- TXT
-
PDF
(PDF provides a complete and accurate display of this text.)
Tip
?
116th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 116-219
======================================================================
INSIDER TRADING PROHIBITION ACT
_______
September 27, 2019.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Ms. Waters, from the Committee on Financial Services,
submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 2534]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 2534) to amend the Securities Exchange Act of
1934 to prohibit certain securities trading and related
communications by those who possess material, nonpublic
information, having considered the same, report favorably
thereon with an amendment and recommend that the bill as
amended do pass.
CONTENTS
Page
Purpose and Summary.............................................. 3
Background and Need for Legislation.............................. 3
Section-by-Section Analysis...................................... 4
Hearings......................................................... 5
Committee Consideration.......................................... 6
Committee Votes.................................................. 6
Statement of Oversight Findings and Recommendations of the
Committee...................................................... 6
Statement of Performance Goals and Objectives.................... 6
New Budget Authority and CBO Cost Estimate....................... 6
Committee Cost Estimate.......................................... 8
Unfunded Mandate Statement....................................... 8
Advisory Committee............................................... 8
Application of Law to the Legislative Branch..................... 8
Earmark Statement................................................ 9
Duplication of Federal Programs.................................. 9
Changes to Existing Law.......................................... 9
89-006
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
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 in Possession 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 in possession of material,
nonpublic information relating to such security, security-based swap,
or security-based swap agreement, or relating to the market for 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)
(referred to in this subsection as the `communicating person'),
wrongfully to communicate material, nonpublic information relating to
such security, security-based swap, or security-based swap agreement,
or relating to the market for 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 in possession of such information; and
``(2) such a purchase, sale, or entry while in possession of
such information is reasonably foreseeable.
``(c) Standard and Knowledge Requirement.--
``(1) Standard.--For purposes of this section, trading while
in possession 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, or a
breach of any other personal or other relationship of
trust and confidence.
``(2) Knowledge requirement.--It shall not be necessary that
the person trading while in possession 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 in possession 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 or 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,
profit from, or directly or indirectly induce the acts constituting the
violation of this section.
``(e) Exempted Transactions.--
``(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, if the Commission
determines that such action is not inconsistent with the
purposes of this section. The prohibitions of this section
shall not apply to any person who acts at the specific
direction of, and solely for the account of, a person whose own
securities trading, or communications of material, nonpublic
information, would be lawful under this section.
``(2) Automatic trading.--
``(A) In general.--Not later than 180 days after the
date of the enactment of this section, the Commission
shall determine if any automatic trading transactions
should be exempted from any of the provisions of this
section and shall make such determination available to
the public, including on the website of the Commission.
``(B) Interim application.--During the period between
the date of the enactment of this section and the date
on which the Commission makes a determination pursuant
to subparagraph (A), automatic trading transactions
shall be exempted from the provisions of this section.
``(C) Automatic trading transaction defined.--For the
purposes of this paragraph, the term `automatic trading
transaction' means any purchase or sale of a security,
security-based swap, or security-based swap agreement
that--
``(i) occurs automatically; or
``(ii) is made pursuant to an advance
election.''.
(b) 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)''.
Purpose and Summary
H.R. 2534, the Insider Trading Act, sponsored by Rep. Jim
Himes, formally codifies the prohibition against insider
trading, creating a clear, consistent standard for both courts
and market participants to follow. The bill largely codifies
the existing case law on insider trading. However, the bill
overturns a controversial judicially-imposed requirement that
an individual who receives insider information know about the
specific personal benefit received by the individual who
discloses the information.\1\
---------------------------------------------------------------------------
\1\See United States v. Newman, 773 F.3d 438 (2d Cir. 2014).
---------------------------------------------------------------------------
Background and Need for Legislation
Insider trading is prosecuted under the general securities
fraud section of the Securities Exchange Act of 1934.\2\ The
definition of insider trading, which has been developed by the
courts over several decades, refers to undisclosed trading on
material, nonpublic corporate information by individuals who
are under a duty of trust and confidence that prohibits them
from using such information for their own personal gain.\3\
Individuals who are subject to this duty also may not disclose
(or ``tip'') the information to outsiders (known as
``tippees''), who then trade on the information themselves even
though they know the information was wrongfully obtained. In
this case, both the tipper and tippee may be liable. An
insider's tip of confidential information to an outsider is a
breach of the insider's duty if the insider ``personally will
benefit, directly or indirectly, from his disclosure.''\4\
---------------------------------------------------------------------------
\2\Section 10(b) of the Exchange Act [15 U.S.C. Sec. 78j(b)]; 17
C.F.R. Sec. 240.10b-5.
\3\See generally Chiarella v. United States, 445 U.S. 222, 226-230
(1980); Dirks v. SEC, 463 U.S. 646, 653-654 (1983); Salman v. United
States, No. 15-628, slip op. at 1 (2016); see also In re Cady, Roberts
& Co., 40 S.E.C. 907 (1961).
\4\Dirks, 463 U.S. at 662.
---------------------------------------------------------------------------
In 2014 the Second Circuit held that even though a tippee
may know that the information was wrongfully disclosed, the
government must also prove that they knew about the specific
personal benefit that the insiders received.\5\ This holding
has made it significantly more difficult for the government to
successfully prosecute insider trading cases. The bill would
overturn this controversial court requirement and establish a
clear, legislative standard for illegal insider trading.
---------------------------------------------------------------------------
\5\See Newman, 773 F.3d at 452.
---------------------------------------------------------------------------
During an April 4, 2019 hearing before the Subcommittee on
Investor Protection, Entrepreneurship, and Capital Markets,
Professor John Coffee of Columbia Law School testified that the
bill ``expands liability in ways that should not be
controversial.'' Representatives from Public Citizen and North
American Securities Administrators Association (NASAA) both
testified their strong support for the bill. The U.S. Chamber
of Commerce expressed concerns that the bill could create a
strict liability standard without any intent on the defendants'
part and that it could ``outlaw'' the safe harbor for trades
conducted through preestablished plans under Rule 10b5-1. The
bill, as amended, does not impose strict liability, and instead
requires defendants to know or recklessly disregard the fact
that insider information was obtained illegally or that the
trading would constitute wrongful use of the information. In
addition, the bill clarifies that the safe harbor for insider
trading plans is not repealed.
Section-by-Section Analysis
Section 1. Short title
Section 1 states that the short title of the bill is the
Insider Trading Prohibition Act.
Section 2. Prohibition on insider trading
Subsection (a) amends the Securities Exchange Act of 1934
to by adding a new section 16A.
Subsection (a) of the new section 16A expressly prohibits
any person from buying or selling, or causing the purchase or
sale, of any security, security-based swap, or security-based
swap agreement if the person knows or recklessly disregards
that the information has been wrongfully obtained, or that a
purchase or sale would constitute the wrongful use of that
information.
Subsection (b) of the new section 16A expressly prohibit
persons covered by subsection (a) of the new section 16A from
communicating certain material, nonpublic information to any
other person if the other person (A) purchases or sells, or
causes the purchase or sale of, any security, security-based
swap, or security-based swap agreement or (B) communicates the
information to another person who makes or causes such
purchase, sale or entry while aware of such information, and
such purchase, sale, or entry while aware of the information is
reasonably foreseeable.
Subsection (c) of the new section 16A provides certain
standards and requirements. Paragraph (1) provides that trading
while aware of material, nonpublic information or communicating
this information is wrongful only if the information has been
obtained by, or its communication or use would constitute
(directly or indirectly): theft, bribery, misrepresentation, or
espionage; a violation of any Federal law protecting computer
data or intellectual property or privacy of computer users; the
conversion, misappropriation, or deceptive taking of
information; or a breach of a fiduciary duty, confidentiality
agreement, contract, or other relationship of trust and
confidence.
Paragraph (2) of the new section 16A(c) establishes the
bill's knowledge requirement. It provides that the knowledge
requirement is satisfied so long as the person trading while
aware of the information or making the communication was aware,
recklessly disregarded being aware, or recklessly disregarded
that the information was wrongfully obtained or communicated.
The provision expressly states that it is not necessary that
the person trading on or communicating the information know the
specific means by which the information was obtained or
communicated, or if there was any personal benefit that was
paid or promised by or to any person in the chain of
communication.
Subsection (d) of the new section 16A provides that no
person can be held liable for violating any provisions of this
bill solely because the person controls or employs a person who
violates the provisions of this bill, if such person or
employer did not participate in, or directly or indirectly
induce the acts constituting a violation of section 16A.
Subsection (e) of the new section 16A provides the
Securities and Exchange Commission with the authority to exempt
any person, securities, transaction, or any class of persons,
securities, or transactions from any or all provisions of this
bill. It also provides an affirmative defense for any person
who acts at the specific direction, and solely for the account
of another person whose actions would be lawful under this
section. Subsection (e) also provides authority for the SEC to
exempt certain automatic trading transaction, including those
that satisfy the requirements of Rule 10b-5-1.
Subsection (b) of Section 2 makes certain conforming
amendments
Hearings
The Committee on Financial Services held a hearing on April
3, 2019 entitled, ``Putting Investors First: Reviewing
Proposals to Hold Executives Accountable,'' examining matters
related to holding public company executives accountable to
both investors and the general public, including H.R. 2534.
Testifying before the Subcommittee was Professor John Coffee,
Adolf A. Berle Professor of Law and Director of the Center on
Corporate Governance at Columbia Law School; Melanie Lubin,
Maryland Securities Commissioner (on behalf of the North
American Securities Administrators Association); Remington A.
Gregg, Counsel for Civil Justice and Consumer Rights, Public
Citizen; and Tom Quaadman, Vice President, U.S. Chamber Center
for Capital Markets Competitiveness, Chamber of Commerce of the
United States of America.
Committee Consideration
The Committee on Financial Services met in open session on
May 8, 2019 and ordered H.R. 2534 be reported favorably to the
House by a voice vote.
Committee Votes and Roll Call Votes
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the Committee advises there were
no roll call votes on H.R. 2534.
Statement of Oversight Findings and Recommendations of the Committee
In compliance with clause 3(c)(1) of rule XIII and clause
2(b)(1) of rule X of the Rules of the House of Representatives,
the Committee's oversight findings and recommendations are
reflected in the descriptive portions of this report.
Statement of Performance Goals and Objectives
Pursuant to clause (3)(c) of rule XIII of the Rules of the
House of Representatives, the goals of H.R. 2534 are to codify
insider trading prohibitions that are currently contained in
case law.
New Budget Authority and CBO Cost Estimate
Pursuant to clause 3(c)(2) of rule XIII of the Rules of the
House of Representatives and section 308(a) of the
Congressional Budget Act of 1974, and pursuant to clause
3(c)(3) of rule XIII of the Rules of the House of
Representatives and section 402 of the Congressional Budget Act
of 1974, the Committee has received the following estimate for
H.R. 2534 from the Director of the Congressional Budget Office:
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 19, 2019.
Hon. Maxine Waters,
Chairwoman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Madam Chairwoman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2534, the Insider
Trading Prohibition Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is David Hughes.
Sincerely,
Phillip L. Swagel,
Director.
Enclosure.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
H.R. 2534 would define and prohibit illegal insider
trading.\1\ It also would prohibit instances in which one
person wrongfully communicates nonpublic, material information
to another person in connection with securities trading,
regardless of whether or not a payment or a promised personal
benefit was involved. Under H.R. 2534, the Securities and
Exchange Commission (SEC) would determine if the new insider
trading prohibitions also apply to automated security-trading
transactions.
---------------------------------------------------------------------------
\1\According to the Securities and Exchange Commission, ``illegal
insider trading refers generally to buying or selling a security, in
breach of a fiduciary duty or other relationship of trust and
confidence, on the basis of material, nonpublic information about the
security.''
---------------------------------------------------------------------------
Current law prohibits the use of ``any manipulative or
deceptive device or contrivance'' when trading securities.\2\
Likewise, federal regulations prohibit people from engaging in
``any act, practice, or course of business which operates . . .
as a fraud or deceit'' in connection with securities
trading.\3\ To date, the SEC has used those general anti-fraud
provisions, informed by judicial decisions and case law, to
prosecute instances of illegal insider trading.
---------------------------------------------------------------------------
\2\15 U.S. Code 78j.
\3\17 CFR 240.10b-5.
---------------------------------------------------------------------------
CBO expects that H.R. 2534 would expand the SEC's authority
to prosecute unlawful insider traders. The SEC might commence
more enforcement actions and impose additional penalties if
illegal insider trading continued at the same rate following
enactment; but the agency would probably commence fewer
enforcement actions if enactment of H.R. 2534 deterred illegal
insider trading.
Under current law, the SEC is authorized to collect fees
sufficient to offset its annual appropriation; therefore, CBO
estimates that any net effect on discretionary spending would
be negligible, assuming appropriation actions consistent with
that authority.
Also under current law, people found guilty of illegal
insider trading are subject to criminal and civil penalties,
which are recorded in the federal budget as revenues. CBO
estimates that revenue collections and associated direct
spending of criminal penalties would not significantly change
under the bill.
H.R. 2534 contains private-sector mandates as defined in
the Unfunded Mandates Reform Act (UMRA). However, CBO cannot
estimate whether the cost of those mandates would exceed the
threshold established in UMRA ($164 million in 2019, adjusted
annually for inflation).
H.R. 2534 would exempt employers from liability for insider
trading solely for employing a person who has violated the new
prohibitions in the bill. This exemption would be a mandate
under UMRA because it would remove a private right of action.
Further, the SEC would be allowed to exempt a person,
transaction, or security from requirements in the bill, thereby
shielding additional entities from liability. The cost of the
mandate would be the foregone net value of awards and
settlements that would have been granted for such claims in the
absence of the bill. CBO cannot estimate the number of suits
that would have been brought or the amount of potential forgone
settlements, and, therefore, cannot determine whether the cost
would exceed UMRA's annual private-sector threshold.
If the SEC increased fees to offset the costs associated
with implementing the bill, H.R. 2534 would increase the cost
of an existing mandate on private entities required to pay
those assessments. CBO estimates that the incremental cost of
the mandate would be very small.
H.R. 2534 contains no intergovernmental mandates as defined
in UMRA.
The CBO staff contacts for this estimate are David Hughes
(for federal costs) and Rachel Austin (for mandates). The
estimate was reviewed by Theresa Gullo, Assistant Director for
Budget Analysis.
Committee Cost Estimate
Clause 3(d)(1) of rule XIII of the Rules of the House of
Representatives requires an estimate and a comparison of the
costs that would be incurred in carrying out H.R. 2534.
However, clause 3(d)(2)(B) of that rule provides that this
requirement does not apply when the committee has included in
its report a timely submitted cost estimate of the bill
prepared by the Director of the Congressional Budget Office
under section 402 of the Congressional Budget Act.
Unfunded Mandate Statement
Pursuant to Section 423 of the Congressional Budget and
Impoundment Control Act (as amended by Section 101(a)(2) of the
Unfunded Mandates Reform Act, Pub. L. 104-4), the Committee
adopts as its own the estimate of federal mandates regarding
H.R. 2534, as amended, prepared by the Director of the
Congressional Budget Office.
Advisory Committee
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Application of Law to the Legislative Branch
Pursuant to section 102(b)(3) of the Congressional
Accountability Act, Pub. L. No. 104-1, H.R. 2534, as amended,
does not apply to terms and conditions of employment or to
access to public services or accommodations within the
legislative branch.
Earmark Statement
In accordance with clause 9 of rule XXI of the Rules of the
House of Representatives, H.R. 2534 does not contain any
congressional earmarks, limited tax benefits, or limited tariff
benefits as described in clauses 9(e), 9(f), and 9(g) of rule
XXI.
Duplication of Federal Programs
Pursuant to clause 3(c)(5) of rule XIII of the Rules of the
House of Representatives, the Committee states that no
provision of H.R. 2534 establishes or reauthorizes a program of
the Federal Government known to be duplicative of another
federal program, a program that was included in any report from
the Government Accountability Office to Congress pursuant to
section 21 of Public Law 111-139, or a program related to a
program identified in the most recent Catalog of Federal
Domestic Assistance.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, H.R. 2534, as reported, are shown as follows:
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
SEC. 16A. PROHIBITION ON INSIDER TRADING.
(a) Prohibition Against Trading Securities While in
Possession 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 in possession of material, nonpublic
information relating to such security, security-based swap, or
security-based swap agreement, or relating to the market for
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) (referred to in this subsection as the
`communicating person'), wrongfully to communicate material,
nonpublic information relating to such security, security-based
swap, or security-based swap agreement, or relating to the
market for 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 in possession of such
information; and
(2) such a purchase, sale, or entry while in
possession of such information is reasonably
foreseeable.
(c) Standard and Knowledge Requirement.--
(1) Standard.--For purposes of this section, trading
while in possession 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, or a breach of any other personal or
other relationship of trust and confidence.
(2) Knowledge requirement.--It shall not be necessary
that the person trading while in possession 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 in possession 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 or 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, profit from, or
directly or indirectly induce the acts constituting the
violation of this section.
(e) Exempted Transactions.--
(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, if the Commission determines that such
action is not inconsistent with the purposes of this
section. The prohibitions of this section shall not
apply to any person who acts at the specific direction
of, and solely for the account of, a person whose own
securities trading, or communications of material,
nonpublic information, would be lawful under this
section.
(2) Automatic trading.--
(A) In general.--Not later than 180 days
after the date of the enactment of this
section, the Commission shall determine if any
automatic trading transactions should be
exempted from any of the provisions of this
section and shall make such determination
available to the public, including on the
website of the Commission.
(B) Interim application.--During the period
between the date of the enactment of this
section and the date on which the Commission
makes a determination pursuant to subparagraph
(A), automatic trading transactions shall be
exempted from the provisions of this section.
(C) Automatic trading transaction defined.--
For the purposes of this paragraph, the term
``automatic trading transaction'' means any
purchase or sale of a security, security-based
swap, or security-based swap agreement that--
(i) occurs automatically; or
(ii) is made pursuant to an advance
election.
* * * * * * *
investigations; injunctions and prosecution of offenses
Sec. 21. (a)(1) The Commission may, in its discretion, make
such investigations as it deems necessary to determine whether
any person has violated, is violating, or is about to violate
any provision of this title, the rules or regulations
thereunder, the rules of a national securities exchange or
registered securities association of which such person is a
member or a person associated, or, as to any act or practice,
or omission to act, while associated with a member, formerly
associated with a member, the rules of a registered clearing
agency in which such person is a participant, or, as to any act
or practice, or omission to act, while a participant, was a
participant, the rules of the Public Company Accounting
Oversight Board, of which such person is a registered public
accounting firm, a person associated with such a firm, or, as
to any act, practice, or omission to act, while associated with
such firm, a person formerly associated with such a firm, or
the rules of the Municipal Securities Rulemaking Board, and may
require or permit any person to file with it a statement in
writing, under oath or otherwise as the Commission shall
determine, as to all the facts and circumstances concerning the
matter to be investigated. The Commission is authorized in its
discretion, to publish information concerning any such
violations, and to investigate any facts, conditions,
practices, or matters which it may deem necessary or proper to
aid in the enforcement of such provisions, in the prescribing
of rules and regulations under this title, or in securing
information to serve as a basis for recommending further
legislation concerning the matters to which this title relates.
(2) On request from a foreign securities authority, the
Commission may provide assistance in accordance with this
paragraph if the requesting authority states that the
requesting authority is conducting an investigation which it
deems necessary to determine whether any person has violated,
is violating, or is about to violate any laws or rules relating
to securities matters that the requesting authority administers
or enforces. The Commission may, in its discretion, conduct
such investigation as the Commission deems necessary to collect
information and evidence pertinent to the request for
assistance. Such assistance may be provided without regard to
whether the facts stated in the request would also constitute a
violation of the laws of the United States. In deciding whether
to provide such assistance, the Commission shall consider
whether (A) the requesting authority has agreed to provide
reciprocal assistance in securities matters to the Commission;
and (B) compliance with the request would prejudice the public
interest of the United States.
(b) For the purpose of any such investigation, or any other
proceeding under this title, any member of the Commission or
any officer designated by it is empowered to administer oaths
and affirmations, subpoena witnesses, compel their attendance,
take evidence, and require the production of any books, papers,
correspondence, memoranda, or other records which the
Commission deems relevant or material to the inquiry. Such
attendance of witnesses and the production of any such records
may be required from any place in the United States or any
State at any designated place of hearing.
(c) In case of contumacy by, or refusal to obey a subpoena
issued to, any person, the Commission may invoke the aid of any
court of the United States within the jurisdiction of which
such investigation or proceeding is carried on, or where such
person resides or carries on business, in requiring the
attendance and testimony of witnesses and the production of
books, papers, correspondence, memoranda, and other records.
And such court may issue an order requiring such person to
appear before the Commission or member or officer designated by
the Commission, there to produce records, if so ordered, or to
give testimony touching the matter under investigation or in
question; and any failure to obey such order of the court may
be punished by such court as a contempt thereof. All process in
any such case may be served in the judicial district whereof
such person is an inhabitant or wherever he may be found. Any
person who shall, without just cause, fail or refuse to attend
and testify or to answer any lawful inquiry or to produce
books, papers, correspondence, memoranda, and other records, if
in his power so to do, in obedience to the subpoena of the
Commission, shall be guilty of a misdemeanor and, upon
conviction, shall be subject to a fine of not more than $1,000
or to imprisonment for a term of not more than one year, or
both.
(d)(1) Whenever it shall appear to the Commission that any
person is engaged or is about to engage in acts or practices
constituting a violation of any provision of this title, the
rules or regulations thereunder, the rules of a national
securities exchange or registered securities association of
which such person is a member or a person associated with a
member, the rules of a registered clearing agency in which such
person is a participant, the rules of the Public Company
Accounting Oversight Board, of which such person is a
registered public accounting firm or a person associated with
such a firm, or the rules of the Municipal Securities
Rulemaking Board, it may in its discretion bring an action in
the proper district court of the United States, the United
States District Court for the District of Columbia, or the
United States courts of any territory or other place subject to
the jurisdiction of the United States, to enjoin such acts or
practices, and upon a proper showing a permanent or temporary
injunction or restraining order shall be granted without bond.
The Commission may transmit such evidence as may be available
concerning such acts or practices as may constitute a violation
of any provision of this title or the rules or regulations
thereunder to the Attorney General, who may, in his discretion,
institute the necessary criminal proceedings under this title.
(2) Authority of a Court To Prohibit Persons From Serving as
Officers and Directors.--In any proceeding under paragraph (1)
of this subsection, the court may prohibit, conditionally or
unconditionally, and permanently or for such period of time as
it shall determine, any person who violated section 10(b) of
this title, section 16A of this title or the rules or
regulations thereunder from acting as an officer or director of
any issuer that has a class of securities registered pursuant
to section 12 of this title or that is required to file reports
pursuant to section 15(d) of this title if the person's conduct
demonstrates unfitness to serve as an officer or director of
any such issuer.
(3) Money Penalties in Civil Actions.--
(A) Authority of commission.--Whenever it shall
appear to the Commission that any person has violated
any provision of this title, the rules or regulations
thereunder, or a cease-and-desist order entered by the
Commission pursuant to section 21C of this title, other
than by committing a violation subject to a penalty
pursuant to section 21A, the Commission may bring an
action in a United States district court to seek, and
the court shall have jurisdiction to impose, upon a
proper showing, a civil penalty to be paid by the
person who committed such violation.
(B) Amount of penalty.--
(i) First tier.--The amount of the penalty
shall be determined by the court in light of
the facts and circumstances. For each
violation, the amount of the penalty shall not
exceed the greater of (I) $5,000 for a natural
person or $50,000 for any other person, or (II)
the gross amount of pecuniary gain to such
defendant as a result of the violation.
(ii) Second tier.--Notwithstanding clause
(i), the amount of penalty for each such
violation shall not exceed the greater of (I)
$50,000 for a natural person or $250,000 for
any other person, or (II) the gross amount of
pecuniary gain to such defendant as a result of
the violation, if the violation described in
subparagraph (A) involved fraud, deceit,
manipulation, or deliberate or reckless
disregard of a regulatory requirement.
(iii) Third tier.--Notwithstanding clauses
(i) and (ii), the amount of penalty for each
such violation shall not exceed the greater of
(I) $100,000 for a natural person or $500,000
for any other person, or (II) the gross amount
of pecuniary gain to such defendant as a result
of the violation, if--
(aa) the violation described in
subparagraph (A) involved fraud,
deceit, manipulation, or deliberate or
reckless disregard of a regulatory
requirement; and
(bb) such violation directly or
indirectly resulted in substantial
losses or created a significant risk of
substantial losses to other persons.
(C) Procedures for collection.--
(i) Payment of penalty to treasury.--A
penalty imposed under this section shall be
payable into the Treasury of the United States,
except as otherwise provided in section 308 of
the Sarbanes-Oxley Act of 2002 and section 21F
of this title.
(ii) Collection of penalties.--If a person
upon whom such a penalty is imposed shall fail
to pay such penalty within the time prescribed
in the court's order, the Commission may refer
the matter to the Attorney General who shall
recover such penalty by action in the
appropriate United States district court.
(iii) Remedy not exclusive.--The actions
authorized by this paragraph may be brought in
addition to any other action that the
Commission or the Attorney General is entitled
to bring.
(iv) Jurisdiction and venue.--For purposes of
section 27 of this title, actions under this
paragraph shall be actions to enforce a
liability or a duty created by this title.
(D) Special provisions relating to a violation of a
cease-and-desist order.--In an action to enforce a
cease-and-desist order entered by the Commission
pursuant to section 21C, each separate violation of
such order shall be a separate offense, except that in
the case of a violation through a continuing failure to
comply with the order, each day of the failure to
comply shall be deemed a separate offense.
(4) Prohibition of attorneys' fees paid from
commission disgorgement funds.--Except as otherwise
ordered by the court upon motion by the Commission, or,
in the case of an administrative action, as otherwise
ordered by the Commission, funds disgorged as the
result of an action brought by the Commission in
Federal court, or as a result of any Commission
administrative action, shall not be distributed as
payment for attorneys' fees or expenses incurred by
private parties seeking distribution of the disgorged
funds.
(5) Equitable Relief.--In any action or proceeding brought or
instituted by the Commission under any provision of the
securities laws, the Commission may seek, and any Federal court
may grant, any equitable relief that may be appropriate or
necessary for the benefit of investors.
(6) Authority of a court to prohibit persons from
participating in an offering of penny stock.--
(A) In general.--In any proceeding under paragraph
(1) against any person participating in, or, at the
time of the alleged misconduct who was participating
in, an offering of penny stock, the court may prohibit
that person from participating in an offering of penny
stock, conditionally or unconditionally, and
permanently or for such period of time as the court
shall determine.
(B) Definition.--For purposes of this paragraph, the
term ``person participating in an offering of penny
stock'' includes any person engaging in activities with
a broker, dealer, or issuer for purposes of issuing,
trading, or inducing or attempting to induce the
purchase or sale of, any penny stock. The Commission
may, by rule or regulation, define such term to include
other activities, and may, by rule, regulation, or
order, exempt any person or class of persons, in whole
or in part, conditionally or unconditionally, from
inclusion in such term.
(e) Upon application of the Commission the district courts of
the United States and the United States courts of any territory
or other place subject to the jurisdiction of the United States
shall have jurisdiction to issue writs of mandamus,
injunctions, and orders commanding (1) any person to comply
with the provisions of this title, the rules, regulations, and
orders thereunder, the rules of a national securities exchange
or registered securities association of which such person is a
member or person associated with a member, the rules of a
registered clearing agency in which such person is a
participant, the rules of the Public Company Accounting
Oversight Board, of which such person is a registered public
accounting firm or a person associated with such a firm, the
rules of the Municipal Securities Rulemaking Board, or any
undertaking contained in a registration statement as provided
in subsection (d) of section 15 of this title, (2) any national
securities exchange or registered securities association to
enforce compliance by its members and persons associated with
its members with the provisions of this title, the rules,
regulations, and orders thereunder, and the rules of such
exchange or association, or (3) any registered clearing agency
to enforce compliance by its participants with the provisions
of the rules of such clearing agency.
(f) Notwithstanding any other provision of this title, the
Commission shall not bring any action pursuant to subsection
(d) or (e) of this section against any person for violation of,
or to command compliance with, the rules of a self-regulatory
organization or the Public Company Accounting Oversight Board
unless it appears to the Commission that (1) such self-
regulatory organization or the Public Company Accounting
Oversight Board is unable or unwilling to take appropriate
action against such person in the public interest and for the
protection of investors, or (2) such action is otherwise
necessary or appropriate in the public interest or for the
protection of investors.
(g) Notwithstanding the provisions of section 1407(a) of
title 28, United States Code, or any other provision of law, no
action for equitable relief instituted by the Commission
pursuant to the securities laws shall be consolidated or
coordinated with other actions not brought by the Commission,
even though such other actions may involve common questions of
fact, unless such consolidation is consented to by the
Commission.
(h)(1) The Right to Financial Privacy Act of 1978 shall apply
with respect to the Commission, except as otherwise provided in
this subsection.
(2) Notwithstanding section 1105 or 1107 of the Right to
Financial Privacy Act of 1978, the Commission may have access
to and obtain copies of, or the information contained in
financial records of a customer from a financial institution
without prior notice to the customer upon an ex parte showing
to an appropriate United States district court that the
Commission seeks such financial records pursuant to a subpoena
issued in conformity with the requirements of section 19(b) of
the Securities Act of 1933, section 21(b) of the Securities
Exchange Act of 1934, section 42(b) of the Investment Company
Act of 1940, or section 209(b) of the Investment Advisers Act
of 1940, and that the Commission has reason to believe that--
(A) delay in obtaining access to such financial
records, or the required notice, will result in--
(i) flight from prosecution;
(ii) destruction of or tampering with
evidence;
(iii) transfer of assets or records outside
the territorial limits of the United States;
(iv) improper conversion of investor assets;
or
(v) impeding the ability of the Commission to
identify or trace the source or disposition of
funds involved in any securities transaction;
(B) such financial records are necessary to identify
or trace the record or beneficial ownership interest in
any security;
(C) the acts, practices or course of conduct under
investigation involve--
(i) the dissemination of materially false or
misleading information concerning any security,
issuer, or market, or the failure to make
disclosures required under the securities laws,
which remain uncorrected; or
(ii) a financial loss to investors or other
persons protected under the securities laws
which remains substantially uncompensated; or
(D) the acts, practices or course of conduct under
investigation--
(i) involve significant financial speculation
in securities; or
(ii) endanger the stability of any financial
or investment intermediary.
(3) Any application under paragraph (2) for a delay in notice
shall be made with reasonable specificity.
(4)(A) Upon a showing described in paragraph (2), the
presiding judge or magistrate shall enter an ex parte order
granting the requested delay for a period not to exceed ninety
days and an order prohibiting the financial institution
involved from disclosing that records have been obtained or
that a request for records has been made.
(B) Extensions of the period of delay of notice provided in
subparagraph (A) of up to ninety days each may be granted by
the court upon application, but only in accordance with this
subsection or section 1109(a), (b)(1), or (b)(2) of the Right
to Financial Privacy Act of 1978.
(C) Upon expiration of the period of delay of notification
ordered under subparagraph (A) or (B), the customer shall be
served with or mailed a copy of the subpena insofar as it
applies to the customer together with the following notice
which shall describe with reasonable specificity the nature of
the investigation for which the Commission sought the financial
records:
* * * * * * *
(5) Upon application by the Commission, all proceedings
pursuant to paragraphs (2) and (4) shall be held in camera and
the records thereof sealed until expiration of the period of
delay or such other date as the presiding judge or magistrate
may permit.
(7)(A) Following the expiration of the period of delay of
notification ordered by the court pursuant to paragraph (4) of
this subsection, the customer may, upon motion, reopen the
proceeding in the district court which issued the order. If the
presiding judge or magistrate finds that the movant is the
customer to whom the records obtained by the Commission
pertain, and that the Commission has obtained financial records
or information contained therein in violation of this
subsection, other than paragraph (1), it may order that the
customer be granted civil penalties against the Commission in
an amount equal to the sum of--
(i) $100 without regard to the volume of records
involved;
(ii) any out-of-pocket damages sustained by the
customer as a direct result of the disclosure; and
(iii) if the violation is found to have been willful,
intentional, and without good faith, such punitive
damages as the court may allow, together with the costs
of the action and reasonable attorney's fees as
determined by the court.
(B) Upon a finding that the Commission has obtained financial
records or information contained therein in violation of this
subsection, other than paragraph (1), the court, in its
discretion, may also or in the alternative issue injunctive
relief to require the Commission to comply with this subsection
with respect to any subpena which the Commission issues in the
future for financial records of such customer for purposes of
the same investigation.
(C) Whenever the court determines that the Commission has
failed to comply with this subsection, other than paragraph
(1), and the court finds that the circumstances raise questions
of whether an officer or employee of the Commission acted in a
willful and intentional manner and without good faith with
respect to the violation, the Office of Personnel Management
shall promptly initiate a proceeding to determine whether
disciplinary action is warranted against the agent or employee
who was primarily responsible for the violation. After
investigating and considering the evidence submitted, the
Office of Personnel Management shall submit its findings and
recommendations to the Commission and shall send copies of the
findings and recommendations to the officer or employee or his
representative. The Commission shall take the corrective action
that the Office of Personnel Management recommends.
(8) The relief described in paragraphs (7) and (10) shall be
the only remedies or sanctions available to a customer for a
violation of this subsection, other than paragraph (1), and
nothing herein or in the Right to Financial Privacy Act of 1978
shall be deemed to prohibit the use in any investigation or
proceeding of financial records, or the information contained
therein, obtained by a subpena issued by the Commission. In the
case of an unsuccessful action under paragraph (7), the court
shall award the costs of the action and attorney's fees to the
Commission if the presiding judge or magistrate finds that the
customer's claims were made in bad faith.
(9)(A) The Commission may transfer financial records or the
information contained therein to any government authority if
the Commission proceeds as a transferring agency in accordance
with section 1112 of the Right to Financial Privacy Act of
1978, except that the customer notice required under section
1112(b) or (c) of such Act may be delayed upon a showing by the
Commission, in accordance with the procedure set forth in
paragraphs (4) and (5), that one or more of subparagraphs (A)
through (D) of paragraph (2) apply.
(B) The Commission may, without notice to the customer
pursuant to section 1112 of the Right to Financial Privacy Act
of 1978, transfer financial records or the information
contained therein to a State securities agency or to the
Department of Justice. Financial records or information
transferred by the Commission to the Department of Justice or
to a State securities agency pursuant to the provisions of this
subparagraph may be disclosed or used only in an
administrative, civil, or criminal action or investigation by
the Department of Justice or the State securities agency which
arises out of or relates to the acts, practices, or courses of
conduct investigated by the Commission, except that if the
Department of Justice or the State securities agency determines
that the information should be disclosed or used for any other
purpose, it may do so if it notifies the customer, except as
otherwise provided in the Right to Financial Privacy Act of
1978, within 30 days of its determination, or complies with the
requirements of section 1109 of such Act regarding delay of
notice.
(10) Any government authority violating paragraph (9) shall
be subject to the procedures and penalties applicable to the
Commission under paragraph (7)(A) with respect to a violation
by the Commission in obtaining financial records.
(11) Notwithstanding the provisions of this subsection, the
Commission may obtain financial records from a financial
institution or transfer such records in accordance with
provisions of the Right to Financial Privacy Act of 1978.
(12) Nothing in this subsection shall enlarge or restrict any
rights of a financial institution to challenge requests for
records made by the Commission under existing law. Nothing in
this subsection shall entitle a customer to assert any rights
of a financial institution.
(13) Unless the context otherwise requires, all terms defined
in the Right to Financial Privacy Act of 1978 which are common
to this subsection shall have the same meaning as in such Act.
(i) Information to CFTC.--The Commission shall provide the
Commodity Futures Trading Commission with notice of the
commencement of any proceeding and a copy of any order entered
by the Commission against any broker or dealer registered
pursuant to section 15(b)(11), any exchange registered pursuant
to section 6(g), or any national securities association
registered pursuant to section 15A(k).
civil penalties for insider trading
Sec. 21A. (a) Authority To Impose Civil Penalties.--
(1) Judicial actions by commission authorized.--
Whenever it shall appear to the Commission that any
person has violated any provision of this title or the
rules or regulations thereunder by purchasing or
selling a security or security-based swap agreement
while in possession of material, nonpublic information
in, or has violated any such provision by communicating
such information in connection with, a transaction on
or through the facilities of a national securities
exchange or from or through a broker or dealer, and
which is not part of a public offering by an issuer of
securities other than standardized options or security
futures products, the Commission--
(A) may bring an action in a United States
district court to seek, and the court shall
have jurisdiction to impose, a civil penalty to
be paid by the person who committed such
violation; and
(B) may, subject to subsection (b)(1), bring
an action in a United States district court to
seek, and the court shall have jurisdiction to
impose, a civil penalty to be paid by a person
who, at the time of the violation, directly or
indirectly controlled the person who committed
such violation.
(2) Amount of penalty for person who committed
violation.--The amount of the penalty which may be
imposed on the person who committed such violation
shall be determined by the court in light of the facts
and circumstances, but shall not exceed three times the
profit gained or loss avoided as a result of such
unlawful purchase, sale, or communication.
(3) Amount of penalty for controlling person.--The
amount of the penalty which may be imposed on any
person who, at the time of the violation, directly or
indirectly controlled the person who committed such
violation, shall be determined by the court in light of
the facts and circumstances, but shall not exceed the
greater of $1,000,000, or three times the amount of the
profit gained or loss avoided as a result of such
controlled person's violation. If such controlled
person's violation was a violation by communication,
the profit gained or loss avoided as a result of the
violation shall, for purposes of this paragraph only,
be deemed to be limited to the profit gained or loss
avoided by the person or persons to whom the controlled
person directed such communication.
(b) Limitations on Liability.--
(1) Liability of controlling persons.--No controlling
person shall be subject to a penalty under subsection
(a)(1)(B) unless the Commission establishes that--
(A) such controlling person knew or
recklessly disregarded the fact that such
controlled person was likely to engage in the
act or acts constituting the violation and
failed to take appropriate steps to prevent
such act or acts before they occurred; or
(B) such controlling person knowingly or
recklessly failed to establish, maintain, or
enforce any policy or procedure required under
section 15(f) of this title or section 204A of
the Investment Advisers Act of 1940 and such
failure substantially contributed to or
permitted the occurrence of the act or acts
constituting the violation.
(2) Additional restrictions on liability.--No person
shall be subject to a penalty under subsection (a)
solely by reason of employing another person who is
subject to a penalty under such subsection, unless such
employing person is liable as a controlling person
under paragraph (1) of this subsection. Section 20(a)
of this title shall not apply to actions under
subsection (a) of this section.
(c) Authority of Commission.--the Commission, by such rules,
regulations, and orders as it considers necessary or
appropriate in the public interest or for the protection of
investors, may exempt, in whole or in part, either
unconditionally or upon specific terms and conditions, any
person or transaction or class of persons or transactions from
this section.
(d) Procedures for Collection.--
(1) Payment of penalty to treasury.--A penalty
imposed under this section shall be payable into the
Treasury of the United States, except as otherwise
provided in section 308 of the Sarbanes-Oxley Act of
2002 and section 21F of this title.
(2) Collection of penalties.--If a person upon whom
such a penalty is imposed shall fail to pay such
penalty within the time prescribed in the court's
order, the Commission may refer the matter to the
Attorney General who shall recover such penalty by
action in the appropriate United States district court.
(3) Remedy not exclusive.--The actions authorized by
this section may be brought in addition to any other
actions that the Commission or the Attorney General are
entitled to bring.
(4) Jurisdiction and venue.--For purposes of section
27 of this title, actions under this section shall be
actions to enforce a liability or a duty created by
this title.
(5) Statute of limitations.--No action may be brought
under this section more than 5 years after the date of
the purchase or sale. This section shall not be
construed to bar or limit in any manner any action by
the Commission or the Attorney General under any other
provision of this title, nor shall it bar or limit in
any manner any action to recover penalties, or to seek
any other order regarding penalties, imposed in an
action commenced within 5 years of such transaction.
(e) Definition.--For purposes of this section, ``profit
gained'' or ``loss avoided'' is the difference between the
purchase or sale price of the security and the value of that
security as measured by the trading price of the security a
reasonable period after public dissemination of the nonpublic
information.
(f) The authority of the Commission under this section with
respect to security-based swap agreements (as defined in
section 206B of the Gramm-Leach-Bliley Act) shall be subject to
the restrictions and limitations of section 3A(b) of this
title.
(g) Duty of Members and Employees of Congress.--
(1) In general.--Subject to the rule of construction
under section 10 of the STOCK Act and solely for
purposes of the insider trading prohibitions arising
under this Act, including section 10(b) and Rule 10b-5
thereunder, and section 16A, each Member of Congress or
employee of Congress owes a duty arising from a
relationship of trust and confidence to the Congress,
the United States Government, and the citizens of the
United States with respect to material, nonpublic
information derived from such person's position as a
Member of Congress or employee of Congress or gained
from the performance of such person's official
responsibilities.
(2) Definitions.--In this subsection--
(A) the term ``Member of Congress'' means a
member of the Senate or House of
Representatives, a Delegate to the House of
Representatives, and the Resident Commissioner
from Puerto Rico; and
(B) the term ``employee of Congress'' means--
(i) any individual (other than a
Member of Congress), whose compensation
is disbursed by the Secretary of the
Senate or the Chief Administrative
Officer of the House of
Representatives; and
(ii) any other officer or employee of
the legislative branch (as defined in
section 109(11) of the Ethics in
Government Act of 1978 (5 U.S.C. App.
109(11))).
(3) Rule of construction.--Nothing in this subsection
shall be construed to impair or limit the construction
of the existing antifraud provisions of the securities
laws or the authority of the Commission under those
provisions.
(h) Duty of Other Federal Officials.--
(1) In general.--Subject to the rule of construction
under section 10 of the STOCK Act and solely for
purposes of the insider trading prohibitions arising
under this Act, including section 10(b), and Rule 10b-5
thereunder, and section 16A, each executive branch
employee, each judicial officer, and each judicial
employee owes a duty arising from a relationship of
trust and confidence to the United States Government
and the citizens of the United States with respect to
material, nonpublic information derived from such
person's position as an executive branch employee,
judicial officer, or judicial employee or gained from
the performance of such person's official
responsibilities.
(2) Definitions.--In this subsection--
(A) the term ``executive branch employee''--
(i) has the meaning given the term
``employee'' under section 2105 of
title 5, United States Code;
(ii) includes--
(I) the President;
(II) the Vice President; and
(III) an employee of the
United States Postal Service or
the Postal Regulatory
Commission;
(B) the term ``judicial employee'' has the
meaning given that term in section 109(8) of
the Ethics in Government Act of 1978 (5 U.S.C.
App. 109(8)); and
(C) the term ``judicial officer'' has the
meaning given that term under section 109(10)
of the Ethics in Government Act of 1978 (5
U.S.C. App. 109(10)).
(3) Rule of construction.--Nothing in this subsection
shall be construed to impair or limit the construction
of the existing antifraud provisions of the securities
laws or the authority of the Commission under those
provisions.
(i) Participation in Initial Public Offerings.--An individual
described in section 101(f) of the Ethics in Government Act of
1978 may not purchase securities that are the subject of an
initial public offering (within the meaning given such term in
section 12(f)(1)(G)(i)) in any manner other than is available
to members of the public generally.
* * * * * * *
CEASE-AND-DESIST PROCEEDINGS
Sec. 21C. (a) Authority of the Commission.--If the Commission
finds, after notice and opportunity for hearing, that any
person is violating, has violated, or is about to violate any
provision of this title, or any rule or regulation thereunder,
the Commission may publish its findings and enter an order
requiring such person, and any other person that is, was, or
would be a cause of the violation, due to an act or omission
the person knew or should have known would contribute to such
violation, to cease and desist from committing or causing such
violation and any future violation of the same provision, rule,
or regulation. Such order may, in addition to requiring a
person to cease and desist from committing or causing a
violation, require such person to comply, or to take steps to
effect compliance, with such provision, rule, or regulation,
upon such terms and conditions and within such time as the
Commission may specify in such order. Any such order may, as
the Commission deems appropriate, require future compliance or
steps to effect future compliance, either permanently or for
such period of time as the Commission may specify, with such
provision, rule, or regulation with respect to any security,
any issuer, or any other person.
(b) Hearing.--The notice instituting proceedings pursuant to
subsection (a) shall fix a hearing date not earlier than 30
days nor later than 60 days after service of the notice unless
an earlier or a later date is set by the Commission with the
consent of any respondent so served.
(c) Temporary Order.--
(1) In general.--Whenever the Commission determines
that the alleged violation or threatened violation
specified in the notice instituting proceedings
pursuant to subsection (a), or the continuation
thereof, is likely to result in significant dissipation
or conversion of assets, significant harm to investors,
or substantial harm to the public interest, including,
but not limited to, losses to the Securities Investor
Protection Corporation, prior to the completion of the
proceedings, the Commission may enter a temporary order
requiring the respondent to cease and desist from the
violation or threatened violation and to take such
action to prevent the violation or threatened violation
and to prevent dissipation or conversion of assets,
significant harm to investors, or substantial harm to
the public interest as the Commission deems appropriate
pending completion of such proceedings. Such an order
shall be entered only after notice and opportunity for
a hearing, unless the Commission determines that notice
and hearing prior to entry would be impracticable or
contrary to the public interest. A temporary order
shall become effective upon service upon the respondent
and, unless set aside, limited, or suspended by the
Commission or a court of competent jurisdiction, shall
remain effective and enforceable pending the completion
of the proceedings.
(2) Applicability.--Paragraph (1) shall apply only to
a respondent that acts, or, at the time of the alleged
misconduct acted, as a broker, dealer, investment
adviser, investment company, municipal securities
dealer, government securities broker, government
securities dealer, registered public accounting firm
(as defined in section 2 of the Sarbanes-Oxley Act of
2002), or transfer agent, or is, or was at the time of
the alleged misconduct, an associated person of, or a
person seeking to become associated with, any of the
foregoing.
(3) Temporary freeze.--
(A) In general.--
(i) Issuance of temporary order.--
Whenever, during the course of a lawful
investigation involving possible
violations of the Federal securities
laws by an issuer of publicly traded
securities or any of its directors,
officers, partners, controlling
persons, agents, or employees, it shall
appear to the Commission that it is
likely that the issuer will make
extraordinary payments (whether
compensation or otherwise) to any of
the foregoing persons, the Commission
may petition a Federal district court
for a temporary order requiring the
issuer to escrow, subject to court
supervision, those payments in an
interest-bearing account for 45 days.
(ii) Standard.--A temporary order
shall be entered under clause (i), only
after notice and opportunity for a
hearing, unless the court determines
that notice and hearing prior to entry
of the order would be impracticable or
contrary to the public interest.
(iii) Effective period.--A temporary
order issued under clause (i) shall--
(I) become effective
immediately;
(II) be served upon the
parties subject to it; and
(III) unless set aside,
limited or suspended by a court
of competent jurisdiction,
shall remain effective and
enforceable for 45 days.
(iv) Extensions authorized.--The
effective period of an order under this
subparagraph may be extended by the
court upon good cause shown for not
longer than 45 additional days,
provided that the combined period of
the order shall not exceed 90 days.
(B) Process on Determination of violations.--
(i) Violations charged.--If the
issuer or other person described in
subparagraph (A) is charged with any
violation of the Federal securities
laws before the expiration of the
effective period of a temporary order
under subparagraph (A) (including any
applicable extension period), the order
shall remain in effect, subject to
court approval, until the conclusion of
any legal proceedings related thereto,
and the affected issuer or other
person, shall have the right to
petition the court for review of the
order.
(ii) Violations not charged.--If the
issuer or other person described in
subparagraph (A) is not charged with
any violation of the Federal securities
laws before the expiration of the
effective period of a temporary order
under subparagraph (A) (including any
applicable extension period), the
escrow shall terminate at the
expiration of the 45-day effective
period (or the expiration of any
extension period, as applicable), and
the disputed payments (with accrued
interest) shall be returned to the
issuer or other affected person.
(d) Review of Temporary Orders.--
(1) Commission review.--At any time after the
respondent has been served with a temporary cease-and-
desist order pursuant to subsection (c), the respondent
may apply to the Commission to have the order set
aside, limited, or suspended. If the respondent has
been served with a temporary cease-and-desist order
entered without a prior Commission hearing, the
respondent may, within 10 days after the date on which
the order was served, request a hearing on such
application and the Commission shall hold a hearing and
render a decision on such application at the earliest
possible time.
(2) Judicial review.--Within--
(A) 10 days after the date the respondent was
served with a temporary cease-and-desist order
entered with a prior Commission hearing, or
(B) 10 days after the Commission renders a
decision on an application and hearing under
paragraph (1), with respect to any temporary
cease-and-desist order entered without a prior
Commission hearing,
the respondent may apply to the United States district
court for the district in which the respondent resides
or has its principal place of business, or for the
District of Columbia, for an order setting aside,
limiting, or suspending the effectiveness or
enforcement of the order, and the court shall have
jurisdiction to enter such an order. A respondent
served with a temporary cease-and-desist order entered
without a prior Commission hearing may not apply to the
court except after hearing and decision by the
Commission on the respondent's application under
paragraph (1) of this subsection.
(3) No automatic stay of temporary order.--The
commencement of proceedings under paragraph (2) of this
subsection shall not, unless specifically ordered by
the court, operate as a stay of the Commission's order.
(4) Exclusive review.--Section 25 of this title shall
not apply to a temporary order entered pursuant to this
section.
(e) Authority To Enter an Order Requiring an Accounting and
Disgorgement.--In any cease-and-desist proceeding under
subsection (a), the Commission may enter an order requiring
accounting and disgorgement, including reasonable interest. The
Commission is authorized to adopt rules, regulations, and
orders concerning payments to investors, rates of interest,
periods of accrual, and such other matters as it deems
appropriate to implement this subsection.
(f) Authority of the Commission to Prohibit Persons From
Serving as Officers or Directors.--In any cease-and-desist
proceeding under subsection (a), the Commission may issue an
order to prohibit, conditionally or unconditionally, and
permanently or for such period of time as it shall determine,
any person who has violated section 10(b) or section 16A, or
the rules or regulations thereunder, from acting as an officer
or director of any issuer that has a class of securities
registered pursuant to section 12, or that is required to file
reports pursuant to section 15(d), if the conduct of that
person demonstrates unfitness to serve as an officer or
director of any such issuer.
* * * * * * *
MINORITY VIEWS
Committee Republicans support finding and prosecuting bad
actors for illegal insider trading, but Committee Republicans
do not support H.R. 2534, the Insider Trading Prohibition Act,
in its current form. There is no one insider trading law.
Rather, Congress has allowed the courts to develop a patchwork
body of law around insider trading that provides little clarity
and security as to what constitutes insider trading. In fact,
Congress' own research office stated ``the courts expansive
view has . . . been called `a boon to prosecutors' by some
reporters.''\1\ H.R. 2534 does not meet the sponsor of the
bill's goals to solve the problem of ambiguity and uncertainty
around insider trading law.\2\ Without an exclusive and
singular prohibition on insider trading, the door will be open
for activist judges and overzealous prosecutors and, worse,
private plaintiffs' counsel to cherry-pick from a menu of
insider trading claim options, producing even more
inconsistencies within insider trading law.
---------------------------------------------------------------------------
\1\Congressional Research Service, ``the Latest Chapter in Insider
Trading Law: Major Circuit Decision Expands Scope of Liability for
Trading on a Tip'' Nicole Vanatko, November 14, 2017.
\2\See, e.g., Office of U.S. Congressman Jim Himes, ``Himes
Bipartisan Insider Trading Bill Passes Financial Services Committee''
(May 10, 2019) (stating that the Insider Trading Prohibition Act would
end ``decades of ambiguity for a crime that has never been clearly
defined by federal law''); see also ``Himes Introduces Bipartisan bill
to Define and Prohibit Illegal Insider Trading'' (Mar. 25, 2015)
(discussing the need for a ``clear definition of insider trading'').
---------------------------------------------------------------------------
Insider trading law is built on a foundation of judge-made
law around the anti-fraud provisions of the federal securities
laws that has been developed over decades. Committee
Republicans are sympathetic to the concerns of the Democrats
that there is no statute in this area. To that end, Committee
Republicans agreed to voice vote H.R. 2534 out of the Committee
with the hope a bipartisan consensus to improve the bill could
be achieved.\3\
---------------------------------------------------------------------------
\3\Committee Republicans have been willing to work in a bipartisan
fashion with Committee Democrats on good legislation relating to
insider trading. See H.R. 4335, the 8-K Trading Gap Act of 2019
(prohibiting trading by corporate insiders relating to certain events
prior to the filing of a Form 8-K or public dissemination of material
information, voted out of Committee 52-0); H.R. 624, the Promoting
Transparent Standards for Corporate Insiders Act (requiring the SEC to
study and report on possible revisions to regulations around Rule 10b5-
1 trading plans by corporate insiders, with a 413-3 vote on the House
floor).
---------------------------------------------------------------------------
Committee Republicans unfortunately remain concerned about
certain ambiguous wording throughout the bill that remains
unchanged from prior versions. For example, the bill prohibits
trading on information ``relating to the market'' for a
security, security-based swap, or security-based swap
agreement, which could be interpreted by an activist judge far
more broadly than the drafters of the bill intend. The bill
also does not explicitly provide a standard for the requisite
personal benefit test,\4\ and thus runs the risk of being read
more broadly by judges than the Supreme Court has allowed--or,
worse, being read out of the law entirely, which is an
overzealous insider trading prosecutor's or plaintiff lawyer's
dream. Reading the personal benefit test out of the law would
have real implications; for example, absent a personal benefit
test, corporate insiders who share information with the full
expectation of confidentiality could become subject to
prosecution simply because that confidentiality was violated.
---------------------------------------------------------------------------
\4\The Supreme Court has consistently ruled that in order to bring
an insider trading case involving tippers and tippees, a tipper must
receive a personal benefit in order to be convicted of an insider
trading violation. See, e.g., Dirks v. Securities and Exchange
Commission, 463 U.S. 646 (1983).
---------------------------------------------------------------------------
In addition, while the bill has moved away from a standard
of trading while in ``possession'' of material, non-public
information, the current ``awareness'' standard may still be
over-inclusive as Committee Republicans believe liability based
on the ``use'' of material, nonpublic information bill would be
more appropriate for ensuring that only those who actively
trade on the information are subject to the bill, because
individuals should not be penalized for making trades they
already planned to make simply because they became aware of
additional information.
At best, the overall wording of this bill does not
substantively change the law of insider trading; at worst, it
is overbroad and will criminalize beneficial trading activity
as well as chill the productive flow of information within the
marketplace. Committee Republicans are concerned that, were
H.R. 2534 to become law, judges interpreting H.R. 2534 may
misunderstand that the drafters of the bill intend to apply
this law only to cases involving insider trading and do not
intend to expand the scope of insider trading law beyond the
state of the law as of 2019.
Finally, one of the biggest concerns is the failure of the
bill to serve as the exclusive definition of improper insider
trading. Committee Republicans have made clear the importance
of providing clarity and certainty as it relates to Congress'
intent with regard to insider trading.\5\ A predecessor bill
that serves as a foundation for H.R. 2534 included an
exclusivity provision stating that the bill ``shall provide the
exclusive standards by which the wrongful use or wrongful
communication of material, nonpublic information in connection
with the purchase or sale of a security shall be
addressed.''\6\ Unfortunately, H.R. 2534 does not include that
exclusivity provision. Without that wording, H.R. 2534 is
simply another insider trading law, rather than the insider
trading law. Absent such an exclusivity clause, judges,
prosecutors, and plaintiffs' lawyers could and likely would
still cite to and bring cases under general antifraud
provisions and case law, and the SEC would, theoretically,
still be able to engage in exemptive rulemaking around the law
that might undo the carefully constructed definition of
improper insider trading this bill seeks to create. This would
give overzealous prosecutors and plaintiffs' lawyers at least
two bites at the apple using potentially varying legal
requirements. Thus, failing to include the exclusivity
provision runs counter to the claimed concerns of the Democrat
drafters regarding the need to provide more certainty and
clarity in this area.
---------------------------------------------------------------------------
\5\See Transcript of Hearing of the House Financial Services
Committee, May 8, 2019 (Ranking Member McHenry stating that H.R. 2534
presents ``an opportunity for Congress to clarify what is a
longstanding body of law'').
\6\See S.1380 (100th Cong.), the Insider Trading Proscriptions Act
of 1987.
---------------------------------------------------------------------------
Committee Republicans believe that if Congress is going to
use its Article I powers to finally legislate in this area, we
should do so correctly and completely. This bill accomplishes
neither. As a result, Committee Republicans cannot support H.R.
2534 as currently drafted.
Lee M. Zeldin.
Alexander X. Mooney.
Andy Barr.
Ann Wagner.
Steve Stivers.
Bill Huizenga.
Blaine Luetkemeyer.
Bill Posey.
Patrick T. McHenry.
Roger Williams.
John W. Rose.
Trey Hollingsworth.
Bryan Steil.
J. French Hill.
Denver Riggleman.
Anthony Gonzalez.
David Kustoff.
Barry Loudermilk.
Lance Gooden.
Tom Emmer.
Scott R. Tipton.
Ted Budd.
Peter T. King.
Frank D. Lucas.
[all]
