back a protection for downstream tippees deriving from the Second Circuit's 2014 decision in United States v. Newman. There, the Second Circuit held that for liability to apply, tippees had to know of the personal benefit the initial tipper received. The bill, however, arguably waters down that requirement by imposing liability when a tippee recklessly disregards that confidential information was wrongfully obtained, improperly used or wrongfully communicated.

Third, in a twist that might actually narrow liability at least in the Second Circuit, the bill did not pick up language from United States v. Martoma, where the Second Circuit held that the government can prove the existence of a "personal benefit" simply by demonstrating that the tipper intended to benefit the tippee, regardless of any tangible benefit to the tipper.

These changes may be limited in their effect, though, given that the House expressly declined to make the bill "the exclusive insider trading law of the land." By declining to take that step, the House seemingly left the government free to prosecute insider trading under other statutes."

If it becomes law (an open question), the bill would certainly impact insider trading prosecutions by removing some hurdles for the prosecution. It remains to be seen, however, whether the bill can accomplish the goal of reducing ambiguity.

David Meister is a partner in the government enforcement and white-collar crime group of Skadden, Arps, Slate, Meagher & Flom. He is a former enforcement director of the U.S. Commodity Futures Trading Commission and a former assistant U.S. Attorney in the Southern District of New York. Chad Silverman, a former CFTC trial attorney, is counsel, and Ben Burkett is an associate in the same group and office.