Insider Trading Prohibition Act

Floor Speech

BREAK IN TRANSCRIPT

Ms. WATERS. 2534 and to insert extraneous material thereon.

BREAK IN TRANSCRIPT

Ms. WATERS. Madam Chairwoman, I yield myself such time as I may consume.

Madam Chairwoman, I rise in strong support of H.R. 2534, the Insider Trading Prohibition Act, introduced by the gentleman from Connecticut, Representative Jim Himes.

This long overdue bill creates a clear definition of illegal insider trading under the securities laws so that there is a codified, consistent standard for courts and market participants to better protect the hard-earned savings of millions of Americans and bring certainty to the U.S. securities market.

For nearly 80 years, the Securities and Exchange Commission--that is, the SEC--has sought to hold corporate insiders accountable for insider trading through general statutory antifraud provisions and rules it has promulgated under those provisions. This has resulted in a web of court decisions that generally prohibit insiders with a duty of trust and confidence to a corporation from secretly trading on material, nonpublic corporate information for their own personal gain.

These insiders are also generally prohibited from tipping outsiders, known as tippees, who then trade on the information themselves, even though they know it was wrongfully obtained.

But, because there isn't a statutory definition of ``insider trading,'' there is uncertainty around who is subject to insider trading prohibitions; and, with various court decisions, liability for this type of violation has shifted.

For example, in 2014, an appeals court added a brand-new requirement that the tippee must not just know that information was wrongfully disclosed but must also know about the specific personal benefit that the insider received.

This decision has severely hampered the SEC's ability to prosecute insider trading cases and, according to Preet Bharara, the former U.S. attorney for the Southern District of New York ``provides a virtual roadmap for savvy hedge fund managers to insulate themselves from tippee liability by knowingly placing themselves at the end of a chain of insider information and avoiding learning details about the sources of obvious confidential and improperly disclosed information.''

So I am pleased that this bill codifies existing case law and overturns this new controversial requirement, creating a clear, consistent standard for the SEC, the courts, and market participants to follow, and does so in a way that, as Columbia Law School professor John Coffee testified before one of our subcommittees, ``expands liability in ways that should not be controversial.''

I would like to commend Representative Himes for his efforts since the bill was marked up in May in committee to ensure that it fairly reflects existing law. In addition to extensive outreach to current and former regulators and prosecutors, investor advocates, and institutional investors, Mr. Himes also repeatedly engaged with our colleagues on the opposite side of the aisle.

As a result, Ranking Member McHenry will offer an amendment which will remove unnecessary ambiguities, clarify the intent of the bill to reflect existing insider trading case law, and ensure that the bill preserves the SEC's ability to bring bad actors to justice under other related insider trading laws.

I plan to support this amendment as a reasonable bipartisan compromise, so I urge all Members to support this commonsense bill that makes the definition of illegal trading very clear for all so that the SEC can effectively crack down on corporate insiders who illegally trade on inside information.

BREAK IN TRANSCRIPT

Ms. WATERS. Madam Chair, I yield such time as he may consume to the gentleman from Connecticut (Mr. Himes), the chair of the Strategic Technologies and Advanced Research Subcommittee of the Permanent Select Committee on Intelligence, and a valued member of the Financial Services Committee.
BREAK IN TRANSCRIPT

Ms. WATERS. Madam Chair, I yield myself the remainder of my time.

Madam Chairwoman, H.R. 2534, the Insider Trading Prohibition Act, is a long overdue piece of legislation that simply spells out the definition of illegal insider trading under the securities laws. It creates clarity for participants in financial markets and empowers the SEC to punish bad actors.

As we have discussed, this bill is supported by groups, including the Council of Institutional Investors, the California State Teachers' Retirement System, the North American Securities Administrators Association, Healthy Markets, and Public Citizen.

Madam Chair, I thank the ranking member, Mr. McHenry, for his very kind comments. I thank him for his cooperation. I thank him for recognizing that it is possible to have bipartisan legislation. And I thank him for recognizing that Mr. Himes has worked very hard to ensure that he would have this as bipartisan legislation, rather than simply having the Democrats try to run roughshod over the opposite side of the aisle to get this done.

I urge all Members to vote ``yes'' on this important bill. Madam Chair, I yield back the balance of my time.

BREAK IN TRANSCRIPT

Ms. WATERS. Mr. Chair, I claim the time in opposition to the amendment, even though I am not opposed to it.

BREAK IN TRANSCRIPT

Ms. WATERS. Mr. Chair, I yield myself such time as I may consume.

First, I thank Ranking Member McHenry for offering this amendment to H.R. 2534 to help further ensure that this commonsense bill codifies the law against insider trading in a fair manner.

When we marked up the bill in committee in May, I understood that my Republican colleagues had several concerns with the bill but nevertheless voiced their support in hopes of having those concerns addressed before the bill made its way to the House floor.

At the end of the day, those concerns amounted to wanting additional clarity that H.R. 2534 reflected the current judge-made law against insider trading, aside from the controversial 2014 appeals court decision that has been subject to criticism from many sides.

After months of discussion with the bill's sponsor, Representative Himes, Ranking Member McHenry has crafted this amendment to do just that. In particular, the amendment would clarify that the existing law that requires the SEC to establish some personal benefit to a tipper in cases involving tipper and tippee liability; clarify that the material, nonpublic information that forms the basis of liability may be related to either a specific security or to any security if that information would have or reasonably be expected to have a material effect on the market price of that security; and remove the rule of construction to avoid confusion and ambiguity and to ensure that this act is not the exclusive means by which the SEC, the Department of Justice, or private litigants may pursue insider trading.

If the amendment is accepted, I believe that the bill would provide the SEC with clear additional authority to bring to justice corporate insiders and others who take unfair advantage of confidential information. In addition, because the bill uses the same terms identified in the current case law against insider trading, the SEC and market participants can easily understand what those terms mean.

Again, Mr. Chair, I thank Ranking Member McHenry for strengthening the bill, and I urge my colleagues to join me in supporting this amendment.

Mr. Chair, I yield the balance of my time to the gentleman from Connecticut (Mr. Himes), the sponsor of this important legislation.

BREAK IN TRANSCRIPT

Ms. WATERS. Mr. Chair, I yield back the balance of my time.

BREAK IN TRANSCRIPT

Ms. WATERS. Mr. Chair, I rise in opposition to the amendment.

BREAK IN TRANSCRIPT

Ms. WATERS. Mr. Chair, I strongly oppose Representative Huizenga's amendment that replaces the bill's standard of illegal insider trading while ``aware of'' material, nonpublic information with trading while ``using'' material, nonpublic information.

This narrower standard is inconsistent with current law, would severely weaken the bill, and would create substantial enforcement hurdles to the benefit of bad actors and to the detriment of the SEC.

If the amendment is adopted, the SEC would have to prove that the reason the defendant traded was because of a specific piece of information. That means that the SEC would have a hard time proving its case in court unless it had an email from a defendant explaining his motive for trading. Not many bad actors engaging in illegal insider trading are that dumb.

Moreover, such a change would benefit insider traders at hedge funds or other market intelligence firms because they would merely have to tell the judge that they had other reasons or data to support their trade.

The SEC's existing rule 10b-5 clearly states that the appropriate standard is awareness. Changing it to ``use,'' as Representative Huizenga's amendment would do, dramatically and substantially weakens the SEC's authority to prosecute insider trading.

Mr. Chair, I urge my colleagues to reject the amendment offered by Mr. Huizenga.

Mr. Chair, I yield the balance of my time to the gentleman from Connecticut (Mr. Himes), the sponsor of this important legislation.

BREAK IN TRANSCRIPT

Ms. WATERS. Mr. Chair, I yield back the balance of my time.

BREAK IN TRANSCRIPT

Ms. WATERS. Mr. Speaker, on that I demand the yeas and nays.

The yeas and nays were ordered.

BREAK IN TRANSCRIPT

Source