[Pages H2460-H2463]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

INSIDER TRADING PROHIBITION ACT

Mr. CLEAVER. Mr. Speaker, I move to suspend the rules and pass the
bill (H.R. 2655) to amend the Securities Exchange Act of 1934 to
prohibit certain securities trading and related communications by those
who possess material, nonpublic information, as amended.
The Clerk read the title of the bill.
The text of the bill is as follows:

H.R. 2655

Be it enacted by the Senate and House of Representatives
of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ``Insider Trading
Prohibition Act''.

SEC. 2. PROHIBITION ON INSIDER TRADING.

(a) In General.--The Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.) is amended by inserting after section 16
the following new section:

``SEC. 16A. PROHIBITION ON INSIDER TRADING.

``(a) Prohibition Against Trading Securities While Aware
of Material, Nonpublic Information.--It shall be unlawful for
any person, directly or indirectly, to purchase, sell, or
enter into, or cause the purchase or sale of or entry into,
any security, security-based swap, or security-based swap
agreement, while aware of material, nonpublic information
relating to such security, security-based swap, or security-
based swap agreement, or any nonpublic information, from
whatever source, that has, or would reasonably be expected to
have, a material effect on the market price of any such
security, security-based swap, or security-based swap
agreement, if such person knows, or recklessly disregards,
that such information has been obtained wrongfully, or that
such purchase or sale would constitute a wrongful use of such
information.
``(b) Prohibition Against the Wrongful Communication of
Certain Material, Nonpublic Information.--It shall be
unlawful for any person whose own purchase or sale of a
security, security-based swap, or entry into a security-based
swap agreement would violate subsection (a), wrongfully to
communicate material, nonpublic information relating to such
security, security-based swap, or security-based swap
agreement, or any nonpublic information, from whatever
source, that has, or would reasonably be expected to have, a
material effect on the market price of any such security,
security-based swap, or security-based swap agreement, to any
other person if--
``(1) the other person--
``(A) purchases, sells, or causes the purchase or sale
of, any security or security-based swap or enters into or
causes the entry into any security-based swap agreement, to
which such communication relates; or
``(B) communicates the information to another person who
makes or causes such a purchase, sale, or entry while aware
of such information; and
``(2) such a purchase, sale, or entry while aware of such
information is reasonably foreseeable.
``(c) Standard and Knowledge Requirement.--
``(1) Standard.--For purposes of this section, trading
while aware of material, nonpublic information under
subsection (a) or communicating material nonpublic
information under subsection (b) is wrongful only if the
information has been obtained by, or its communication or use
would constitute, directly or indirectly--
``(A) theft, bribery, misrepresentation, or espionage
(through electronic or other means);
``(B) a violation of any Federal law protecting computer
data or the intellectual property or privacy of computer
users;
``(C) conversion, misappropriation, or other unauthorized
and deceptive taking of such information; or
``(D) a breach of any fiduciary duty, a breach of a
confidentiality agreement, 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
for a direct or indirect personal benefit (including
pecuniary gain, reputational benefit, or a gift of
confidential information to a trading relative or friend).
``(2) Knowledge requirement.--It shall not be necessary
that the person trading while aware of such information (as
proscribed by subsection (a)), or making the communication
(as proscribed by subsection (b)), knows the specific means
by which the information was obtained or communicated, or
whether any personal benefit was paid or promised by or to
any person in the chain of communication, so long as the
person trading while aware of such information or making the
communication, as the case may be, was aware, consciously
avoided being aware, or recklessly disregarded that such
information was wrongfully obtained, improperly used, or
wrongfully communicated.
``(d) Derivative Liability.--Except as provided in
section 20(a), no person shall be liable under this section
solely by reason of the fact that such person controls or
employs a person who has violated this section, if such
controlling person or employer did not participate in, or
directly or indirectly induce the acts constituting a
violation of this section.
``(e) Affirmative Defenses.--
``(1) In general.--The Commission may, by rule or by
order, exempt any person, security, or transaction, or any
class of persons, securities, or transactions, from any or
all of the provisions of this section, upon such terms and
conditions as it considers necessary or appropriate in
furtherance of the purposes of this title.
``(2) Directed trading.--The prohibitions of this section
shall not apply to any person who acts at the specific
direction of, and solely for the account of another person
whose own securities trading, or communications of material,
nonpublic information, would be lawful under this section.
``(3) Rule 10b-5-1 compliant transactions.--The
prohibitions of this section shall not apply to any
transaction that satisfies the requirements of Rule 10b-5-1
(17 CFR 240.10b5-1), or any successor regulation.''.
(b) Commission Review of Rule 10b-5-1.--Not later than
180 days after the date of the enactment of this Act, the
Securities and Exchange Commission shall review Rule 10b-5-1
(17 CFR 240.10b5-1) and make any modifications the Securities
and Exchange Commission determines necessary or appropriate
because of the amendment to the Securities Exchange Act of
1934 made by this Act.
(c) Conforming Amendments.--The Securities Exchange Act
of 1934 (15 U.S.C. 78a et seq.) is further amended--
(1) in section 21(d)(2), by inserting ``, section 16A of
this title'' after ``section 10(b) of this title,'';
(2) in section 21A--
(A) in subsection (g)(1), by inserting ``and section
16A,'' after ``thereunder,''; and
(B) in subsection (h)(1), by inserting ``and section
16A,'' after ``thereunder,''; and
(3) in section 21C(f), by inserting ``or section 16A,''
after ``section 10(b)''.

SEC. 3. DETERMINATION OF BUDGETARY EFFECTS.

The budgetary effects of this Act, for the purpose of
complying with the Statutory Pay-As-You-Go Act of 2010, shall
be determined by reference to the latest statement titled
``Budgetary Effects of PAYGO Legislation'' for this Act,
submitted for printing in the Congressional Record by the
Chairman of the House Budget Committee, provided that such
statement has been submitted prior to the vote on passage.

The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
Missouri (Mr. Cleaver) and the gentleman from Arkansas (Mr. Hill) each
will control 20 minutes.
The Chair recognizes the gentleman from Missouri.

General Leave

Mr. CLEAVER. Mr. Speaker, I ask unanimous consent that all Members
may have 5 legislative days within which to revise and extend their
remarks on this legislation and to insert any extraneous materials
thereon.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Missouri?
There was no objection.
Mr. CLEAVER. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I rise in strong support of H.R. 2655, the Insider
Trading Prohibition Act, which was introduced by my colleague, Mr.
Himes.

[[Page H2461]]

This long-overdue bill creates a clear definition of illegal insider
trading under the securities laws so that there is a codified,
consistent standard for courts and market participants. This bill will
help to better protect the hard-earned savings of millions of Americans
and bring legal and regulatory certainty to U.S. securities markets.
For nearly 80 years, the Securities and Exchange Commission has
sought to hold corporate insiders accountable for insider trading
through general statutory antifraud provisions and rules it has
promulgated under those provisions. This has resulted in a web of court
decisions that generally prohibit insiders with a duty of trust and
confidence to a corporation from secretly trading on material,
nonpublic corporate information for their own personal gain.
These insiders are also generally prohibited from tipping outsiders,
known as tippees, who then trade on the information themselves, even
though they knew it was wrongly obtained. But because there isn't a
statutory definition of insider trading, there is uncertainty around
who is subject to insider trading prohibitions.
Further, with various court decisions, liability for this type of
violation has shifted. For example, in 2014, an appeals court added a
brand-new requirement that the tippee must not just know that
information was wrongfully disclosed but must also know about the
specific personal benefit that the insider received. This decision has
severely hampered the SEC's ability to prosecute insider trading cases.
According to Preet Bharara, the former U.S. attorney for the Southern
District of New York, this decision ``provides a virtual roadmap for
savvy hedge-fund managers to insulate themselves from tippee liability
by knowingly placing themselves at the end of a chain of insider
information and avoiding learning details about the sources of obvious
confidential and improperly disclosed information.''
I am pleased that this bill codifies existing case law and overturns
this new controversial requirement, creating a clear, consistent
standard for the SEC, the courts, and market participants to follow.
Last Congress, the House of Representatives passed this commonsense
bipartisan bill with an overwhelmingly bipartisan vote of 410-13.
Mr. Speaker, I urge my colleagues to once again support this
important bill, and I reserve the balance of my time.
Mr. HILL. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, stopping and punishing bad actors for illegal insider
trading is a top priority for House Republicans. This illegal activity
hurts everyday Main Street investors as well as the integrity and
efficiency of our markets. Trading on material insider information in
breach of fiduciary duty is currently prohibited by court-made law
under the antifraud provisions of the Federal securities laws.
The Securities and Exchange Commission, the SEC, and the Department
of Justice have the power to bring insider trading cases, and both
agencies regularly exercise this power.
One body of insider trading law that has been developed is through
the courts. Decades of judicial precedent are in place to protect
investors and markets by punishing bad actors who illegally trade on
insider information.
Codifying nuanced case law and regulations that have been developed
over the decades into a single statute prohibiting insider trading is a
serious undertaking, and the gentleman from Connecticut (Mr. Himes) has
tackled this challenging task.
To be explicitly clear, this legislation's intent is to codify, and
neither expand nor contract, insider trading law as it is currently
understood and interpreted by the Federal courts.
Again, there should not be a single cause of action available under
this law that would not otherwise be available to Federal prosecutors
or SEC enforcement attorneys under the already existing securities
laws. I underscore this point because both Republican and Democratic
SEC Commissioners have expressed concerns about Congress drafting a
statute that accurately captures this expansive body of law without
expanding it.
I agree with them. I think it would be tough to draft a perfect
insider trading law. But with that said, I appreciate the gentleman
from Connecticut's intentions not to expand the scope of current
insider trading enforcement and his willingness to work with us in a
bipartisan manner last Congress and again in this Congress.
Specifically, Ranking Member Patrick McHenry's amendment last
Congress, included in the base text of this year's provision, provides
the needed changes to align the explicit personal benefit test more
closely with Supreme Court precedent. It also clarifies ambiguous
wording to ensure that judges and prosecutors know that this bill is
not intended to expand or create new insider trading liability.
Republicans will continue to speak out and support efforts to combat
illegal insider trading. We look forward to working with our colleagues
on the House Financial Services Committee and in the Senate, and
I reserve the balance of my time.

Mr. CLEAVER. Mr. Speaker, I yield 2 minutes to the gentleman from
Connecticut (Mr. Himes), who is also a sponsor of this legislation.
Mr. HIMES. Mr. Speaker, I thank Mr. Emanuel Cleaver for yielding, and
I thank my subcommittee ranking member, Mr. Hill, for a very good
characterization of the project we are undertaking here.
I will emphasize two things.
Number one, at a moment when we are working hard to find ways to work
in a bipartisan fashion in the public interest, this is landmark
legislation. As Mr. Hill pointed out, we passed it in the last Congress
with a vote of 410-13, and that was the result of a very comprehensive
and fairly technical negotiation around the fine points of insider
trading.
The second thing I would point out is that everyone in this Chamber
should agree that law is to be made in this Chamber, not in the
chambers of unelected judges throughout the land. While Mr. Hill is
correct that there has been a vast body of court-made law around
insider trading developed over the generations, that is far from ideal
and, frankly, an abrogation of the legislative responsibilities of the
United States Congress. So, we are where we are.
We have attempted to make clear and clear up a great deal of the
uncertainty, the reversed convictions, the activities in the Second
Circuit that have overturned convictions and created uncertainty in the
law. This is an effort to make clear what I think everyone understands,
which is that if you trade on information that you know to have been
wrongly obtained or that you wrongly obtained or that you recklessly
disregard was wrongly obtained, you are doing something wrong. In this
case, with the passage of this legislation, it will be clear that you
have violated the law.
I am excited for the passage of this legislation because I am a
believer that it is, in fact, the elected legislators of this country
and not the judges, as important as their role may be, who should
determine what we consider wrong in statute and what we punish people
for doing.
Finally, of course, it is essential that everyone out there have
confidence in our markets. Every time there is another headline about
an insider trader or a reversed conviction of insider trading, that
confidence is damaged. So, I applaud the bringing of this bill to the
floor.

{time} 1345

Mr. HILL. Mr. Speaker, I thank my friend from Connecticut for his
vigorous defense, always welcome on the House floor, of Article I power
here in the Congress. Both sides of the aisle are grateful for that, as
we defend it on a regular basis. We thank him for his work.
Mr. Speaker, I yield 3 minutes to the gentleman from Michigan (Mr.
Huizenga), the ranking member of the Subcommittee on Investor
Protection, Entrepreneurship, and Capital Markets of the House
Financial Services Committee to speak on the topic of this bill.
Mr. HUIZENGA. Mr. Speaker, I rise with my friend and colleague from
Arkansas to acknowledge the work that has been put in by our colleague
from Connecticut. This has been a long discussion that we have had
various points where we have debated, and this is a positive thing.

[[Page H2462]]

Mr. Speaker, as you know, preventing fraud and abuse within our
financial system and cracking down on bad actors for illegal insider
trading is a nonpartisan priority. We all believe that this is a good
thing. In fact, this kind of fraud and illegal activity hurts everyday
Main Street investors. It also makes our capital markets less
efficient, accurate, and fair to all investors.
Now, current law prohibits trading on material insider information in
breach of a fiduciary duty under the antifraud provisions of the
Federal securities laws. Let me just repeat that. Current law prohibits
those activities.
The Securities and Exchange Commission and the Department of Justice
are the Federal agencies tasked with enforcing insider trading laws.
Both agencies regularly use their authority to bring insider trading
cases against these bad actors who violate our insider trading laws.
However, the bill we are discussing here today, H.R. 2655, is flawed
and could potentially create even more confusion and uncertainty within
the law of insider trading. It could expand liability for good-faith
traders, which would weaken investor confidence, chill vital
information-gathering, and hurt the efficiency of our markets.
I believe it is important to note that, once again, the SEC is not
asking for this bill or, frankly, any other legislative help on this
issue. That is, the cop on the beat is not saying we need additional
tools. Moreover, Democrats have not identified a problem within the
current body of law that inhibits the prosecution of bad actors who
illegally trade on material, nonpublic information. Again, the
regulators have the tools that they need.
Republican and Democrat SEC chairs alike, with vastly different
approaches to enforcement matters, have expressed concerns over
Congress codifying a prohibition on insider trading into one single
statute, as we are doing. Specifically, they voiced concerns that
Congress would write a law that would be both overly broad, yet too
narrow. Now, that is an odd phrase.
Former SEC Chair Mary Jo White, during 2015 testimony--by the way,
she was President Obama's SEC chair--before our Financial Services
Committee, when asked whether or not Congress should pursue an explicit
statutory prohibition, stated: ``I think it is challenging to codify it
clearly in a way that is both not too broad and retains the strength of
the common law.''
Additionally, former SEC Chair Jay Clayton voiced similar concerns
that Congress could write an insider trading law that is both too broad
and too narrow.
I want to commend the gentleman from Connecticut for his dedicated
work over the years on this issue, and I appreciate his efforts to try
and codify a specific insider trading prohibition.
The SPEAKER pro tempore. The time of the gentleman has expired.
Mr. HILL. Mr. Speaker, I yield an additional 1 minute to the
gentleman from Michigan.
Mr. HUIZENGA. However, codifying very nuanced case law and
regulations that have been developed over decades to prohibit insider
trading is a significant task and undertaking. We all know that case
law does oftentimes dictate the nuances. I fear that this bill could
add more confusion and uncertainty around insider trading law with
rogue judges and prosecutors using the language to expand the bounds of
insider trading laws.
It was mentioned that this bill passed this body 410-13, and I was
one of the 13.
We have to ask ourselves: Why was the bill ignored by the Senate?
There isn't a compelling problem to solve is why it was ignored. This
is a solution in search of a problem.
I believe H.R. 2655, the Insider Trading Prohibition Act, which we
are debating today, is both too broad and too narrow, just as former
SEC Chair White warned was possible, and I continue to be opposed to
the legislation.
Mr. CLEAVER. Mr. Speaker, I yield 1 minute to the gentleman from
Connecticut (Mr. Himes).
Mr. HIMES. Mr. Speaker, I must say, as much respect as I have for Mr.
Huizenga--I have been around here a little while--I think this may be
the first time I have heard from my colleagues on the other side of the
aisle that the regulators deserve deference on this, that the
regulators are not asking us to make a statutory change. I have never
heard that in this Chamber--this Chamber--which, under Article I of the
Constitution, is charged with writing the laws of this country.
Apparently, my Republican friends, who don't typically defer to
regulators, are now saying the SEC is, at best, neutral on this law.
Is there damage?
I would urge anybody who wants to know about that to read the
activities of the Second Circuit Court of Appeals in the overturning of
conviction after conviction of hedge fund managers and others around
points of technical complexity.
We make the laws. We don't ask the regulators whether they would like
us to, or whether they would cheer us on in making laws. We make the
laws. If we are going to send people to jail, if we are going to stop
the confusion of judge-made law, let's do our job and pass this
legislation.

Mr. HILL. Mr. Speaker, I yield 2 minutes to the gentleman from
Michigan (Mr. Huizenga).
Mr. HUIZENGA. Mr. Speaker, let me throw out one name--I guess it is
actually, technically, two names: Dodd-Frank.
My friends on the other side wrote a massively expansive bill that
did turn over all of that authority to come up and promulgate rules out
of whole cloth.
What we are talking about here is a very key word: materiality.
We are having this exact debate about the environmental, social, and
governance issues, the ESG of the Securities and Exchange Commission,
and the boundaries of those rules. This is the balance between making
sure that the legislature and our constitutional powers do not
contradict the powers that are given to those regulators.
Yet, at the same time, we need to make sure that the regulators,
based on case law, based on experience and the flexibility that they
may need to go and do a law enforcement action, that they have those
tools and that they are not pulled back from them.
If the gentleman's sort of example was to hold true, then we would
have to eliminate all corporate law and every single publicly traded
company that incorporates in Delaware. Delaware's entire corporate
structure is based on case law and what has gone on. It is widely
accepted throughout the United States that it is solid and positive,
and that is what we are trying to do here today.
We are not trying to hand over more power to the bureaucrats. We are
trying to make sure that the system that is in place, that everybody
understands the rules of the road, that they then are going to be used
to be enforced.
Mr. CLEAVER. Mr. Speaker, I have no further speakers, I am prepared
to close, and I reserve the balance of my time.
Mr. HILL. Mr. Speaker, I yield myself the balance of my time.
Mr. Speaker, I think this is a good debate. Again, I thank my friend
from Michigan and my friend from Connecticut for the quality of that
debate.
Mr. Speaker, I urge my colleagues to support H.R. 2655, and I yield
back the balance of my time.
Mr. CLEAVER. Mr. Speaker, I yield myself the balance of my time.
H.R. 2655, the Insider Trading Prohibition Act, is a long overdue
piece of legislation that simply spells out the definition of illegal
insider trading under the security laws. It creates clarity for
participants in financial markets, and empowers the SEC to punish bad
actors.
This bill is supported by groups, including the Council of
Institutional Investors, the California State Teachers' Retirement
System, the North American Securities Administrators Association, and
Public Citizen.
Mr. Speaker, I urge all Members to vote ``yes'' on this important
bill, and I yield back the balance of my time.
The SPEAKER pro tempore. The question is on the motion offered by the
gentleman from Missouri (Mr. Cleaver) that the House suspend the rules
and pass the bill, H.R. 2655, as amended.
The question was taken.
The SPEAKER pro tempore. In the opinion of the Chair, two-thirds
being in the affirmative, the ayes have it.
Mr. HUIZENGA. Mr. Speaker, on that I demand the yeas and nays.

[[Page H2463]]

The SPEAKER pro tempore. Pursuant to section 3(s) of House Resolution
8, the yeas and nays are ordered.
Pursuant to clause 8 of rule XX, further proceedings on this motion
are postponed.

____________________