[House Report 115-891]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-891
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PROMOTING TRANSPARENT STANDARDS FOR CORPORATE INSIDERS ACT
_______
August 3, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 6320]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 6320) to require the Securities and Exchange
Commission to carry out a study of Rule 10b5-1 trading plans,
and for other purposes, having considered the same, report
favorably thereon without amendment and recommend that the bill
do pass.
PURPOSE AND SUMMARY
On July 10, 2018, Representative Maxine Waters introduced
H.R. 6320, the ``Promoting Transparent Standards for Corporate
Insiders Act.'' The bill requires the U.S. Securities and
Exchange Commission (SEC) to conduct a study as to whether SEC
Rule 10b5-1 should be amended, as further described below, and,
if so, to amend Rule 10b5-1, subject to notice and comment, in
a manner consistent with the results of such study.
Under Rule 10b5-1, directors and other major insiders of
issuers registered under the Securities Exchange Act of 1934
who have access to material nonpublic information are able to
establish a written plan that details when they will be able to
buy or sell shares at a predetermined time on a scheduled
basis. The bill requires the SEC to consider whether certain
types of amendments to Rule 10b5-1 would enhance the rule and
directs the SEC to consider certain factors, including how any
such amendments to Rule 10b5-1 would clarify and enhance
existing prohibitions against insider trading, the impact of
any such amendments on attracting candidates for insider
positions, the impact on capital formation, and the effects on
a company's willingness to operate as a public company.
BACKGROUND AND NEED FOR LEGISLATION
In 2000, the SEC promulgated Rule 10b5-1 (``Rule''). Rule
10b5-1 addresses the issue of when insider trading liability
arises in connection with a trader's ``use'' or ``knowing
possession'' of material nonpublic information. This rule
provides that a person trades ``on the basis of'' material
nonpublic information when the person purchases or sells
securities while aware of the information. However, the rule
also sets forth several affirmative defenses, to permit persons
to trade in certain circumstances where it is clear that the
information was not a factor in the decision to trade.
``Insider trading'' is a term subject to many definitions
and connotations and it encompasses both legal and prohibited
activity. Illegal insider trading refers generally to buying or
selling a security, in breach of a fiduciary duty or other
relationship of trust and confidence, while in possession of
material, nonpublic information about the security. The Rule
adopted by the SEC in 2000 gives corporate employees a means to
buy and sell without fearing potential securities fraud
charges. Under the rule, an insider can put in place a plan to
trade company shares when the person does not have inside
information. That allows a corporate employee to ``carry out
those pre-planned transactions at a later time, even if they
later become aware of material nonpublic information.''
Some critics of the Rule as currently written argue
insiders can maneuver around the Rule and trade on material,
nonpublic information. Further, some observers have highlighted
in the press notable trades by insiders that critics claim
raise concerns regarding the efficacy of Rule 10b5-1 plans, and
others have found that insiders may outperform other
shareholders despite utilizing Rule 10b5-1 plans, which
presumably operate in a manner to ensure that insiders are
trading in a manner more consistent with shareholders who do
not possess material nonpublic information. Nonetheless, as a
general matter, Rule 10b5-1 serves an important function by
providing greater clarity regarding what trades are presumed to
have been made on the basis of material nonpublic information,
while providing insiders with an affirmative defense where
trades are executed pursuant to an establish Rule 10b5-1 plan.
The SEC's adopting release for Rule 10b5-1 noted that ``the
revised defense is designed to cover situations in which a
person can demonstrate that the material nonpublic information
was not a factor in the trading decision.'' Providing clarity
regarding insider trading is important to our capital markets
because equity compensation is the preferred way to reward
executives and encourage performance, which means those
rewarded with such shares must be able to sell them at
appropriate times.
Because Rule 10b5-1 became effective 2000, this bill
directs the SEC to study whether amendments to Rule 10b5-1 are
necessary. In particular, the SEC shall consider whether the
Rule should be amended to, among other things: limit the
ability of insiders to adopt a Rule 10b5-1 plan during the
issuer's trading windows; limit the ability of insiders to
adopt multiple, overlapping trading plans; establish a
mandatory delay between adoption of the trading plan and
execution of the first trade, and if so, whether such delay
should be the same for trading plans adopted during the
issuer's trading window as opposed to outside such window and
whether any exceptions to such a delay are appropriate; limit
the frequency of modifications or cancellations to trading
plans; require insiders to file with the SEC trading plan
adoptions, amendments, terminations, and transactions; and
require boards of issuers who have adopted trading plans to
adopt certain policies, periodically monitor trading plan
transactions, and ensure that the issuer's policies discuss use
of the plans in the context of equity hedging, holding, and
ownership.
At the time of the Rule's adoption in 2000, the SEC noted
the following benefits, ``. . . the rule should increase
investor confidence in the integrity and fairness of the market
because it clarifies and strengthens existing insider trading
law. Second, the rule will benefit corporate insiders by
providing greater clarity and certainty on how they can plan
and structure securities transactions.'' Some eighteen years
later, it is appropriate to review the results of the Rule and
to consider if amendments may be appropriate to consider how
any amendments to Rule 10b5-1 clarify and enhance existing
prohibitions against insider trading, the impacts of such
amendments with regards to attracting candidates for insider
positions, the impacts on capital formation, the effects on a
company's willingness to operate as a public company, and any
other considerations necessary and appropriate for the
protection of investors. The bill directs the SEC to report to
the House Financial Services Committee and Senate Banking
Committee the findings of the study within one year of
enactment. Additionally, if the SEC finds that amendments are
necessary, the bill directs the SEC to revise Rule 10b5-1
consistent with the results of the study, subject to public
notice and comment.
HEARINGS
The Committee on Financial Services held no hearings
examining matters relating to H.R. 6320.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
July 11, 2018, and ordered H.R. 6321 to be reported favorably
to the House by voice vote.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole vote was on a motion by Chairman Hensarling to report the
bill favorably to the House without amendment. The motion was
agreed to by voice vote, a quorum being present.
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 6320
will mandate the SEC to conduct a study on SEC rule 10b5-1 in
order to determine if the rule needs to be amended in order to
better prevent insider trading.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, July 17, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3555, H.R. 6177,
H.R. 6319, H.R. 6320, H.R. 6321, H.R. 6322, H.R. 6323, and H.R.
6324.
If you wish further details on these estimates, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Mark P. Hadley
(For Keith Hall, Director).
Enclosure.
Securities and Exchange Commission Legislation
On July 11, the House Committee on Financial Services
ordered eight bills to be reported related to the rules,
regulations, and operations of the Securities and Exchange
Commission (SEC). The bills are:
H.R. 3555, the Exchange Regulatory
Improvement Act, would require the Securities and
Exchange Commission (SEC) to issue regulations
regarding its definition of what constitutes a facility
used by a national securities exchange;
H.R. 6177, the Developing and Empowering our
Aspiring Leaders Act of 2018, would direct the SEC to
conduct a rulemaking to expand what types of asset
acquisitions are considered qualifying investments for
a venture capital fund;
H.R. 6319, the Expanding Investment in Small
Business Act, would require the SEC to conduct a study
on the limitation on the amount of outstanding
securities a closed-end fund may hold from a single
issuer and still be classified as diversified;
H.R. 6320, the Promoting Transparent
Standards for Corporate Insiders Act, would require the
SEC to conduct a study of various proposals to change
agency rules regarding the use of written trading plans
by certain securities traders;
H.R. 6321, the Investment Adviser Regulatory
Flexibility Improvement Act, would require the SEC to
revise the definitions of a small business and small
organization applicable for assessing the effect of the
agency's rulemakings under the Investment Advisers Act
of 1940 on those entities;
H.R. 6322, the Enhancing Multi-Class Share
Disclosures Act, would direct the SEC to issue a rule
requiring securities issuers with multi-class stock
structures to make disclosures regarding the voting
power of certain individuals;
H.R. 6323, the National Senior Investor
Initiative Act of 2018, would direct the SEC to
establish a taskforce to identify challenges that
senior investors face and to report on its findings
every two years; and
H.R. 6324, the Middle Market IPO
Underwriting Cost Act, would direct the SEC to study
the costs associated with small and medium-sized
companies undertaking an initial public offering and to
report on its findings.
Using information from the SEC regarding the costs of
similar activities, CBO estimates that implementing seven of
those bills--H.R. 3555, H.R. 6177, H.R. 6319, H.R. 6320, H.R.
6321, H.R. 6322, and H.R. 6324--would each have a gross cost of
about $1 million for the agency to conduct the required studies
and rulemakings and to issue reports. CBO estimates that
implementing the eighth bill--H.R. 6323--would have a gross
cost of $7 million over the 2019-2023 period for the SEC to
establish and carry out the functions of the taskforce
established under the bill.
However, the SEC is authorized to collect fees sufficient
to offset its annual appropriation; therefore, CBO estimates
that the net effect on discretionary spending of implementing
each of those bills would be negligible, assuming appropriation
actions consistent with that authority. H.R. 6323 also would
require the Government Accountability Office (GAO) to conduct a
study on the economic costs of the financial exploitation of
senior citizens and CBO estimates that implementing that
section would cost GAO less than $500,000; such spending would
be subject to the availability of appropriated funds.
None of the bills would affect direct spending or revenues;
therefore, pay-as-you-go procedures do not apply for any of the
eight bills.
None of the bills would increase net direct spending or on-
budget deficits in any of the four consecutive 10-year periods
beginning in 2029, CBO estimates.
None of the bills contain intergovernmental mandates as
defined in the Unfunded Mandate Reform Act (UMRA) and would not
affect the budgets of state, local, or tribal governments. All
of them would require the SEC to take actions that could raise
the agency's administrative costs and the fees it collects to
offset those costs. If the SEC increased fees, it would
increase the cost of an existing mandate on private entities
required to pay those fees. CBO estimates that none of the
bills would increase fees in an amount that would exceed the
annual threshold for private-sector mandates established in
UMRA ($160 million in 2018, adjusted annually for inflation).
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Rachel Austin (for mandates). The
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
DUPLICATION OF FEDERAL PROGRAMS
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This section cites H.R. 6320 as the ``Promoting Transparent
Standards for Corporate Insiders Act.''
Section 2. SEC study
This section cites that the SEC shall conduct a study of
whether Rule 10b5-1 should be amended to more effectively
regulate insider trading. It also requires the SEC to prepare a
report to the Committee on Financial Services of the House of
Representatives and the Committee on Banking, Housing, and
Urban Affairs of the Senate and to revise the rule, subject to
public notice and comment, consistent with the results of the
study. If the SEC finds that no amendments are necessary, the
Commission would not be expected to revise Rule 10b5-1.
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: H.R. 6320 does not
repeal or amend any section of a statute. Therefore, the Office
of Legislative Counsel did not prepare the report contemplated
by Clause 3(e)(1)(B) of rule XIII of the Rules of the House of
Representatives.
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