[Senate Hearing 117-621]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 117-621


     KEEPING MARKETS FAIR: CONSIDERING INSIDER TRADING LEGISLATION

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                                   ON

 EXAMINING INSIDER TRADING LEGISLATION AND HOW WE CAN BEST SUPPORT THE 
              AMERICAN PEOPLE BY KEEPING OUR MARKETS FAIR
                               __________

                             APRIL 5, 2022
                               _________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                 Available at: https://www.govinfo.gov/

                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
55-723 PDF                 WASHINGTON : 2024   

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                     SHERROD BROWN, Ohio, Chairman

JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
JON TESTER, Montana                  MIKE CRAPO, Idaho
MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia                  JERRY MORAN, Kansas
RAPHAEL G. WARNOCK, Georgia          KEVIN CRAMER, North Dakota
                                     STEVE DAINES, Montana

                     Laura Swanson, Staff Director

                 Brad Grantz, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                 Dan Sullivan, Republican Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                        Pat Lally, Hearing Clerk

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, APRIL 5, 2022

                                                                   Page
Opening statement of Chairman Brown..............................     1
        Prepared statement.......................................    29

Opening statements, comments, or prepared statements of:
    Senator Toomey...............................................     3
        Prepared statement.......................................    30

                               WITNESSES

Robert J. Jackson, Jr., Pierrepont Family Professor of Law, New 
  York University School of Law..................................     6
    Prepared statement...........................................    32
    Responses to written questions of:
        Chairman Brown...........................................    75
        Senator Reed.............................................    76
        Senator Cortez Masto.....................................    78
        Senator Warnock..........................................    84
M. Todd Henderson, Michael J. Marks Professor of Law, University 
  of Chicago Law School..........................................     8
    Prepared statement...........................................    39
    Responses to written questions of:
        Senator Warnock..........................................    85
David R. Burton, Senior Fellow in Economic Policy, Roe Institute 
  for Economic Policy Studies, The Heritage Foundation...........    10
    Prepared statement...........................................    41
    Responses to written questions of:
        Senator Warnock..........................................    85
John C. Coffee, Jr., Adolf A. Berle Professor of Law, Director of 
  the Center on Corporate Governance, Columbia Law School........    12
    Prepared statement...........................................    72
    Responses to written questions of:
        Chairman Brown...........................................    85
        Senator Reed.............................................    86
        Senator Cortez Masto.....................................    87
        Senator Warnock..........................................    88

              Additional Material Supplied for the Record

Letter submitted by NASAA........................................    90
Letter submitted by Coalition supporting JOBS Act 4.0............    93
Letter submitted by SBIA.........................................    95
Statement submitted by Coalition of Innovation and 
  Entrepreneurship
  Organizations..................................................    96
Statement submitted by SIFMA.....................................    97
S. 3990..........................................................    99

                                 (iii)

 
     KEEPING MARKETS FAIR: CONSIDERING INSIDER TRADING LEGISLATION

                              ----------                              


                         TUESDAY, APRIL 5, 2022

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., via Webex and in room 538, 
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of 
the Committee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Senate Committee on Banking, Housing, 
and Urban Affairs will come to order. Today's hearing is in the 
hybrid format. Our witnesses are in person. Members have the 
option to appear either in person or virtually.
    The tragedy and uncertainty of the coronavirus pandemic 
taught us a lot about the economy and the stock market. At 
first, for a brief period at the beginning of the pandemic, the 
stock market tracked what was happening in the rest of the 
economy. As small businesses and families struggled, U.S. stock 
market suffered the fastest drop in history, plummeting 34 
percent in 33 days.
    But then, the stock market had the fastest rebound in 
history, recovering all of those losses by mid-August. 
Meanwhile, small businesses were making impossible decisions 
about layoffs or shutting their doors altogether. Fourteen 
million Americans were unemployed. And last year, we saw record 
highs in the stock market and all-time records in initial 
public offerings, private equity, and venture capital. A story 
just came out that U.S. corporations had their most profitable 
year since 1950, yet continue to raise their prices.
    All of this was a reminder of what most Americans already 
know--the stock market is detached from the reality of most 
people's lives.
    And it disproportionately benefits the wealthy. No news 
there, even in the Senate Banking Committee.
    According to Federal Reserve data, the wealthiest 1 percent 
hold 53 percent of stock and mutual fund investments, and the 
bottom 90 percent own less than 12 percent.
    Think about that, just 1 percent of the country holds more 
than half of all Wall Street assets.
    So it is no surprise that most Americans do not trust the 
markets any more than they trust the banks. They do not think 
the stock market is fair, and they think the wealthy and well-
connected cheat the system, and the facts are on their side. 
Too often they are right. It is why today we are examining how 
Congress must work to crack down on bad actors who cheat the 
system and cheat Americans planning for the future.
    Everyone on Wall Street should play by the same rules. We 
know that is almost never been the case. Right now, it seems 
too easy for corporate insiders out on the golf course, in 
Florida or any other State, to exchange information about 
upcoming mergers and deals, and then mostly get away with it.
    All too often we see insiders, from boardrooms to bankers, 
involved in suspicious trading. These are people who should 
know better, people who know when they are crossing the line, 
but they just cannot seem to help themselves.
    The SEC and the Department of Justice have prosecuted 
insider trading for decades using principles of fraud under the 
securities laws. Most of these principles have developed 
without a standard defined by Congress. Most people would 
probably be surprised to learn that there is no one law written 
down anywhere that spells out what constitutes illegal insider 
trading.
    Over the years, Federal courts have disagreed on what types 
of misconduct are in fact illegal, and when the Supreme Court 
has stepped in, instead of resulting in a clearer understanding 
of the law, it is just created more confusion on what counts as 
illegal insider trading.
    We should all want strict, clear rules on what constitutes 
illegal insider trading. We should all want a statute that 
spells out when someone is crossing the line. That would help 
avoid this uncertainty and inconsistency.
    Since 2014, there has been a debate between the Federal 
circuit courts and the Supreme Court about when people who 
provide or receive inside information and trade on it are 
liable for insider trading.
    After the back and forth in those cases, experts still 
disagree on how much the law changed, where the lines are, and 
what happens if courts disagree in the future.
    We have also seen that there may be limits to our ability 
to use insider trading case law to hold new varieties of 
improper trades accountable. This is especially true with the 
rise of cyber threats, for example, if someone deliberately 
hacks into a computer system to access inside information and 
then trades on it. Existing statutes and case law, believe it 
or not, do not always treat that as wrongful insider trading, 
even though to pretty much everyone that sounds like a textbook 
example.
    Our colleagues in the House have been considering these 
gaps. I particularly thank Representative Himes who has been 
leading on this issue for years. He has pushed legislation that 
would take away the uncertainty created by the courts and 
establish standards that address the questions that come up 
repeatedly. Our colleague on this Committee, a senior Member of 
this Committee, Senator Reed, introduced S. 3990, a Senate 
version of that House-passed bill that our witnesses will, in 
fact, discuss today.
    Insider trading cases might not be as cut and dry or as 
exciting as we see in the movies, but the same kind of 
misconduct and suspicious trading happens again and again. It 
is wrong, it is unfair, and it is yet one more way that the 
wealthy and the well-connected game the system to get ahead.
    It is funny how the people who seem to have the best luck 
playing the stock market so often happened to have friends in 
high places. How shocking.
    We hear all the time about insiders who have amazing timing 
and buy stock days before a big announcement, or we read about 
the chain of people who share a stock ``tip,'' that is clearly 
confidential information that should not be shared or traded 
on.
    Congress has, finally, the opportunity to make it clear 
what the rules are.
    A statutory definition of insider trading would capture 
abuses and misconduct--like hacking to steal confidential stock 
information--that courts have found to be outside the concepts 
of ``fraud'' and ``deception.'' Even if the hacker accessed the 
information because of a security weakness, that does not mean 
what that hacker did is OK and it should not mean they can keep 
his ill-gotten profits.
    The measure we are discussing today closes that gap by 
focusing on ``wrongfully'' acquired nonpublic information. 
Well-connected people buy sophisticated derivatives on a 
company's stock on a Friday. The following Tuesday the company 
announces a merger. To most people that does not sound like 
just a lucky bet or a coincidence. That sounds more like a wink 
and a nod, and a ``you scratch my back, I will scratch yours'' 
understanding.
    And when that happens all the time, it is no surprise that 
most Americans do not think they can trust the market with 
their retirement savings. For the vast majority of people who 
get their income from a paycheck, not a brokerage account, they 
do not see it as a way to make money.
    Families saving for the future deserve to know Congress 
will protect everyone who invests to send their kids to college 
or to buy a home one day. We must make sure our laws are 
written down, they are clear, and they apply to everyone, no 
matter how powerful, no matter how wealthy.
    Senator Toomey.

         OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

    Senator Toomey. Thank you, Mr. Chairman.
    I will address insider trading, but first I would like to 
acknowledge that it was 10 years ago to this very day that 
President Obama signed the Jumpstart Our Business Startups, or 
JOBS, Act into law. This remarkable piece of bipartisan 
legislation opened new avenues for companies to raise capital. 
For example, it created a streamlined path for new startups to 
go public as ``emerging growth companies.''
    Since 2014, these ``emerging growth companies'' have 
accounted for almost 90 percent of all initial public 
offerings, or IPOs. Despite that, the number of public 
companies continues to decrease. In fact, the number of public 
companies has declined 40 percent since its peak in the late 
1990s. If not for the JOBS Act, the situation would be even 
worse today. This decrease in public companies hurts economic 
growth, cuts off funding avenues for American businesses, and 
reduces investment opportunities for average Americans.
    Although the last 2 years saw more IPOs, this may be an 
aberration if the large number of SPAC offerings turns out to 
be a temporary phenomenon. And if last week's SEC proposal on 
SPACs becomes final, we may see the end of SPACs altogether.
    But investors have been clamoring to be part of SPAC 
offerings, and we ought to ask the question, why is that? My 
view is that they want growth-stage investments, and it is hard 
to get them any other way.
    Companies face excessive costs in going and staying public, 
which discourages them from going public in the first place. 
IPOs used to be a capital raising event. Now, they are too 
often just a liquidity event for early investors.
    These costs of going public will increase substantially if 
the 23 SEC proposals, announced in only the last 4 months and 
many that significantly uproot the historical approaches taken 
in securities regulation, go into effect. For one of the 
proposals, just the one on climate change, the SEC estimates 
that it will nearly triple the external costs for companies in 
preparing their annual 10-K reports. Imagine that.
    Think of the money companies spend today on preparing 
annual reports to cover the entirety of their businesses. And 
the SEC would nearly triple that cost to add often immaterial 
disclosure requirements regarding climate change.
    In my view, the SEC is taking disclosures in the wrong 
direction. Unless we change that direction, we could lose 
America's number one position as the leader in active and 
efficient capital markets.
    That is why yesterday, with my colleagues on the Banking 
Committee, I rolled out a discussion draft of the JOBS Act 4.0. 
This draft is the result of a request I made last February for 
proposals to increase economic growth and job creation by 
facilitating capital formation.
    In response, we received 35 submissions with more than 150 
legislative proposals from a wide variety of bipartisan 
organizations and stakeholders. We turned a number of these 
proposals into bills, a number of which have received 
bipartisan support.
    These bills encourage companies to be publicly traded, 
particularly during earlier growth stages, they improve the 
market for private capital by appropriately tailoring 
regulations for small businesses, they would enhance retail 
investor access to investment opportunities, and improve 
regulatory oversight.
    We are seeking feedback on this draft over the next 60 
days, and I am hopeful that Republicans and Democrats can come 
together and find agreement on a new JOBS Act 4.0. This draft 
acknowledges the important role played by private markets and 
how they can be improved.
    Now some resist improving private markets because they 
claim that doing so would discourage companies from going 
public, but if we want to encourage companies to go public, 
maybe the answer is to make it less onerous to be a public 
company.
    I do not believe that one of type of market, private or 
public, is inherently better than the other. Indeed, the 
optimal source of capital for a company might vary at different 
stages of its growth cycle. Improved private markets can help 
private companies stay around long enough to grow into public 
companies.
    However, as the pool of public companies shrinks, retail 
investors are cut out of key investment opportunities. We 
should expand retail investor access to these nonpublic 
investments so that they can diversify their portfolios and 
potentially receive the higher returns available to the 
wealthy.
    We know that union pensions, other institutional investors, 
and high-net-worth individuals routinely include nonpublic 
investments, such as private equity and venture capital, as a 
part of their diversified portfolios. We ought to be ensuring 
that pension plans like CalPERS and wealthy investors are not 
the only ones with access to these types of investments.
    Now let me turn to insider trading. The securities markets 
are at the heart of our economy and our financial system. They 
reflect the collective decisionmaking of many individuals on 
whether to buy, sell, or hold securities, and in doing so they 
carry out the critical function of price discovery.
    An accurate market price, one that efficiently incorporates 
all available public information, is perhaps the most important 
investor protection that exists. Thus, it is crucial that 
market participants have incentives to use lawful means to 
discover information, conduct analysis, and develop investment 
hypothesis and to use those efforts to make better decisions 
about market prices.
    For that reason, insider trading has never been about one 
market participant having better information over another. 
Instead, insider trading is about one person wrongfully 
obtaining, or using, material, nonpublic information in breach 
of a fiduciary duty or through misappropriation.
    In the decades since the first insider trading cases were 
brought, the courts have developed an extensive body of insider 
trading law. In my view, it would be preferable for Congress to 
codify what that law should entail. If we do so, we should be 
cautious about legislation that could cause confusion, 
uncertainty, or unintended consequences in this highly 
technical area, particularly regarding investment research.
    I look forward to hearing from today's witnesses about all 
of these important issues.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Ranking Member Toomey. Senator 
Toomey and I are having a meeting later this week, and I will 
take a look at these proposals, and I know that the Ranking 
Member and I would like bipartisan legislation that we can 
perhaps move forward on making housing more affordable and 
accessible and strengthening our communities and looking at the 
JOBS 4.0 Act.
    I will introduce today's witnesses.
    Professor Robert Jackson, Jr., is the Pierrepont Family 
Professor of Law and Codirector of the Institute for Corporate 
Governance and Finance at the NYU Law School. He was nominated 
and unanimously confirmed by the Senate to be an SEC 
commissioner, back when the Senate did things in those ways, in 
December 2017.
    Professor Todd Henderson is the Michael Marks Professor of 
Law at the University of Chicago. He studies corporate and 
securities law. He is an expert witness in securities fraud, 
litigation, and on the subject of insider trading. He served as 
a judge and on the National Adjudicatory Council at FINRA.
    Mr. David Burton is the Heritage Foundation's Senior Fellow 
in Economic Policy. He focuses on tax matters, securities law, 
entrepreneurship, financial privacy, and regulatory and 
administrative law issues. He was General Counsel at the 
National Small Business Administration before joining Heritage.
    Professor John Coffee is the Adolf Berle Professor of Law 
at Columbia Law School and Director of their Center on 
Corporate Governance. He served as a member of the Bharara Task 
Force on Insider Training.
    Professor Jackson, please begin your testimony.
    And understand, all of you, there will be two votes during 
this Committee, so people, including the Ranking Member and I, 
will be a little more up and down than we would like to be at 
this hearing.
    So proceed, please.

    STATEMENT OF ROBERT J. JACKSON, JR., PIERREPONT FAMILY 
      PROFESSOR OF LAW, NEW YORK UNIVERSITY SCHOOL OF LAW

    Mr. Jackson. Well thank you, Chairman Brown, and thank you, 
Ranking Member Toomey, for the opportunity to testify before 
you today.
    You know, the last time I had the honor of testifying 
before this Committee it was at the hearing on my nomination to 
be a commissioner of the Securities and Exchange Commission. My 
mom and dad, who grew up in big, Irish Catholic families in the 
Bronx--my mother is one of nine kids and my father is one of 
five--proudly sat behind me that day. The day I was born, none 
of my family had been to college, but my parents plowed their 
paychecks into the market, and 40 years later they sat behind 
their son as a Presidential nominee.
    So me, markets are important not only because they 
encourage entrepreneurship and growth, they are important 
because they make possible for two middle-class parents to 
change their son's life, and we owe it to families pursuing 
their vision of the American dream, just like mine did, to make 
sure that when they invest in our markets they do so on a level 
playing field.
    And that is why, after I was confirmed to be a commissioner 
I joined Preet Bharara, the former United States Attorney for 
the Southern District of New York, in calling for a national 
task force on the law of insider trading. You know, because 
Congress has never codified insider trading rules, both 
defendants and ordinary investors like my mom and dad are 
exposed to gaps in our law.
    The task force, featuring a bipartisan group of 
prosecutors, defense counsel, legal academics, and judges, 
concluded that Congress should clarify the law of insider 
trading, and I agree. That is why the Insider Trading 
Prohibition Act you are considering today is so important. As 
the task force urged, the act would focus liability on whether 
information was wrongfully taken, used, or communicated, and 
for a detailed and thoughtful analysis of those provision I 
commend to you the testimony of my colleague, Professor Coffee, 
and his writing on the subject.
    My testimony will identify two additional gaps in current 
law that make clear the urgent need for this legislation. 
First, current law allows cyber hackers to profit from trading 
on their activities, and second, insiders at foreign firms 
listed in the United States, and particularly Russian and 
Chinese firms, profit extensively from their trading, putting 
American investors at risk.
    As this Committee knows too well, our companies are in a 
constant battle to protect themselves from hackers who seek 
access to millions of Americans' most private information, and 
there is concerning evidence that these hackers not only attack 
our companies but also trade before the attack is public, 
raising the prospect that our very markets help finance the 
cyberattacks that put Americans' privacy at risk.
    And as it stands today, the law of insider trading often 
does not cover that activity. The reason is that establishing 
insider trading liability under current law generally requires 
the Government to show that the information was obtained by 
breach of a duty or by way of deception. But you see, many 
hackers attack our companies not through deception but by brute 
for tactics that simply overwhelm our defenses.
    Now from the perspective of the judges who made our insider 
trading law, that distinction might make a difference. But for 
ordinary investors like my mom and dad, the idea that the law 
of insider trading allows hackers to profit from the 
destruction they cause raises doubts about the fundamental 
fairness of our markets, and this act would close that gap.
    Among the most significant impacts of the law would be to 
clearly outlaw trading on information obtained through 
cybersecurity attacks, and closing gaps like these is all the 
more urgent in today's fast-moving markets, where traders are 
constantly looking for advantages against ordinary investors.
    And in a study released last week, my coauthors and I 
examine another such gap, insider trading by executives at 
foreign firms listed in the United States. As this Committee 
knows, foreign companies domiciled in China and Russia now 
raise significant funds from American investors by listing on 
U.S. stock exchanges. Unlike executives at American companies, 
however, insiders at foreign firms are not subject to prompt 
disclosure of their trades in their company's stock, raising 
the risk that our outdated insider trading law allows foreign 
firm insiders to take advantage of ordinary investors.
    So Daniel Taylor and Bradford Lynch of the Wharton School, 
and I dug into the data. Drawing on the unique dataset based on 
thousands of paper filings with the SEC, describing sales of 
stock over a 5-year period, we study whether foreign firm 
insiders are able to avoid losses on U.S.-traded stocks by 
selling in advance of price declines--and the results are 
striking.
    Our data provides systematic evidence that foreign firm 
insiders avoid substantial losses by selling shares before the 
stock price drops, and this activity is concentrated in firms 
domiciled in just a few countries overseas. When insiders of 
U.S.-listed Chinese companies sell shares, their median company 
stock price falls by 23 percent in the 12 months after that 
sale. And when insiders at U.S.-listed Russian firms sell, the 
median firm stock declines by 21 percent. These sales allow 
foreign firm insiders to avoid significant losses in dollar 
terms. Indeed, we estimate that insiders at Chinese-domiciled, 
U.S.-listed companies have avoided over $10 billion in losses 
as a result of well-timed stock sales.
    It is far from clear why foreign firm insiders should be 
playing by a different set of rules than their American company 
counterparts, who must disclose their trades promptly to 
investors, and that is why the SEC should reconsider foreign 
firms' exemption from the insider trading disclosure rules 
companies must follow under the Exchange Act.
    For decades, the judge-made law governing insider trading 
has left gaps inviting insiders to take advantage of ordinary 
investors, and Congress should make clear that all participants 
in our markets must play by the same rules.
    Thank you for the opportunity to testify before you today, 
and I would be delighted to answer your questions.
    Chairman Brown. Thank you, Professor Jackson.
    Professor Henderson, welcome.

  STATEMENT OF PROFESSOR M. TODD HENDERSON, MICHAEL J. MARKS 
       PROFESSOR OF LAW, UNIVERSITY OF CHICAGO LAW SCHOOL

    Mr. Henderson. Thank you, Mr. Chairman and Members of the 
Committee. For a kid from Appalachia, this is a great honor to 
me to be in the world's greatest deliberative body, so thank 
you for having me.
    It is an important topic we are talking about, capital 
raising and insider trading. These issues, as the Ranking 
Member said, are at the heart of our economy. Every company has 
to raise money, and laws and regulations have a tremendous 
impact on how this is done, and more importantly, how much it 
costs.
    It is easy, and maybe politically appealing to add more and 
more obligations on companies, but the costs of compliance do 
not just fall on rich investors and abstract companies. They 
are paid for by every American. While we need laws to prevent 
fraud and ensure accurate disclosure of information, every 
dollar spent on complying with regulations is a dollar not 
spent on employing workers, investing in research and 
development, and in bringing products and services to everyday 
Americans. The goal of law should be to obligate companies to 
spend no more than absolutely necessary to protect investors 
and ensure robust capital markets. After all, we all pay for 
regulation, and we should only be willing to do so if the 
benefits exceed the costs.
    There is no real question that the costs of fundraising are 
too high today. The burdens of securities disclosures are many 
times higher than they were just a few decades ago. To give 
just one example, disclosure obligations under Regulation S-K. 
It has 102 specific items of disclosure set forth in over 
140,000 words on 385 pages of the Code of Federal Regulations. 
These rules have grown 20 times in length since 1980. This 
means lots of lawyers can find work, which is fine for me as a 
law professor, but fewer engineers, chemists, and others who 
actually discover things that improve the lives of people.
    The risks of meritless securities fraud suits also remains 
high, despite Congress' effort to eliminate them. The result 
has been a sharp drop in the number of public companies. There 
are about half as many today as there were in 2000. And 
companies are also resorting to new ways to raise capital, like 
SPACs, as a work-around going public. And while the verdict is 
still out on SPACs, the fact that such innovation is viewed as 
necessary by investors and companies should give regulators 
pause before piling on new costs of going public through 
traditional means.
    Instead of trying to reduce the burdens on public 
companies, the SEC is doubling down, issuing proposed rules 
that will straddle investors, workers, and customers with more 
costs. At the same time, it is hampering the ability of all 
Americans to invest in private markets. Private companies are 
an important alternative to public ones, and returns in the 
private equity market and other alternative asset classes have 
been superior to public returns in recent decades. This is not 
only an important investment opportunity for investors of all 
kinds but it helps turn around struggling companies, offers all 
companies an alternative governance approach that can fit their 
needs at various times, and, most importantly, provides 
discipline against public company managers that may act in a 
self-serving way. Congress and the SEC should expand the 
opportunity of every investor to access private equity and 
other asset classes, consistent with fiduciary duty obligations 
under ERISA and other laws.
    Let me turn briefly to insider trading. When we are talking 
about insider trading it is important to put aside the 
conventional wisdom that it is unlawful to trade based on 
``material nonpublic information.'' Investment advisors and 
stock market analysts make their living seeking informational 
advantages for their clients. Without these incentives, there 
will be less information about stock prices, which means stock 
prices will be less accurate. The consequence will be that 
capital will not be allocated to where it is most valuable. 
This harms everyone, not just investors.
    Insider trading based on an informational advantage is only 
illegal when it results in a violation of the antifraud 
provisions of the Federal securities laws. Under existing case 
law, that generally happens when a corporate insider trades on 
material nonpublic information for his benefit, when someone 
deceptively takes nonpublic information that does not belong to 
them and uses it to trade, or when individuals provide--like a 
``tipper''--the material nonpublic information to someone else 
in return for a personal benefit. Justice Ginsburg made this 
property-based approach clear in her opinion in United States 
v. O'Hagan.
    The Insider Trading Protection Act purports to merely 
codify this existing law but it goes way further than this. 
When law professors can turn everyday scenarios, like overheard 
conversations about deals and documents left in the back of 
airplane seat pockets, into challenging law school 
hypotheticals, the result is a huge chilling effect on the work 
necessary to ensure accurate stock prices.
    This means not only the opportunities for misallocation of 
capital but also large compliance costs for investment funds. 
Importantly, these costs of ensuring investment professionals 
do not violate the law will fall disproportionately on smaller 
and mid-sized investment funds. To make matters worse, these 
funds are likely to be owned and operated by women and 
minorities, and likely to be the ones taking alternative 
positions on things like ESG and other related matters.
    There are a few problems with the ITPA in its current form.
    It purports to codify the existing personal benefit 
requirement for a tipper, but includes the language ``indirect 
personal benefit.'' It is possible to describe virtually any 
human interaction as providing an ``indirect benefit'' to the 
participants. Instead, the law should reflect the commonsense 
notion that the source of information either received something 
tangible and valuable in return or provided something like a 
monetary gift to a relative or friend.
    Second, the act uncontroversially states that trading on 
information wrongfully obtained by theft, deception, and so on 
will lead to liability. But it contains a very broad provision 
about confidentiality. This is a system ripe for abuse, with 
companies potentially able to prevent investors from trading 
merely by providing them with information they do not want.
    Third, it expands the types of traders who can be held 
liable for insider trading. Currently, a trader has to act with 
some intent to violate the law. Under the bill, however, anyone 
who, quote, ``was aware, consciously avoided being aware, or 
recklessly disregarded'' that the information was wrongfully 
obtained or communicated can have a case brought against them. 
The ITPA is silent on what ``recklessly disregarded'' means, 
which would appear to rope in innocent traders along with 
actual wrongdoers.
    Finally, the ITPA does not contain an exclusivity 
provision. There is a provision of Federal criminal law, 18 
U.S.C. 1348, which the Department of Justice has used to 
criminally prosecute cases of insider trading where there was 
no personal benefit. Without an exclusivity provision, the 
Government will just use that provision, avoiding the entire 
ITPA to bring cases. So the ITPA should include an exclusivity 
provision.
    There is little dispute that the knowing use of material 
nonpublic information is wrong. It is known as ``stealing,'' 
and that is what the Government should be trying to prevent. At 
the same time, we do not want to chill the valuable 
communications that go on between company insiders and market 
participants, which provide investors with important real-time 
information about their investments. This is an opportunity for 
Congress to establish insider trading provisions with a clear 
set of limited rules that we should follow. But the law should 
be changed to clarify what a ``personal benefit'' is, drop the 
catchall provision about wrongfully obtained information, 
require an actual knowledge requirement, and make it the 
exclusive basis for bringing insider trading claims.
    Thank you for your time.
    Chairman Brown. Mr. Burton.

STATEMENT OF DAVID R. BURTON, SENIOR FELLOW IN ECONOMIC POLICY, 
    ROE INSTITUTE FOR ECONOMIC POLICY STUDIES, THE HERITAGE 
                           FOUNDATION

    Mr. Burton. My name is David Burton. I am Senior Fellow in 
Economic Policy at The Heritage Foundation. I would like to 
express my thanks to you, Mr. Chairman, Ranking Member Toomey, 
and other Members of the Committee for the opportunity to be 
here this morning.
    Because today is the 10th anniversary of the 2012 JOBS Act, 
a bipartisan achievement of consequence, I have been asked to 
focus on entrepreneurial capital formation issues in my 
testimony. Specifically, my written statement addresses the 
importance of the original JOBS Act, the importance of 
entrepreneurial capital formation to the economy and the 
American people, the importance of regulatory impediments to 
entrepreneurial capital formation, and legislative proposals 
that have been introduced to this Congress and have been 
incorporated into the JOBS Act 4.0 discussion draft.
    In addition, I discuss a number of statutory improvements 
that this Committee may want to consider and some fundamental 
reforms in securities laws that could help entrepreneurs, 
larger public companies, and the return to investors.
    The 2012 JOBS Act has had immeasurable positive impact and 
improved entrepreneurs' access to capital. JOBS Act offerings 
account for 3 to 7 percent, depending on the year, of private 
capital raised. In addition, the emerging growth company 
provision included in Title I of the JOBS Act arrested the 
precipitous decline in IPOs, initial public offerings, and 
since then they have been largely flat.
    The JOBS Act made five basic changes to the law. They fall 
into five basic categories: smaller public ``emerging growth 
companies'' or EGCs; general solicitation under Regulation D; 
crowdfunding; an improved small issues exemption, often called 
Regulation A+; and changes to the registration threshold 
allowing more companies to remain private.
    Title I relating to emerging growth companies was a major 
contributing factor in stopping the decline in IPOs. Title II, 
permitting general solicitation in Regulation D offerings, 
resulted in Rule 506(c), and this has helped companies raise 
$65 billion to $200 billion annually. It is a major and 
underappreciated success.
    Title III, crowdfunding, has largely been a failure because 
of the underlying statute and major regulatory piling-on by the 
SEC. Both the tiny crowdfunding issuers and funding portals are 
significantly overregulated. The SEC revisions that took effect 
last March may help reduce this problem, but they are not going 
to solve the underlying problem.
    Title IV, Regulation A Plus, is a modest success. It 
currently is used to raise about $1 billion annually. Some 
relatively straightforward changes, the most important of which 
is addressed in the discussion draft, could make Regulation A a 
much more important source of entrepreneurial capital 
formation.
    The legislative proposals incorporated in the JOBS Act 4.0 
discussion draft would, as a package, dramatically improve 
entrepreneurs' access to capital and improve investor 
protections and returns. The legislation would remove 
restrictions on secondary market sales but seriously impede the 
ability of investors to recognize full value for their 
investment. It would democratize access to private equity 
markets, enabling more investors to diversify their portfolios 
and achieve higher returns, and it would make major 
improvements to the rules governing emerging growth companies, 
Regulation D, Regulation A, crowdfunding, micro-offerings, 
finders, exchanges, periodic disclosure requirements by 
issuers, business brokers, small broker-dealers, investment 
companies, retirement plans, and many other areas.
    It is an extremely constructive piece of legislation that 
would generally improve people's lives, and I do not have the 
time right now to address all the positive aspects of this 
legislation.
    I would specifically like to talk about the SEED Act, which 
creates a micro-offering exemption and would have a very 
positive effect on the smallest companies in the United States.
    The Unlocking Capital for Small Business Act is a well-
drafted piece of legislation that addresses a major problem 
created by the SEC and is underappreciated in Washington. It 
would help the smallest entrepreneurs access capital found in 
money centers, using finders and private placement brokers, 
potentially helping tens of thousands of small businesses each 
year, or more.
    Similarly, the Small Business Mergers, Acquisition, Sales, 
and Brokerage Simplification Act would clarify the rules 
governing broker-dealers.
    The Equal Opportunity for all Investors Act is an extremely 
constructive piece of legislation that would democratize access 
to private offerings. Section 308 of the bill relating to 
retirement savings modernization would make it clear that 
fiduciaries managing defined contribution plans can invest in 
private equity and other assets. And there is a host of other 
very constructive legislation in this discussion draft.
    In my written remarks I made a number of suggestions for 
additional reforms. I look forward to working with the 
Committee on these matters. The discussion draft is very 
important legislation, and the process that you have begun will 
result in a strong, well-thought-out bill that will help 
millions of Americans. Thank you.
    Chairman Brown. Thank you, Mr. Burton.
    Professor Coffee, welcome.

 STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE PROFESSOR OF 
 LAW, DIRECTOR OF THE CENTER ON CORPORATE GOVERNANCE, COLUMBIA 
                           LAW SCHOOL

    Mr. Coffee. Chairman Brown, Ranking Member Toomey, and 
fellow Members of the Committee, thank you for inviting me. I 
expect you are going to be happy to hear that I am going to 
radically condense my written testimony to focus on just two 
questions. One, what is right with this bill--and there is much 
that is right with this bill--and what is wrong with this 
bill--and there is one thing that is tragically wrong with this 
bill because it will be a backward step that will permit all 
professional traders--hedge funds and other active investors--
to trade on large amounts, counseled by their counsel, so that 
they will never be involved with a personal benefit. Once you 
impose the personal benefit requirement it can be outflanked by 
sophisticated parties, and it will be impossible to prosecute 
them, and accountability will be lost.
    Let us go first to what is right with this bill. It is 
overdue to have legislative codification of this bill. Insider 
trading was defined by the SEC in 1961, in the Cady, Roberts 
decision. That is over 60 years ago. Since then there has been 
a constant dialogue between the SEC and the courts. Sometimes 
the courts have cut the SEC back. Sometimes they have tolerated 
various expansions and outflankings.
    But Congress has been totally left out of that conversation 
and dialogue. Yes, Congress knows it is against insider trading 
because it keeps raising the penalties periodically, and that 
shows their position. But the consequence of this kind of a 
common-law crime through judicial interpretation is that courts 
treat insider trading much like they would create a common-law 
torte. They constantly expand it at the margins more and more, 
and it grows over time. OK. Once that happens you have greater 
disparity among the circuits. There is high disparity now. Some 
circuits require personal benefit. Some, like the Second 
Circuit, where most of the action is, does not today.
    And you cannot really end that problem by passing the 
statute, because as Professor Henderson properly pointed out, 
there is another statute, 1348, which allows you to prosecute 
securities fraud and insider trading, and makes very clear that 
when it was passed as part of the Sarbanes-Oxley Act that it 
did not intend to impose many requirements. It greatly 
simplified these prosecutions, and thus the courts have upheld 
that. Several decisions have said that, but the most important 
is Blaszczak, which right now has been remanded on a different 
issue, back to the Second Circuit.
    You could write a statute that says 16A is exclusive. I 
think that would be much too quick and much too rash, because 
there are all kinds of implications, and we do not know what is 
going to happen yet when the Second Circuit deals with the 
Blaszczak decision on remand from the Supreme Court, and what 
the Supreme Court would do after that. So it would be 
legislating a little hastily to make this statute exclusive. 
But if it is not exclusive, prosecutors are not dumb. There is 
a hard route and an easy route, and they will take the easy 
route, and that is 1848.
    Now let me go from what was right with the statute--and I 
have not touched half the things that are right with it. By the 
way, I am biased on this because I did work with Congressman 
Himes on the original drafting of this statute, so I know the 
good things that are in there, and there are many.
    But what is wrong with it, and this is the personal benefit 
requirement. And what is wrong with the personal benefit 
requirement? Well, since the bill was adopted, was introduced 
and passed in the House, the Preet Bharara Commission, or Task 
Force, came out with this report on insider trading. It was 
staffed with judges, prominent prosecutors, prominent SEC 
enforcement attorneys, and a sprinkling of modest law 
professors, including myself, so I am biased there too.
    But is said the principle obstacle to insider trading 
prosecutions today was the personal benefit requirement, and it 
applied particularly to the sophisticated traders that we most 
want to hold accountable. It made a recommendation. It said we 
have got to get away from personal benefit and focus more 
broadly on wrongfulness. Wrongfulness would be the better 
alternative standard. Was this behavior clearly wrongful so the 
person that we are prosecuting would have been conscious of the 
wrongfulness of this behavior? That does not require you pay a 
bribe.
    When you look at the best-known insider trading cases, and 
the one that caused much of the consternation, which was the 
Newman decision, one hedge fund got inside information 
improperly and tipped another within seconds it was received. 
Actually, they tipped three or four, but the other was 
prosecuted, made $72 million on that transaction in 1 day of 
trading. That is not small time. That is a big-time crime, and 
under this bill it would be perfectly permitted to do this. 
There would be a royal road how you could successfully engage 
in insider trading.
    Why does this tipping occur among hedge funds? Very simply 
because Wall Street is effectively a giant favor bank. There 
are norms of reciprocity among these activist hedge funds. If I 
tip you, you have got to tip me, or I will not do it again. And 
in that world where everybody knows that you have got to keep 
your deposits and your withdrawals in balance, we will have 
people tipping back and forth without a personal benefit.
    On that note I will just say again, I think you would make 
a tragic mistake if you left in the personal benefit 
requirement. Thank you.
    Chairman Brown. Thank you, Professor Coffee.
    I will start with you. On the legislation we are 
discussing, Senator Reed's bill that updates Representative 
Himes' bill that you worked on, lays out a framework that bans 
insider trading and identifies when sharing insider information 
is wrongful and when trading inside information is wrongful.
    Why is it important, Professor Coffee, for Congress to 
target wrongful conduct?
    Mr. Coffee. Well it is the alternative to focusing on 
personal benefit, which is overly narrow. Personal benefit says 
if you do not pay a bribe you can do this, but you can do it 
without paying a bribe because there are norms of reciprocity 
in the world of people who interact regularly. And you do have 
personal benefit down there in Standard 11D of the statute. All 
you have got to do is take out three or four words--for a 
direct or indirect personal benefit. Now if those words were 
taken out I would be happy to support this bill, which I worked 
long and hard on before it was initially introduced. But there 
was a last-minute, within minutes of this bill being passed in 
the House, that change was made, to put personal benefit back 
in, and I think it was ill-advised.
    Chairman Brown. Thank you. A couple of questions for you, 
Professor Jackson. Some argue the courts have addressed insider 
trading for so long that Congress does not need to legislate, 
but we have seen courts disagree on liability for insiders, or 
tippers, who pass on confidential information, and the 
recipients, known as tippees, who trade on it. How have these 
disagreements affected the enforcement of insider trading 
cases?
    Mr. Jackson. Well thank you, Senator. I think this lack of 
clarity has caused real problems in the application and 
enforcement of securities law. You know, when I was an SEC 
commissioner we often worried about whether the law was clear 
enough for us to be able to proceed against defendants, even 
when we were convinced that they had used information 
wrongfully. And the costs of that, sir, are real. There are 
cases that cannot be brought, and when market participants know 
that we are not able to hold them accountable when they do 
something wrong like that they tend to do more of it.
    So I think this lack of clarity has been a real issue. And 
I just want to be clear about something, Senator. The fact that 
the courts have spoken on the issue does not mean Congress 
should not. Quite the opposite, sir. In my view it is Congress 
that should speak clearly about what the law is in this area, 
and drawing on the experience of the courts to be sure.
    Chairman Brown. Professor Jackson, illuminate this for all 
of us. Tell us, if you would, about common facts across insider 
trading cases that would indicate someone knows they are 
engaging in wrongful trading. Walk that through for us.
    Mr. Jackson. Sure. Well, a fact pattern we saw with 
surprising frequency, that I saw when I was a corporate lawyer 
and that I saw as an SEC commissioner, is when somebody in 
possession of material, nonpublic information will buy short-
dated, out-of-the-money call options, for example, taking 
advantage not just of the information that they have but the 
ability to make as much profit from it as quickly as they 
possibly can.
    Often when we see that pattern defendants respond that they 
were very lucky. And, sir, at least I have not been the benefit 
of that kind of luck in my experience in the stock market. 
Nevertheless, this kind of activity is well-known to the SEC 
and the courts, and candidly, we know wrongful trading when we 
see it, sir.
    Chairman Brown. Professor Coffee, critics of the insider 
trading legislation suggest that it will criminalize everyday 
activities like stock research, accidental communications of 
confidential information, and expand the scope of illegal 
insider trading beyond its current limits. Is that a realistic 
reading of the legislation?
    Mr. Coffee. Not if you assert a clear wrongfulness 
requirement. I fully agree with what Professor Henderson said. 
Merely the possession of material, nonpublic information does 
not create a duty not to trade. It is only when you breach a 
duty, whether it is a duty to the shareholders, a duty to the 
source of the information, or a duty to the last tippee who 
told you.
    If you know that this was wrongfully received information 
you are really in the same position as the classic fence in a 
theft case. Fences who receive stolen property, knowing that 
this property was wrongfully obtained and acquired, are going 
to be criminally liable for selling the property, moving it on. 
You cannot receive stolen property. I do not think you can 
receive stolen information. Inside information that has been 
received by a breach of a fiduciary duty is really a kind of 
stolen information, and if there is consciousness of that your 
behavior is wrongful.
    If you talk to lawyers in advance, you will make sure you 
do not ask for a personal benefit, and you do not receive a 
personal benefit, and then, under the personal benefit 
standard, you are immune. But you should not be immune. If it 
is wrongful behavior because you had consciousness that this 
was stolen information, I think that is sufficient to justify 
prosecution.
    Chairman Brown. Professor Jackson, do you want to add 
anything to that?
    Mr. Jackson. Absolutely. I think one of the issues in our 
insider trading law, Senator, is that it just has not kept up 
with the way that markets work. You know, the idea that in 
order to prove a case against an insider tipper, or is giving 
information to an insider trader, that the Government has to 
produce a bag of cash that she received in exchange for her 
secrets, strikes me as both an unrealistic burden for the 
Government to carry and also not the way information moves in 
our markets.
    As Professor Coffee explained, I think quite correctly, 
sir, the way information is shared in our markets these days is 
through an extensive system of conversations and favors among 
market participants, and the law can and should capture that 
when it is wrongful.
    Chairman Brown. Thank you. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman.
    Professor Henderson, I get the sense that there is a little 
bit a disagreement on the panel, that Professors Jackson and 
Coffee have a different idea of what the standard should be for 
liability. And I think that the distinction pivots on this 
personal benefit versus indirect benefit standard.
    So I wonder if you have a response to the arguments that 
they have made as to why you, if I remember correctly, do not 
believe the indirect benefit standard should be the appropriate 
standard, but also what would be the adverse effect if that 
were to become law?
    Mr. Henderson. Thank you, Senator. I have a lot of 
agreement with what they have said about cyber hacking and 
great respect, and I agree. I think the focus, as Professor 
Coffee said, should be on stealing.
    Professor Jackson said the SEC knows wrongfulness when it 
sees it. I am skeptical of that. The most famous insider 
trading case probably ever was SEC v. Dirks, where the SEC's 
view was that Mr. Dirks, who was trading on information 
revealed to him by an insider at a company that was running a 
giant Ponzi scheme, was wrongful, and they wanted to punish Mr. 
Dirks.
    Taking information from a company that is running a Ponzi 
scheme, that they had tried to tell the Government, on repeated 
occasions, was a Ponzi scheme and nobody would listen, and 
trading on that information to move the stock price in the 
right direction, that is not wrongful conduct. It might be 
stealing from the standpoint of the company, whose property has 
the information, but it is not wrongful in any sense.
    The SEC, frankly, their attitude for the last five decades 
has been to try to create a parity of information between 
traders, that people should trade based on the same 
information, and if that is the view of the Commission and 
their idea of wrongfulness, I think that is a real problem.
    I think the idea that what Professor Coffee said, which is 
if someone steals information in return for some financial 
gain--and it does not have to be a bag of money, as Professor 
Jackson said; it could be a favor you are doing for someone--
knowing you are going to get something in return, something 
that you are doing this to serve your own selfish interests, 
that is a problem. That is just like stealing office furniture. 
We do not allow people to do that.
    If what you are doing is really not about serving your own 
personal interests, it is about revealing fraud within a 
company, then I think that is a completely different situation. 
This idea that we are going to have a property rights approach 
where the companies get to determine what the property is I 
think is the wrong way to go. I think we should focus on the 
stealing, and I think we should say when people have motives to 
steal that are person, self-serving, you do not need a bag of 
money. The Government does have to show the burden. But if they 
can show the networks that Professor Coffee is talking about, 
of information trading and groups of people in these 
activities, then I think that should be enough.
    Senator Toomey. Thank you. Mr. Burton, we have had several 
observations about the huge decline in the number of public 
companies in America, despite the fact that we have more 
people, we have more businesses, we have a bigger economy, yet 
we have fewer publicly traded companies. Just briefly, what do 
you think the main reason is we have fewer public companies in 
America today than we did decades ago.
    Mr. Burton. I think there are two related reasons. One is a 
massive increase in the regulatory burden of being a public 
company, that has been ongoing for approximately three decades, 
and it is about to get radically worse if the SEC promulgates 
some of the rules that it has recently proposed.
    The second reason is a substantial increase in litigation 
risk and the costs associated with either preemptively 
protecting yourself against that litigation or defending 
against litigation.
    Senator Toomey. With respect to the SEC's new raft of 
disclosure requirements, it is my understanding that for the 
first time the SEC is going to require the disclosure about 
facts that are not financially material to the companies that 
have this burden. That strikes me as a whole new layer, 
approach to regulation. I wonder if you have any thoughts on 
the wisdom of that.
    Mr. Burton. I think going down that path is a serious 
mistake, but they are, in effect, trying to redefine the way 
materiality has been understood for eight decades. And the 
proposed greenhouse gas emission rule, or climate change 
disclosure rule that was released about 2 weeks ago would 
literally triple the cost of being a public company, and that 
is going to have dramatic effects. It will make the going-
private transactions associated with Sarbanes-Oxley's internal 
control reporting requirements look like child's play.
    And then also if you look at the OMB Unified Regulatory 
Agenda there is a whole series of other similar type disclosure 
requirements in the pipeline relating to DEI or human capital 
management, and so on down the line, which have either no 
relationship to financial outcome of a company or a tangential 
relationship to the outcome of the company.
    Senator Toomey. And that is a complete departure from the 
historical norm on the terms of the----
    Mr. Burton. It is, and I think ultimately it may well--
well, I know it will seriously undermine securities law, 
because there is this variance with its fundamental historical 
purposes of helping to provide material information to 
investors so our capital markets are more efficient, and so 
that investors can make more informed investment decisions.
    Senator Toomey [presiding]. Thank you. Senator Menendez.
    Senator Menendez. Thank you. Let thank the Chairman for 
holding this hearing. I also want to thank my colleague, 
Senator Reed, who is at the Armed Services Committee, for his 
tireless work to pursue legislation that we are working on 
together. He and I have been working to codify and clarify our 
laws regarding insider trading since 2015, when we introduced 
the Stop Illegal Insider Trading Act.
    I am glad to be able to continue that work today with the 
discussion of our new bill, the Insider Trading Prohibition 
Act. I believe this is commonsense legislation that will 
provide much-needed clarity and regulatory stability as well as 
protections for investors.
    So let me turn to my questions.
    I believe that everyone is more or less in agreement that 
insider trading is unfair, and that, to me, is reason enough to 
clearly and explicitly ban the practice. However, I also want 
to push back on the idea that it is a victimless crime. One of 
the reasons I believe it is important to codify our laws 
against insider trading is that the practice has tangible 
negative effects on the economy.
    Professor Jackson, can you talk about some of the negative 
consequences of insider trading on markets and shareholders and 
the public at large?
    Mr. Jackson. Absolutely, Senator. Thank you. Our inability 
to enforce the insider trading laws and the limits of the 
judge-made doctrine that we have has very real costs for 
ordinary Americans. What it means is that when they enter our 
markets they cannot be as sure as they should be, sir, that 
they are going to be on a level playing field, but instead that 
they might be trading against individuals who have better 
information than they do, for reasons unrelated to the actual 
underlying value of the stock, but instead because those 
individuals are in a privileged position, for example, in the 
senior management of the company.
    Those are very real costs that ordinary families face. And 
when they try to plan for their retirement or education we 
should do better in making clear to them that when they put 
that money in the market, like my parents did years ago, they 
are going to be on a level playing field rather than trading 
against somebody who knows more than they do simply because 
they happen to work at the company.
    Senator Menendez. Yeah. I think insider trading can 
increase market volatility and certainly reduce confidence in 
markets and companies at the expense of shareholders, which is 
why I think it is important that we act.
    Let me ask you, one of the goals of the Insider Trading 
Prohibition Act is to clarify certain conflicts that have 
arisen in the courts. One such clarification is that this 
legislation makes it unlawful to trade securities based on 
information that the trader knows or has reason to know was 
wrongfully obtained, regardless of whether the trader knows 
whether a source breached a fiduciary duty and/or if they 
derived any personal benefit.
    Can you explain to the Committee what led to the court 
conflict over personal benefits and why this clarification is 
important?
    Mr. Jackson. Absolutely, Senator. What happened in the 
courts is they were trying to understand when a tipper inside a 
company gives information to a trader, why she did that. And 
what they did was use the personal benefit approach as a way to 
understand whether she was personally getting something by 
giving away this information.
    While in theory that sounds like a good idea, Senator, the 
problem is, in practice, as I was suggesting earlier, the way 
financial markets work is that people do not trade information 
for bags of cash. No. They trade information, as Professor 
Coffee has explained, in relationships, conversations, trading 
favors, et cetera. That is the way information passes in our 
markets today. And if we make the Government prove that they 
handed over cash in order to give up their secrets, what that 
really means is that we will not be able to bring those cases. 
And as you pointed out, Senator, what that means is that 
ordinary Americans cannot be sure they are getting a fair deal 
when they invest in our markets.
    Senator Menendez. OK. I raised this point--and thank you 
for your answer and your insights--because it exemplifies what 
the legislation is all about. It is about making sure that the 
law is clear, that it resolves existing ambiguities, and covers 
the full range of practices that constitute insider trading. If 
someone knowingly trades on insider information it should not 
matter whether that person that shared the information violated 
a duty or received a benefit.
    Finally, one question Congress has been grappling with is 
how to fit digital assets into existing financial and 
regulatory frameworks. Though our bill does not directly deal 
with digital assets it is important to consider how these 
assets might interact with insider trading regulations.
    Dr. Coffee, what concerns, if any, do you have regarding 
insider trading of digital assets.
    Mr. Coffee. Well, right now, of course, the securities laws 
do not apply to cryptocurrency as such. It does apply to 
certain initial public offerings of cryptocurrencies. That is a 
funny distinction. But I do think that it is the Wild West out 
there in terms of cryptocurrencies. We do not know what is 
going on, but it is extremely volatile and people are making or 
losing billions, and I do not want the small investor getting 
into that until the market is cleaned up and the West becomes a 
somewhat tamer place. That is the world of cryptocurrencies.
    I just want to emphasize what the professor, my colleague, 
was saying a minute ago. The Bharara report is not for making 
strict liability. It is not for making insider trading very 
easy to prosecute. It is instead saying using only the personal 
benefit standard is under-inclusive. Properly counseled by good 
lawyers, hedge funds can avoid making a payment or promising a 
payment, and then they are immune, if you use the personal 
benefit standard.
    What you should instead use, and I think this is the 
representative body, the Bharara Commission, is we should 
instead use a wrongfulness standard, that the parties know they 
were behaving wrongfully. When you tell someone else, ``We just 
got word Dell is going to reduce its earnings by 50 percent. It 
will be announced the day after tomorrow,'' and the two hedge 
funds trade like wild and make, in the case of the Newman case, 
something like $72 million in that 1 day, I think that is the 
kind of behavior that I can say shows wrongfulness.
    And if you want to add a little bit more to the statute to 
make that wrongfulness requirement even clearer, we are not 
suggesting strict liability. We are suggesting if you behave 
wrongfully but do not pay a clear bribe you can still be held 
liable. If you do not say that you have created a royal road 
for hedge funds to get very rich and behave very badly.
    Senator Menendez [presiding]. Thank you. Senator Tillis.
    Senator Tillis. Thank you, Senator Menendez. Thank you all 
for being here today.
    Mr. Burton, one question I have for you is I think there 
are a lot of hard-working Americans that find themselves on the 
outside looking in, especially when it comes to opportunities 
to invest in a deep and diverse pool of young companies with 
significant growth potential. So I and a couple of my other 
colleagues believe it is important to update the rules of the 
road so more everyday Americans--and not just large funds--can 
chart their own economic path as early stage and accredited 
investors.
    Senator Scott and I have introduced a bill called the Equal 
Opportunity for All Investors Act, and the legislation updates 
laws on accredited investor status to allow examinations and 
subsequent self-certifications for accredited investor status.
    Do you think that increasing access to early growth 
companies are an important way to democratize investing?
    Mr. Burton. Absolutely. I believe your legislation is 
extremely constructive legislation. It will give less-affluent 
investors access to high-growth companies, enabling them to 
achieve higher returns and also diversify their portfolios, and 
make it so that the securities laws basically do not set up the 
system so that only rich or very affluent people can 
participate in these offerings. And that is, I think, a very 
important step forward.
    The other thing I mention is the fact that you allow people 
to test into the status by demonstrating investment knowledge 
gives life to something that has been in Regulation D since its 
advent, namely the concept of a sophisticated investor. But 
because people do not really know what it means, it is not used 
very often and the bright-line thresholds relating to income 
and net worth are used instead. So that would enable someone 
who actually is sophisticated to demonstrate that by taking a 
test administered by someone like FINRA.
    Senator Tillis. Anyone wishing to speak in opposition? Mr. 
Robert.
    Mr. Jackson. Well thank you, Senator.
    Senator Tillis. I like creating a debate format from time 
to time, particularly when there are not a lot of Members here.
    Mr. Jackson. Thank you, Senator. Certainly it is important 
to give people opportunities to raise capital, sir, but I was 
actually very pleased to see that part of the package that has 
been rolled out includes an issue in the cost of raising money 
that has not been addressed by the SEC, and that is the tax 
that small- and mid-sized companies pay when they go public, to 
Wall Street.
    You know, sir, for 20 years there has been clear evidence 
in the finance literature that when a small or mid-sized 
company goes public in this country they give 7 percent of what 
they created as entrepreneurs over to Wall Street. Not 6.5 
percent, not 7.5 percent, but exactly 7 percent. It is not my 
experience, sir, that competitive markets set prices at the 
exact same level for 20 years in a row.
    When I was on the SEC I called for us to study this and ask 
why do small- and mid-sized companies in this country have to 
pay this tax on the toll road to going public? And I was 
delighted to see that part of this package is going to ask the 
SEC to study that question and get after why it is so expensive 
for small- and mid-sized businesses to raise capital in our 
markets.
    Senator Tillis. Mr. Burton, 45-second rebuttal.
    Mr. Burton. He is absolutely right on the aspect that we 
need to study the costs associated with initial public 
offerings. We need actual better information from the SEC 
across the board.
    I work in a number of different fields, and the Department 
of Labor, the Internal Revenue Service, the Commerce Department 
all put out a great deal of information every year so we know 
what is going on in that area. The only place where that is not 
true is the Securities and Exchange Commission, and we talked 
about that a little bit when you were a commissioner. 
Basically, the SEC is extraordinarily bad at providing 
information to policymakers like yourselves, and we need to fix 
that.
    In terms of your legislation, more specifically on amending 
the accredited investors, not only will it democratize access 
to these private placements, it will also help entrepreneurs, 
particularly in rural areas or smaller States. Because if you 
live in Washington, an entrepreneur is likely to know a 
tremendous number of accredited investors. If you live in a 
smaller community where incomes and net worths are lower, you 
do not have access. And I think people typically here, in 
Washington, do not focus on how rare accredited investors are 
in much of this country, and your legislation will help address 
that disparity.
    Senator Tillis. I am about to run out of time, but one 
question, Mr. Burton--I may just see if I can get your 
response, a question for the record. I have worked on the 
Reporting Requirements Reduction Act, which had to do with 
going from quarterly to semiannual reporting. I think that you 
expressed maybe some, if not concern but expressed some 
opinions that I would be very interested in. But I still 
believe that we need to right-size regulations, and you are 
talking to a former partner at PricewaterhouseCoopers who built 
a big firm that had a lot of regulatory compliance. But I think 
it would be nice to be able to lower the temperatures here, 
because when we are talking about right-sizing regulations, I 
am not talking about walking away from something that is a real 
risk that needs to have oversight, but doing it in a tailored, 
more modern way.
    Your just general comment on regulatory tailoring.
    Mr. Burton. I have totally been a strong proponent of 
scaled disclosure for a very long time. I totally share your 
concern that we are having an extraordinary adverse impact on 
entrepreneurs because we over-regulate and impose costs.
    In terms of your specific proposal to reduce the frequency, 
in effect replace 10Q's with semiannual reporting of financial 
statements, I have some reservations, although it is possible 
that it would work out. Obviously it would reduce costs, but it 
is also going to reduce the amount of information available to 
the marketplace so that it can accurately price securities in 
the secondary market.
    On the other hand, it is not like there will not be any 
information, because there is 8-K report, current reporting 
requirements. So it may very well work out fine.
    What I would suggest is that maybe we run, in effect, a 
test and limit it to smaller reporting companies or maybe 
smaller reporting companies and EGCs and see if that works 
before it is generalized.
    Senator Tillis. Tailor it further. Thank you. Thank you for 
the input.
    On behalf of the Senator Brown, Senator Warner, you are 
recognized.
    Chairman Brown [presiding]. Thank you, Senator Tillis.
    Senator Warner. I was going to call you Mr. Chairman.
    Senator Tillis. You are exactly right. I was just trying 
to----
    Chairman Brown. Tillis always does whatever I ask. It is 
unbelievable.
    Senator Warner. I am not even going to complain about the 
extra minute you took, Senator Tillis.
    I am going to start with Professor Jackson, and, you know, 
talk a little bit about cybersecurity. This is an area where I 
see it not only from this Committee's standpoint but 
particularly I see it from my chair on the Intel Committee. 
Unfortunately, we have seen a dramatic rise in cyberattacks. We 
have seen a dramatic explosion of ransomware payments.
    I am happy that I think virtually everybody on this 
Committee has supported the bipartisan legislation to make sure 
we have actually got a cyber incident reporting that is now 
law. Only about 30 percent of cyberattacks are actually 
reported. And if we do not have mandatory reporting, frankly, 
not to go after the company but to identify and share with 
other private sector partners, bad, bad things will happen, and 
frankly, I am still amazed that we have not seen more Russian 
cyber activity against our institutions in light of the Ukraine 
war.
    Professor Jackson, I know in your testimony you touched on 
this. We often think about cyberattacks in terms of ransomware, 
but as you pointed out in your testimony there is actually the 
ability that victims' stocks can actually be manipulated. Can 
you talk about how prevalent this practice is and how some of 
these cyberattacks can move beyond traditional ransomware, and 
whether this is actually extending to potentially State actors?
    Mr. Jackson. Absolutely, Senator. Thank you. Let me make 
two points about that.
    First, there is significant evidence, sir, that right 
before it becomes public that a company has been the victim of 
a cyberattack. There are significant spikes in the trading and 
options, on particular put options, in those companies' stocks. 
And what that suggests to me, sir, is that there are folks out 
there who are profiting not just from the cyberattack but by 
trading on it. And that puts us at risk, that our markets are 
funding the very cyberattacks that you, sir, are working so 
hard to help companies stop. That is a deeply concerning kind 
of insider trading, and this bill would stop it, or rather this 
bill would make very clear or leave no doubt that the Federal 
courts, which have expressed some confusion about this, in fact 
should conclude that trading on cyberhacked information is a 
violation of Federal law.
    Let me say one other thing, Senator. You asked about 
foreign companies, and in my testimony today I pointed to very 
troubling evidence that insiders at Chinese-domiciled firms 
listed in the United States are trading ahead of very 
significant stock price declines. In fact, we show, in a new 
report, sir, that after these sales the stocks of Chinese-
domiciled, U.S.-listed firms dropped more than 20 percent. More 
than $10 billion in losses were avoided by insiders at these 
firms, by selling in advance of stock price declines, and those 
losses were borne by American investors.
    I think it is crucial that we close these kinds of gaps in 
our insider trading laws, sir.
    Senator Warner. Two quick comments, and I want to get to my 
final question for you. One is, this amount of trading that 
goes on before the public announcement of a cyberattack--and 
again, we give confidentiality if you report to CISA, so we do 
not have a mandatory disclosure requirement. Have you been able 
to measure and actually track that? I mean, I have not followed 
this thing. I think it is a really relevant point. But have you 
got some metrics around that?
    Mr. Jackson. Yes, sir. There is an excellent study in the 
Harvard Business Law Review by Columbia Law School professors 
Joshua Mitts and Eric Talley, studying the spike in options 
trading just before a cyberattack is revealed to the public. 
They detect a very substantial increase in that trading. And 
because options are levered bets on the changes in stock price, 
the proceeds from that kind of trading could be very 
substantial indeed.
    Senator Warner. Well, I think I am going to take a look at 
that, because it is an area that I am not that familiar with. 
And candidly, I looked a lot at some of these foreign-domiciled 
companies that are trading on American exchanges. I am not sure 
I was fully aware that they were not subject to the same 
insider trading restrictions, although I was interested to see 
that at least there was some indication, from China standpoint, 
that they are going to have these firms finally audited by 
Western auditors, which I think is a step in the right 
direction.
    As long as I have got you, Mr. Jackson, Professor Jackson, 
I am just going to talk about how insider trading can also 
relate to stock repurchasing, stock buybacks. You know, too 
often I think companies, the management may end up saying, 
``Aha. We see there is going to be a downturn. Let's go ahead 
and repurchase stock at a discounted price.''
    Can you speak to that? I know you have raised this issue as 
well.
    Mr. Jackson. Yes, sir. I documented, in evidence that I 
produced while I was still an SEC commissioner, it is very 
clear from the evidence that insiders at public companies 
increase their sales of stock in connection with the 
announcement of a share repurchase plan.
    And what I found so troubling about that, sir, is that it 
is a strange thing for the CEO of the company to say that the 
stock is cheap enough that we should do a buyback but I would 
like to sell my shares. It is not my experience that CEOs are 
in the business of selling their property for cheap.
    Because of that, it is very important that there has been 
some movement in the direction of forcing executives to hold 
their shares when they engage in a buyback, because, sir, if 
the idea here is capital allocation, it is not obvious to me 
why that is the moment the CEO needs to profit on her shares. 
If the buyback is a good thing for the company in the long run, 
it should not trouble her at all to hold her shares over an 
extended period. And I think proposals to that effect are going 
to be very constructive for our markets.
    Senator Warner. Well I share your concern. I do know if I 
am defaulting back to Chairman Brown or Senator Tillis, but my 
time has expired.
    Chairman Brown. Thank you, Senator Warner.
    Senator Warren, from Massachusetts, is recognized.
    Senator Warren. Thank you, Mr. Chairman.
    So one of the biggest threats to a functioning market is 
insider trading. When some market participants get special 
access to information they can use it to take advantage of 
everyone else. It is cheating, plain and simple, and it is 
illegal. Even so, it happens.
    We have talked a lot today about one kind of market 
participant, and that is company executives who trade stock 
based on secret information they have about their businesses. 
But it can happen in other ways too. Sometimes a high-ranking 
Government official might know about a change in Government 
policy that can powerfully affect a corporation.
    Professor Jackson, you are one of the Nation's top experts 
on insider trading, so let me run through some examples with 
you. If an official, let us say a Member of Congress, learned 
that the Federal Government was about to award a company a 
huge, new contract, and then that Senator bought stock in that 
company before news of that contract was made public. Could 
that be considered insider trading?
    Mr. Jackson. Yes, Senator, it could.
    Senator Warren. OK. Let us try another one. What about if 
that Member of Congress attended a top-secret briefing and 
learned that a company was facing big legal trouble. Could 
selling their stock before that company made that information 
public be considered insider trading?
    Mr. Jackson. Yes, Senator, it could.
    Senator Warren. OK. And what if that Member learned in a 
closed committee meeting of plans to boost the Pentagon's 
budget by tens of billions of dollars. If that Member bought 
defense stock, generally, ahead of the markup, could that be 
considered insider trading?
    Mr. Jackson. Yes, Senator, it could.
    Senator Warren. Let us do one more. What if that Member 
held drug company stocks and learned from their committee chair 
that legislation to cut drug prices would be moving in the 
committee, and if they sold those stocks could that be 
considered insider trading?
    Mr. Jackson. Yes, Senator, it could.
    Senator Warren. So Members of Congress are in a unique 
position to obtain information that they can use to gain the 
stock market. In fact, the risks with Government officials are 
even higher than they are with most CEOs, because Government 
officials can sometimes use their positions to influence 
private outcomes and the values of the stocks that they hold or 
trade.
    For example, voting on laws that would protect or break up 
a giant tech company could have a direct impact on the wealth 
of a Member of Congress who holds stock in giant tech 
companies.
    So look, this is not a hypothetical problem. Last year 
alone, Members of Congress and their spouses traded more than 
half-a-billion dollars of stocks and other investments. And 
here is the most alarming part. On average, Members of Congress 
came out ahead of the S&P 500, and yet not one single Member 
was criminally charged with insider trading.
    Now there is no doubt in my mind that Members of Congress 
who break Federal laws by engaging in insider trading should be 
criminally prosecuted. But there is also no doubt that is not 
enough to fix the problem. That is already the law.
    So let me ask you, Professor Jackson, do we need stronger 
rules to prevent insider trading in the halls of Congress?
    Mr. Jackson. Yes. This is critical, Senator. When Members 
are in the business of making decisions that can affect 
companies at the same time that they have portfolios that could 
include those very companies, there is a risk of a conflict, 
and we absolutely need rules to address this, Senator.
    Senator Warren. Thank you. And Professor Coffee, you are 
also one of the country's leading experts in the area of 
insider trading. Would you like to weigh in on this?
    Mr. Coffee. Well, I think Professor Jackson was basically 
relying on the Stock Act, which is a very specific statute. I 
would point out that with respect to Section 16 here, if this 
was someone other than a Congressman or a person covered by the 
Stock Act, it might be impossible to prosecute them because 
there would be no personal benefit paid for the information, 
and then he would not be liable under this proposed Section 16, 
with its personal benefit rule.
    But in terms of the broader question you asked, I think you 
might be suggesting that we should move beyond the criminal 
law, which is always a blunt sword that could only be 
occasionally applied, and have Congress impose upon itself some 
prophylactic rules. It maybe Congress should only invest in 
diversified portfolios like mutual funds and not own individual 
stocks. I have heard that idea has been suggested in these 
halls. I think it is a very good idea.
    Senator Warren. Thank you very much, Professor Coffee.
    You know, regardless of how trustworthy Members of Congress 
might be, trading in individual stocks undermines public 
confidence in the markets and it undermines public confidence 
in Congress. And this is why, as Professor Coffee delicately 
alludes, I have introduced bipartisan legislation with Senator 
Daines, who is also a Member of this Committee, to ban Members 
of Congress from owning or trading individual stocks. They can 
still do the big mutual funds, but not individual stocks. We 
need to change the rules so that it is 100 percent clear that 
Members of Congress are not going to be allowed to game the 
system.
    Mr. Chairman, I know that you have introduced legislation 
to achieve a similar goal, and I look forward to working with 
you and working on a bipartisan basis. We need to get this 
done.
    Chairman Brown. I do too. Thank you, Senator Warren.
    There are two Republican Senators that are trying to get 
online, not yet quite ready, Senator Daines and Senator Moran. 
And Senator Van Hollen, from the Democratic side, from his 
office, from Maryland. Is he ready?
    Senator Van Hollen. I am. Can you hear me?
    Chairman Brown. Go for it. Senator Van Hollen is 
recognized.
    Senator Van Hollen. Thank you, Mr. Chairman. I had hoped to 
get back to the Committee in person, but good to do it 
virtually. And I want to thank all the witnesses for their 
testimony.
    Professor Jackson, good to see you again. And as you and I 
discussed in the past, I have introduced legislation called the 
8-K Trading Gap Act, which seeks to close a current gap that we 
think can lead to mischief in insider trading rules.
    As you know, right now public companies are required to 
disclose significant corporate events to the public within four 
business days after the event occurs, and they have to do it on 
a form called an 8-K. This could be for the announcement of 
clinical trial results for a drug maker, it could be the 
announcement of a merger with a big competitor, or a big 
cybersecurity breach that has affected a business' customers.
    During this period, market-moving information is known to 
insiders but not to ordinary investors, and it is a period we 
call the 8-K trading gap.
    So based on your research, is there any reason to believe 
that executives with access to this material, nonpublic 
information may be trading within this 4-day window before the 
news get out to the public?
    Mr. Jackson. Yes, Senator, there is reason to believe that. 
In a paper released a few years back with coauthors from 
Harvard and Columbia, I documented that there is significant 
amounts of insider transactions during the 4-day gap you 
described.
    And, Senator, we also observe that some of the 
announcements that are pending at the end of that 4-day period 
are very clearly material corporate events--mergers and 
acquisitions, balance sheet restructurings, and the like--and 
yet we see very considerable transactions.
    You know, Senator, when we started that study we expected 
to find very little trading during this period. After all, the 
company has publicly said that they are going to disclose a 
material event. We thought that insiders would not trade during 
this period. We were astonished to see insider trading to this 
degree.
    And I think it points out both the need for your important 
legislation, to address the 8-K gap, and the need for the 
legislation before the Committee today that would better deter 
insiders from engaging in these kinds of transactions.
    Senator Van Hollen. Well I appreciate that. I was going to 
ask, you know, I understand giving companies the 4 days to 
report on these events, but there certainly does not seem to be 
any justifiable reason to allow insiders to trade during that 
period. I assume you agree, based on your previous answer.
    Mr. Jackson. Well that is right, sir. I cannot think of 
one. I cannot imagine why the company would want its senior 
management or directors to be trading during the pendency of an 
announcement that warrants a Form 8-K.
    Senator Van Hollen. Now we also need to make sure that 
American investors are protected on U.S. exchanges in other 
ways. Obviously insider trading here at home is one. But we 
also need to deal with foreign corporations, and a couple of 
years ago Senator Kennedy and I introduced the Holding Foreign 
Companies Accountable Act. That passed into law, to make sure 
that all companies listed on U.S. exchanges, whether domiciled 
in the United States or overseas, had to comply with simple 
accounting and transparency rules.
    I was just looking at a paper that you wrote recently, just 
in the last couple of days, I believe, on the issue of foreign 
insiders and their insider trading and how they are not 
governed by the exact same rules that apply here in the United 
States. Could you talk a little bit about this?
    Mr. Jackson. Of course. Thank you, Senator, yes. Building 
on your important legislation on the Holding Foreign Companies 
Accountable Act, two coauthors from the Wharton School and I 
just last week released a paper documenting insider trading by 
foreign firms that are listed in the United States.
    We showed, sir, that these insiders, by selling before 
stock prices fall, avoid billions upon billions of dollars in 
losses that ordinary American investors have to bear.
    There are two important points I want to make about this 
new study. First is these foreign firms are exempted from the 
straightforward disclosure that American companies have to 
provide investors when their insiders engage in trading. That 
exemption was provided by the SEC decades ago, and I think it 
is long past time for the SEC to take another look at that, 
sir. When the provided that exemption, our capital markets were 
a very different place, and foreign firms raised considerably 
less money on U.S. exchanges.
    Second, it is troubling that these foreign insiders are 
able to see in this way, and the disclosures that they are 
providing are provided in paper to the SEC, under long-outdated 
rules under what is called Rule 144. The idea that there are 
paper filings sitting in a cabinet at the SEC, sir, with this 
kind of important information, we have got to fix that.
    And so I am hopeful that I will be able to work with both 
all of you on this Committee and at the SEC to get these rules 
tightened up, to deter foreign insiders from trading in a way 
that is unfair to ordinary investors.
    Senator Van Hollen. Well thank you for highlighting this 
issue. Based on your investigation, we are working on 
legislation to close that unfair situation, and I look forward 
to being in touch with you about it.
    Thank you.
    Mr. Jackson. Thank you, Senator.
    Chairman Brown. Thank you, Senator Van Hollen.
    I believe that no one else is returning. We are voting on 
the Supreme Court today, and voted on a high-level HUD nominee, 
so I think I will turn to Senator Toomey for some last remarks 
and then I will wrap. Thank you.
    Senator Toomey. Thank you, Mr. Chairman. I just would like 
to ask unanimous consent to enter into the record letters and 
statements of support for JOBS Act 4.0, with more than 20 
industry and taxpayer advocate associations, including but not 
limited to the Small Business Investor Alliance, Managed Fund 
Association, Securities Industries and Financial Markets 
Association, Natural Venture Capital Association, BIO 
[phonetic], Small Business and Entrepreneurship Council, AFP, 
Club for Growth, and the Competitive Enterprise Institute.
    Chairman Brown. Thank you, Senator Toomey. Thank you all, 
to the witnesses today. I am submitting a statement--without 
objection, so ordered, his request.
    I am submitting a statement for the record by the Maryland 
Securities Commissioner, Melanie Senter Lubin, President of the 
North American Securities Administrators Association. Without 
objection.
    For Senators who wish to submit questions for the hearing 
record those questions are due 1 week from today, Tuesday, 
April 12th. To the witnesses, please submit your responses to 
those questions within 45 days of receipt.
    Thank you again for your testimony today. The Committee is 
adjourned.
    [Whereupon, at 11:24 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
    The tragedy and uncertainty of the coronavirus pandemic taught us a 
lot about the economy and the stock market.
    At first, for a brief period at the beginning of the pandemic, the 
stock market tracked what was happening in the rest of the economy. As 
small businesses and families struggled, U.S. stock market suffered the 
fastest drop in history, plummeting 34 percent in 33 days.
    But then, the stock market had the fastest rebound in history, 
recovering all of those losses by mid-August.
    Meanwhile, small businesses were making impossible decisions about 
layoffs or shutting their doors altogether. Fourteen million Americans 
were unemployed.
    And last year, we saw record highs in the stock market and all-time 
records in initial public offerings, private equity, and venture 
capital.
    It was a reminder of what most Americans already know--the stock 
market is detached from the reality of most people's lives.
    And it disproportionately benefits the wealthy. According to 
Federal Reserve data, the wealthiest one percent hold 53 percent of 
stock and mutual fund investments, and the bottom 90 percent own less 
than 12 percent.
    Think about that--just one percent of the country holds more than 
half of all Wall Street assets.
    So it's no surprise that most Americans don't trust the markets. 
They don't think the stock market is fair, and they think the wealthy 
and well-connected cheat the system.
    And too often, they're right. It's why today we're examining how 
Congress and this Committee must work to crack down on bad actors who 
cheat the system and cheat Americans planning for the future.
    Everyone on Wall Street should play by the same rules. We know 
that's almost never been the case.
    Right now, it seems too easy for corporate insiders out on the golf 
course to exchange information about upcoming mergers and deals, and 
get away with it.
    All too often we see insiders--from boardrooms to bankers--involved 
in suspicious trading. These are people who should know better, people 
who know when they are crossing the line--but they just can't seem to 
help themselves.
    The SEC and the Department of Justice have prosecuted insider 
trading for decades using principles of fraud under the securities 
laws. Most of these principles have developed without a standard 
defined by Congress.
    Most people would probably be surprised to learn that there's no 
one law written down anywhere that spells out what constitutes illegal 
insider trading.
    Over the years, Federal courts have disagreed on what types of 
misconduct are in fact illegal. And when the Supreme Court has stepped 
in, instead of resulting in a clearer understanding of the law, it's 
just created more confusion on what counts as illegal insider trading.
    We should all want strict, clear rules on what constitutes illegal 
insider trading. We should all want a statute that spells out when 
someone is crossing the line.
    That would help avoid this uncertainty and inconsistency.
    Since 2014, there's been a debate between the Federal circuit 
courts and the Supreme Court about when people who provide or receive 
inside information and trade on it are liable for insider trading.
    After the back and forth in those cases, experts still disagree on 
how much the law changed, where the lines are, and what happens if 
courts disagree in the future.
    We have also seen that there may be limits to our ability to use 
insider trading case law to hold new varieties of improper trades 
accountable.
    This is especially true with the rise of cyber threats--for 
example, if someone deliberately hacks into a computer system to access 
inside information and then trades on it. Existing statutes and case 
law, believe it or not, don't always treat that as wrongful insider 
trading, even though to pretty much everyone that sounds like a 
textbook example.
    Our colleagues in the House have been considering these gaps. 
Representative Himes has been leading on this issue for years, and has 
pushed legislation that would take away the uncertainty created by the 
courts and establish standards that address the questions that come up 
repeatedly. Senator Reed has been working on a Senate version of that 
House-passed bill that our witnesses will discuss today.
    Insider trading cases might not be as cut and dry or as exciting as 
we see in the movies, but the same kind of misconduct and suspicious 
trading happens again and again. It's wrong, it's unfair, and it's yet 
one more way that the wealthy and the well-connected game the system to 
get ahead.
    It's funny how the people who seem to have the best luck playing 
the stock market so often happened to have friends in high places.
    We hear all the time about insiders who have amazing timing and buy 
stock days before a big announcement, or we read about the chain of 
people who share a stock ``tip,'' that is clearly confidential 
information that shouldn't be shared or traded on.
    Congress has the opportunity to finally make it clear what the 
rules are.
    A statutory definition of insider trading would also capture abuses 
and misconduct--like hacking to steal confidential stock information--
that courts have found to be outside the concepts of ``fraud'' and 
``deception.'' Even if the hacker accessed the information because of a 
security weakness, that doesn't mean what they did is okay and it 
shouldn't mean they can keep their ill-gotten profits.
    The measure we are discussing today closes that gap by focusing on 
``wrongfully'' acquired nonpublic information.
    Well-connected people buy sophisticated derivatives on a company's 
stock on a Friday. The following Tuesday the company announces a 
merger. To most people that doesn't sound like just a lucky bet or a 
coincidence. That sounds more like a wink and a nod, and a ``you 
scratch my back, I'll scratch yours'' understanding.
    And when that happens all the time, it's no surprise that most 
Americans don't think they can trust the market with their retirement 
savings. For the vast majority of people who get their income from a 
paycheck, not a brokerage account, they don't see it as a way to make 
money.
    Families saving for the future deserve to know Congress will 
protect everyone who invests to send their kids to college or to buy a 
home one day. We must make sure our laws are written down, clear, and 
apply to everyone, no matter how wealthy and how powerful.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
    Thank you, Mr. Chairman.
    I will address insider trading, but first I'd like to acknowledge 
that 10 years ago to this very day, President Obama signed the 
Jumpstart Our Business Startups, or JOBS, Act into law. This remarkable 
piece of bipartisan legislation opened new avenues for companies to 
raise capital. For example, it created a streamlined path for new 
startups to go public as ``emerging growth companies.''
    Since 2014, these ``emerging growth companies'' have accounted for 
almost 90 percent of all initial public offerings, or IPOs. Yet, the 
number of public companies continues to decrease. In fact, the number 
of public companies has declined 40 percent since its peak in the late 
1990s. If not for the JOBS Act, the situation would be even worse. This 
decrease hurts economic growth, cuts off funding avenues for American 
businesses, and reduces investment opportunities for average Americans.
    Although the last 2 years saw more IPOs, this may be an aberration 
if the large number of SPAC offerings turns out to be a temporary 
phenomenon. And if last week's SEC proposal on SPACs becomes final, we 
may see the end of SPACs altogether.
    But investors have clamored to be part of SPAC offerings. Why is 
that? My view is that they want growth-stage investments, and they are 
not getting them any other way.
    Companies face excessive costs in going and staying public, which 
discourages them from going public in the first place. IPOs used to be 
a capital raising event. Now, they are too often just a liquidity event 
for early investors.
    These costs of going public will increase substantially if the 23 
SEC proposals--announced in only the last 4 months and many that 
significantly uproot the historical approaches taken in securities 
regulation--go into effect. For a single proposal on climate change, 
the SEC estimates that it will nearly triple the external costs for 
companies to prepare their annual 10-K reports. Imagine that.
    Think of the money companies spend today on preparing annual 
reports to cover the entirety of their businesses. And the SEC would 
nearly triple that cost to add often immaterial disclosure requirements 
regarding climate change.
    In my view, the SEC is taking disclosures in the wrong direction. 
Unless we change that direction, we could lose America's number one 
position as the leader in active and efficient capital markets.
    That's why yesterday, with my colleagues on the Banking Committee, 
I have rolled out a discussion draft of the JOBS Act 4.0. This draft is 
the result of a request I made last February for proposals to increase 
economic growth and job creation by facilitating capital formation.
    In response, we received 35 submissions with more than 150 
legislative proposals from a wide variety of bipartisan organizations 
and stakeholders. We turned a number of these proposals into bills, 
some of which received bipartisan support.
    These bills encourage companies to be publicly traded, particularly 
during earlier growth stages, improve the market for private capital by 
appropriately tailoring regulations for small businesses, enhance 
retail investor access to investment opportunities, and improve 
regulatory oversight.
    We are seeking feedback on this draft over the next 60 days. I am 
hopeful that Republicans and Democrats can come together and find 
agreement on the JOBS Act 4.0. This draft acknowledges the important 
role played by private markets and how they can be improved.
    Some resist improving private markets because they claim that doing 
so would discourage companies from going public. If we want to 
encourage companies to go public, maybe the answer is to make it less 
onerous to be a public company.
    I don't believe that one of type of market--private or public--is 
inherently better than the other. Indeed, the optimal source of capital 
for a company might vary at different stages of its growth cycle. 
Improved private markets can help private companies stay around long 
enough to grow into public companies.
    However, as the pool of public companies shrinks, retail investors 
are cut out of key investment opportunities. We should expand retail 
investor access to these nonpublic investments so they can diversify 
their portfolios and potentially receive the higher returns available 
to the wealthy.
    We know that union pensions, other institutional investors, and 
high-net worth individuals routinely include nonpublic investments, 
such as private equity and venture capital, as a part of their 
diversified portfolios. We ought to be ensuring that pension plans like 
CalPERS and wealthy investors aren't the only ones with access to these 
types of investments.
    Now, let me turn to insider trading. The securities markets are at 
the heart of our economy and our financial system. They reflect the 
collective decision-making of many individuals on whether to buy, sell, 
or hold securities. In so doing, they carry out the critical function 
of price discovery.
    An accurate market price--one that efficiently incorporates all 
available public information--is perhaps the most important investor 
protection that exists. Thus, it is crucial that market participants 
have incentives to use lawful means to discover information, conduct 
analysis, and develop investment hypothesis and to use such efforts to 
make better decisions about market prices.
    For that reason, insider trading has never been about one market 
participant having better information over another. Instead, insider 
trading is about one person wrongfully obtaining, or using, material 
nonpublic information in breach of a fiduciary duty or through 
misappropriation.
    In the decades since the first insider trading cases were brought, 
the courts have developed an extensive body of insider trading law. It 
would be preferable for Congress to codify what that law would entail. 
If we do so, we should be cautious about legislation that might cause 
confusion, uncertainty, or unintended consequences in this highly 
technical area, particularly regarding investment research.
    I look forward to hearing from today's witnesses about all of these 
important issues.
                                 ______
                                 
              PREPARED STATEMENT OF ROBERT J. JACKSON, JR.
 Pierrepont Family Professor of Law, New York University School of Law
                             April 5, 2022

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                PREPARED STATEMENT OF M. TODD HENDERSON
  Michael J. Marks Professor of Law, University of Chicago Law School
                             April 5, 2022
    Mr. Chairman and Members of the Committee, thank you for having me 
testify on the topic of the regulation of capital raising and insider 
trading. These issues are at the heart of our economy. Every company 
has to raise money, and laws and regulations have a tremendous impact 
on how this is done and, most importantly, how much it costs. It is 
easy and maybe politically appealing to add more and more obligations 
on companies, but costs of compliance don't fall just on rich investors 
or abstract companies--they are paid for by every American. While we 
need some laws to prevent fraud and to ensure accurate disclosure of 
information, every dollar spent on complying with regulations is a 
dollar not spent on employing workers, investing in research and 
development, and in bringing products and services to everyday 
Americans. The goal of law should be to obligate companies to spend no 
more than is absolutely necessary to protect investors and ensure 
robust capital markets. After all, we as a society pay the costs of 
regulation, and we should be willing to do so only if the return 
exceeds that cost.
    There is no real question that the costs of fundraising are too 
high today. The burdens of complying with securities disclosures are 
many times higher than they were just a few decades ago. To give just 
one example, consider the disclosure obligations under Regulation S-K. 
This regulation has 102 specific items of disclosure set forth in over 
140,000 words on 385 pages of the Code of Federal Regulations--the 
rules have grown twenty-fold in length since 1980. This means lots of 
lawyers can find work, but fewer engineers, chemists, and others who 
actually discover things that improve our world.
    Moreover, the risks of meritless securities fraud suits remains 
high, notwithstanding efforts by Congress to eliminate them. The result 
has been a sharp drop in the number of public companies and the number 
of companies going public. There are about half as many public 
companies today as there were in 2000. Companies are also resorting to 
new means of access public equity--such as SPACs--as a work around of 
the costs of going public. While the verdict is still out on SPACs, the 
fact that such innovation is viewed as necessary by investors and 
companies should give regulators pause before piling on new costs of 
going public through traditional means.
    Instead of trying to reduce the burdens on public companies, the 
SEC is doubling down, issuing proposed rules that will straddle 
shareholders, workers, and customers with even more costs. At the same 
time, it is hampering the ability of all Americans to invest in private 
markets. Private companies are an important alternative to public ones, 
and returns in the private equity market and other alternative asset 
classes have been superior to public returns in recent decades. Private 
equity provides not only an important investment option for investors 
of all kinds, but it helps turn around struggling companies, offers all 
companies an alternative governance approach that can fit their needs 
at particular times, and, most importantly, provides discipline against 
public-company managers that may act in a self-serving way. Congress 
and the SEC should expand the opportunity of every investor to access 
private equity and other asset classes, consistent with fiduciary duty 
obligations under ERISA and other laws.
    Let me turn briefly to insider trading. When talking about insider 
trading, it is important to put aside conventional wisdom on the topic. 
There is nothing unlawful about trading based on ``material nonpublic 
information'' about a company. Investment advisors and stock market 
analysts make their living seeking information advantages for their 
clients. Without these incentives, there will be less information about 
stock prices, which means they will be less accurate. The consequence 
will be that capital will not be allocated to where it is most 
valuable. This harms everyone, not just investors.
    Insider trading based on an information advantage is only illegal 
when it results in a violation of the antifraud provisions of the 
Federal securities laws. Under existing case law, that generally 
happens when a corporate insider trades on material nonpublic 
information for his or her own benefit, when someone deceptively takes 
material nonpublic information that does not belong to them and uses it 
to trade, or when these individuals provide--as a ``tipper''--the 
material nonpublic information to someone else to trade on in return 
for a personal benefit. Justice Ginsburg made this property-based 
approach clear in her opinion in United States v. O'Hagan.
    The Insider Trading Protection Act purports to merely codify our 
existing insider trading prohibitions. But the actual effect of ITPA 
would be to increase uncertainty for the analysts and traders that do 
the essential work of incorporating information into stock prices. When 
law professors can turn everyday scenarios--such as overheard 
conversations about deals and documents left in the back of airplane 
seat pockets--into challenging hypotheticals for law school exams, the 
result is a huge chilling effect on the work necessary to ensure 
accurate stock prices.
    This means not only the potential for capital misallocation, but 
also large compliance costs for investment funds. Importantly, these 
costs of ensuring investment professionals do not violate the law will 
fall disproportionately on smaller and mid-sized investment funds. To 
make matters worse, these funds are more likely to be owned and 
operated by minorities and women, and to be the ones taking alternative 
positions on matters related to ESG and other matters.
    There are several problems with the ITPA in its current form.
    First, ITPA codifies the existing personal benefit requirement for 
a tipper, but includes an ``indirect personal benefit.'' It is possible 
to describe virtually any human interaction as providing an ``indirect 
benefit'' to the participants. Instead, the law should reflect the 
commonsense notion that the source of information either received 
something tangible and valuable in return or provided what amounts to a 
monetary gift to a relative or friend.
    Second, ITPA uncontroversially states that trading on information 
wrongfully obtained or communicated as a result of theft, deception, or 
a breach of fiduciary duty will lead to liability. It also contains a 
catchall provision, however, extending the concept to ``a breach of a 
confidentiality agreement, a breach of contract, or a breach of any 
other personal or other relationship of trust and confidence.'' This is 
a system ripe for abuse, with companies potentially able to prevent 
individual investors from trading merely by providing them with 
information whether they want it or not.
    Third, ITPA expands the types of traders who can be held liable for 
insider trading. Currently, a trader has to act with some form of 
intent to violate the law. Under the bill, however, anyone who ``was 
aware, consciously avoided being aware, or recklessly disregarded'' 
that the information was wrongfully obtained or communicated can have a 
case brought against them. ITPA is silent on the meaning of 
``recklessly disregarded,'' which would appear to rope in innocent 
traders along with actual wrongdoers.
    Finally, ITPA does not contain an exclusivity clause stating that 
it will be the sole basis for bringing Federal insider trading claims. 
Allowing prosecutors to cherry pick their preferred law is no way to 
provide clear rules for the market. Indeed, there is a Federal statute 
that allows the Department of Justice to bring criminal insider trading 
claims without having to demonstrate the existence of a personal 
benefit. So much for ITPA's personal benefit provision.
    There is little dispute that the knowing use of material nonpublic 
information obtained in clearly illicit ways to reap securities trading 
gains--commonly known as ``stealing''--is what the Government should be 
trying to prevent. At the same time, we do not want to chill the 
valuable communications that go on between company insiders and market 
participants, which provide investors with important real-time 
information about their investments. ITPA is an opportunity for 
Congress to establish insider trading prohibitions with a clear set of 
limited rules that the Government and investors alike can easily 
follow.
    To that end, Congress needs--at a minimum--to narrowly define 
``personal benefit,'' drop the catchall provision as to how information 
can be wrongfully obtained or communicated, limit liability to 
individuals with actual knowledge of their wrongdoing, and make ITPA 
the exclusive basis for Federal insider trading claims.
    Thank you.
                                 ______
                                 
                 PREPARED STATEMENT OF DAVID R. BURTON
  Senior Fellow in Economic Policy, Roe Institute for Economic Policy 
                    Studies, The Heritage Foundation
                             April 5, 2022

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               PREPARED STATEMENT OF JOHN C. COFFEE, JR.
 Adolf A. Berle Professor of Law, Director of the Center on Corporate 
                    Governance, Columbia Law School
                             April 5, 2022
    Chairman Brown, Ranking Member Toomey, and fellow Members of the 
Committee, thank you for inviting me today. I must begin with a very 
simple message: the law of insider trading has been for too long the 
product exclusively of judicial decision-making. Insider trading is 
effectively a ``common law'' crime that has evolved without legislative 
direction. Yet, it is the Congress' job to state the criminal law 
because it alone is the voice of the community that can reach a truly 
democratic decision. Letting insider trading law develop on a simply 
common law basis ensures that there will be inter-Circuit disparities, 
that the law will expand in irregular and sometimes spasmodic 
movements, and that the public at large will be excluded from these 
deliberations.
    H.R. 2655 was an effort, I believe, to correct this problem and 
establish a clearer legislative definition of insider trading. But 
since its passage by the House in 2021, there have been two major 
developments that, I suggest, the Senate should also address:
    First, although H.R. 2655 was originally intended to eliminate the 
``personal benefit'' requirement, this provision was eliminated or 
downsized at the last minute. \1\ Nonetheless, to the extent there is 
any consensus today, that consensus is probably stated best in the 
Report of the Bharara Task Force on Insider Trading (2020), which 
explicitly calls for the elimination of the ``personal benefit'' 
requirement as a major obstacle to the prosecution of insider trading. 
\2\ That Task Force, chaired by the former U.S. Attorney for the 
Southern District of New York, was staffed primarily by former 
prosecutors, SEC enforcement officials, and judges (with a sprinkling 
of law professors), and it was bipartisan. It found, as I explain 
later, that the ``personal benefit'' requirement ``generated a 
disproportionate share of confusion and uncertainty,'' produced 
``incongruent results,'' and allowed clearly wrongful conduct to escape 
the law's reach. \3\
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     \1\ Proposed Section 16A(c)(1)(D) does state such a requirement 
(``for a direct or indirect personal benefit''). Although prosecutors 
need not rely on clause (D) and could instead rely on (A), (B), or (C), 
there is an ambiguity as to whether all these sections should be read 
in pari materia. Given that the Supreme Court granted certiorari on 
this question in Blaszczak (as later explained), I would strongly 
recommend explicitly rejecting the ``personal benefit'' requirement.
     \2\ For the record, I was a member of this Task Force.
     \3\ See Report of the Bharara Task Force on Insider Trading (2020) 
(at pp. 15-16).
---------------------------------------------------------------------------
    Second, in a recent case, United States v. Blaszczak, \4\ the 
Second Circuit agreed that insider trading can be prosecuted under 
certain other Federal statutes, \5\ and, in such cases, there was no 
need to prove that a ``personal benefit'' was paid or promise to the 
tipper. However, in Blaszczak, defendants appealed this outcome on two 
grounds: (1) they argued that the material information that was tipped 
did not constitute ``property'' because it was developed by the 
Government in an effort at regulation (and not as a property holder), 
and (2) the various Federal statutes applicable to insider trading had 
to be read consistently (``in pari materia'' in legal parlance) and all 
therefore required a showing of a personal benefit. The Supreme Court 
granted certiorari on both questions, but later, at the request of the 
Solicitor General, remanded to the Second Circuit for it to reconsider 
its decision in Blaszczak in the light of an intervening Supreme Court 
decision. \6\
---------------------------------------------------------------------------
     \4\ 947 F.3d 19 (2d. Circ. 2019).
     \5\ The defendants in Blaszczak were convicted under 18. U.S.C. 
1343 and 18 U.S.C. 1348, but were acquitted under the Rule 10b-5 charge 
(probably because the jury saw no evidence of a ``personal benefit'').
     \6\ Blaszczak v. United States, 2021 U.S. LEXIS 93, 141 S. Ct. 
1040 (vacating and remanding to the Second Circuit for further 
consideration in light of Kelly v. United States, 140 S. Ct. 1565 
(2020)). Kelly involved the ``BridgeGate'' scandal in New Jersey in 
which certain officials working under the New Jersey Governor allegedly 
cut off access to several lanes of the George Washington Bridge to 
residents of Fort Lee as a political reprisal. The Supreme Court 
reversed their convictions on the grounds that such a political 
retaliation did not offend Federal fraud statutes because no property 
was taken or sought. Kelly was a decision that in turn relied on 
Cleveland v. United States, 531 U.S. 12 (2000), which found that video 
poker licenses issued by the State were not ``property'' in the hands 
of the State, because the State was acting as a regulator, not as a 
property holder.
---------------------------------------------------------------------------
    The net result is to leave as at a moment of great uncertainty. To 
illustrate, suppose the Federal Reserve were to decide to significantly 
raise interest rates. If one could trade in the stock market based on 
this material nonpublic information and prior to its public disclosure, 
one could easily reap profits in the millions of dollars. But at 
present, it is uncertain whether this violates the law. To be sure, the 
Second Circuit will eventually decide the case remanded to it, and the 
losing side will predictably appeal to the Supreme Court. But even if 
the Supreme Court takes this case, its decision may only decide the 
issue over a narrow factual range. Characteristically (and properly), 
courts rule narrowly.
    More is needed. Legislation could do much better and establish 
general principles.
The Current Statutory Law on Insider Trading
    At present, the only statutory foundation for the prohibition of 
insider trading are a few short words in Section 10(b) of the 
Securities Exchange Act of 1934, which forbid the use of any 
``manipulative or deceptive device or contrivance in contravention of 
such rules as Commission may prescribe . . . '' (emphasis added). There 
is no doubt that Congress wants insider trading prohibited, as it has 
several times passed legislation raising the penalties for insider 
trading. \7\ But it has left the definition of insider trading to the 
courts.
---------------------------------------------------------------------------
     \7\ See, e.g., Insider Trading Sanctions Act of 1983 (ITSA) 
(increasing civil penalty to three times the gain or loss avoided and 
raising criminal fine), Insider Trading and Securities Fraud 
Enforcement Act of 1988 (ITSEA) (raising prison sentence and maximum 
penalty and authorizing SEC to pay whistleblowers).
---------------------------------------------------------------------------
    Meanwhile, the case law has developed in different directions in 
different circuits. In all Circuits, there is both the ``Classical 
Theory'' of insider trading and the Misappropriation Theory, but in the 
Second Circuit there is also a theory recently articulated in United 
States v. Martoma \8\ that information provided by the tipper to the 
tippee with the intention to benefit the tippee also violates Rule 10b-
5. This expanded ``gift theory,'' while derived from Dirks v. SEC, \9\ 
goes further than the law in any other Circuit to reach persons who 
receive material confidential information (without paying or promising 
any person benefit). Also in Martoma, the Government took the position 
that there was no longer any need to establish a ``meaningfully close 
personal relationship'' between the tipper and the tippee. \10\ Without 
criticizing Martoma, the point here made is that the Federal courts 
have not been able to create a reasonably uniform body of law.
---------------------------------------------------------------------------
     \8\ 894 F.3d 64 (2d Cir. 2018) (as corrected).
     \9\ 436 U.S. 646 (1983).
     \10\ See United States v. Martoma, 894 F.3d at 71 to 72.
---------------------------------------------------------------------------
    Other issues also are highly uncertain that are unrelated to the 
``personal benefit'' issue (which involves the relationship of the 
tipper and tippee). Let me give just two examples: First, the SEC has 
just succeeded in convincing a district court to accept a new and novel 
legal theory that prohibits what is called ``shadow trading.'' In SEC 
v. Panuwat, \11\ the district court refused to dismiss an SEC action 
brought against an employee of a company that was about to be acquired; 
the employee did not buy shares of either his company or the acquiring 
company, but instead bought stock in a company similar to his own 
because he guessed (correctly) that the acquisition of his company 
would drive up the price of similar companies. Reasonable people can 
disagree about the wisdom of this new theory (I was surprised that the 
SEC brought this case). But my point is this type of significant 
extension of the criminal law should be a decision for the legislature.
---------------------------------------------------------------------------
     \11\ 21-CV-6322 (N.D. Cal. January 14, 2022) (denying motion to 
dismiss).
---------------------------------------------------------------------------
    To give a second example, suppose that a defendant finds a way to 
``hack'' into a company's information system to steal confidential, 
market-moving information. This conduct may (or may not) violate 
computer privacy statutes, but, even if it does, that will not help the 
SEC, which in fact is the principal enforcer of insider trading law (in 
terms of cases filed), as the SEC can only sue based on prohibitions in 
the Federal securities laws. In truth, the SEC has been able on at 
least one occasion in the Second Circuit to reach such a ``hacking'' 
case, \12\ but it is very uncertain whether other Circuits would follow 
it. H.R. 2655 would correct this problem, legislating a general 
prohibition that would reach virtually any form of ``wrongful'' 
hacking.
---------------------------------------------------------------------------
     \12\ See SEC v. Dorozhko, 574 F.3d 42, 48-50 (2d Cir. 2009).
---------------------------------------------------------------------------
The ``Personal Benefit'' Requirement
    The ``personal benefit'' originated with Dirks as a seemingly 
``objective'' means of distinguishing between (1) the self-serving use 
of corporate information that breached a duty owed to the shareholders 
(or the source of the information), and (2) a legitimate (or at least 
innocuous) use of the information. Also, the Court may have believed 
that it was important to protect institutional investors who might 
otherwise be chilled from engaging in communication with the 
corporations in which they invested. But experience with the ``personal 
benefit'' requirement has shown at least three problems that regularly 
recur:
    First, it protects and immunizes defendants from liability in some 
cases that involve obviously wrongful behavior. Suppose, for example, 
an activist investor has learned material nonpublic information about 
Corporation X (possibly legitimately), and an executive at that 
investor tips that information to a hedge fund who trades on it. But 
the latter hedge fund has not paid or promised anything for this 
information. Thus, it has the defense that it paid no personal benefit 
to the tipper and so cannot be held liable. Still, there may have been 
an implicit, unstated understanding: the tippee who benefitted in this 
case would be expected to reciprocate and tip its tipper in a future 
case. Both sides would be wise enough to make no explicit promise (or 
even hint at one). Norms of reciprocity are common in most networks 
where repeat players interact. Only a fool would make an illegal 
promise to reciprocate when a silent payback (months later) will work.
    Second, disparities are likely under the fact-specific character of 
this standard. For the law to apply, do the parties have to be very 
close friends or just interacting market participants who see that 
reciprocation can benefit both? Circuits now disagree. Moreover, the 
more the standard is fact-specific, the more the likelihood that 
circuits will disagree.
    Third, prosecutors may be unwilling to investigate in detail if 
their only chance of winning a conviction depends on finding a fact (a 
quid pro quo) that can be easily hidden.
    So what is the best alternative? Congress should direct Federal 
courts to focus not on the specific case (whether a quid was paid for a 
quo), but on the more general issue of whether the information was 
``wrongfully'' taken, used or communicated. That is the Bharara Task 
Force Report's position. This approach does not make insider trading 
either a strict liability crime or a crime of simple negligence, but 
requires culpable behavior.
Whose Property Is It?: The Case of Governmental Information
    Should the Government have the right to protect its confidential 
information--at least to prevent others from trading on it to overreach 
public investors? This is not a constitutional issue. It is simply 
requires the legislature to speak clearly and bar the tipping of, or 
trading on, such information. If statutes such as the mail and wire 
fraud statutes were revised to cover not just the theft or 
misappropriation of property, but also of information that the 
Government had a legitimate interest in keeping confidential, such 
legislation would be legitimate and enforceable.
What Then Should Be Done to H.R. 2655?
    There are many ways to skin the cat! One way would be to add a new 
subsection (c) to proposed Section 16A, stating that:

        (c) It shall not be necessary that any person trading while in 
        possession of such information (as proscribed by subsection 
        (a), or making the communication (as proscribed by subsection 
        (b), (i) have paid or promised any benefit (monetary or 
        otherwise) to the tipper (or on its behalf) or to any person in 
        the chain of communication, or (ii) know the specific means by 
        which the information was obtained or communicated, so long as 
        the person trading while in possession of such information or 
        making the communication, as the case may be, was aware, or 
        recklessly disregarded, that such information was wrongfully 
        obtained or communicated.

    To ensure that there was no possible confusion, I would take 
``old'' Section 16A(c) (Standard and Knowledge Requirement), renumber 
it as ``(d)'', and revise its subsection (1)(d) to read as follows:

        (D) a breach of any fiduciary duty to shareholders of an 
        issuer, including--
          (i) an existing or future pecuniary gain or reputational 
        benefit; or
          (ii) a gift of confidential information to a relative or 
        friend.

    With those changes, H.R. 2655 would better arm prosecutors, while 
still requiring ``wrongful'' behavior by the criminal defendant. And it 
would end the ``common law'' nature of the crime of insider trading. 
But if the ``personal benefit'' standard is retained, I am afraid that 
in its practical effect, H.R. 2655 would be more a step backward than a 
step forward.
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM ROBERT J. 
                          JACKSON, JR.

Q.1. Please provide any additional comments on the benefits of 
insider trading legislation.

A.1. The uncertainty created by our outdated, judge-made 
insider-trading law leads investors to question the fairness of 
our markets while leaving legitimate market participants unsure 
about the rules of the road. Congress' failure to act has often 
left ordinary investors asking whether financial markets are 
stacked in favor of those who skirt the rules--a question on 
which our law should leave no doubt.
    That's why, shortly after my confirmation to be 
Commissioner of the U.S. Securities and Exchange Commission 
(SEC), I joined Preet Bharara, the former United States 
Attorney for the Southern District of New York, in calling for 
a national task force on the law of insider trading. \1\ The 
task force, which included a bipartisan group of prosecutors, 
defense counsel, legal academics and judges with decades of 
experience enforcing, interpreting, and advising clients 
regarding our securities laws, unanimously concluded that 
Congress should clarify the law of insider trading--and I 
agree. \2\
---------------------------------------------------------------------------
     \1\ Preet Bharara and Robert J. Jackson, Jr., ``Insider Trading 
Laws Haven't Kept Up With the Crooks'', N.Y. Times (Oct. 9, 2018).
     \2\ ``Report of the Bharara Task Force on Insider Trading 20'' 
(January 2020).
---------------------------------------------------------------------------
    The Insider Trading Prohibition Act would do just that, 
closing glaring gaps in our insider-trading law. Consider, for 
example, a hacker who steals American consumers' data from a 
publicly traded company. As the Committee knows, our companies 
are in a constant battle to protect themselves from hackers. 
\3\ There is troubling evidence that hackers who succeed in 
stealing data also trade before the hack is known to the 
public--so that our markets help finance the very cyberattacks 
that put Americans' privacy at risk. \4\
---------------------------------------------------------------------------
     \3\ SEC Commissioner Robert J. Jackson, Jr., ``Corporate 
Governance: On the Front Lines of America's Cyber War'' (March 15, 
2018) (in 2017, more than 90 percent of American public companies 
suffering a cybersecurity breach did not promptly disclose that fact to 
investors on securities filings). Since then, the SEC has proposed 
important new rules requiring prompt disclosure of cybersecurity 
breaches. See U.S. Sec. and Exch. Comm'n, Proposed Rule: Cybersecurity 
Risk Management, Strategy, Governance, and Incident Disclosure (March 
9, 2022).
     \4\ See Joshua Mitts and Eric Talley, ``Informed Trading and 
Cybersecurity Breaches'', 9 Harv. Bus. L. Rev. 1 (2019) (``[O]ur 
findings appear strongly consistent with the proposition that 
arbitrageurs can and do obtain early notice of impending [cyber] breach 
disclosures, and that they are able to profit from such 
information.'').
---------------------------------------------------------------------------
    Most investors would expect this hacker to be held 
accountable for insider trading. But our antiquated insider-
trading law often does not reach this case, because that law 
requires the Government to show that information was obtained 
in breach of a duty or by way of deception. \5\ Many hackers 
attack our companies not through deception but by brute-force 
tactics that simply overwhelm our defenses. \6\ From the 
perspective of the judges who have made our insider-trading 
law, that distinction might make a difference. But for ordinary 
investors, the idea that the law of insider trading allows 
hackers to profit from the destruction they cause raises doubts 
about the fundamental fairness of our markets.
---------------------------------------------------------------------------
     \5\ 15 U.S.C. 78j(b) (forbidding the use of any ``manipulative or 
deceptive device or contrivance in contravention of such rules as the 
[SEC] may prescribe'').
     \6\ SEC v. Dorozhko, 574 F.3d 42, 47 (2d Cir. 2009) (``In our 
view, misrepresenting one's identify in order to gain access to 
information that is otherwise off limits, and then stealing that 
information is plainly `deceptive' within the ordinary meaning of the 
word. It is unclear, however, that exploiting a weakness in an 
electronic code to gain unauthorized access is `deceptive,' rather than 
being mere theft.'').
---------------------------------------------------------------------------
    The Act would address that gap. Among the ``most 
significant impact[s]'' of the law, according to practitioners, 
would be to clearly outlaw trading on information obtained 
through cybersecurity hacks. \7\ All agree that, without 
Congressional action, it will remain unclear whether such 
trading is prohibited by American securities law. I cannot see 
why our law should countenance the possibility that profits 
obtained through illicit trading are funding the cyberattacks 
that our Government, and American public companies, are working 
so hard to combat. \8\
---------------------------------------------------------------------------
     \7\ See, Insider Trading Prohibition Act, 117th Cong., S. 3990, 
Section 2 (prohibiting trading based on information ``obtained by'' ``a 
violation of any Federal law protecting computer data'' or ``the 
intellectual property or privacy of computer users''); see also Davis 
Polk, ``Client Memorandum: House Passes Insider Trading Bill'' (May 25, 
2021) (``Perhaps the most significant impact [of the Act] would be to 
cover hacking . . . without regard to whether the hacking method 
involved `deceptive' conduct.'').
     \8\ Mitts and Talley, supra note 4, at 14 (distinguishing insider 
trading of this kind from the standard case by noting that the trading 
may provide incentives to engage in socially counterproductive 
conduct).
---------------------------------------------------------------------------
    The hearing left little doubt that it is time for Congress 
to clarify the law in this area. For example, one witness 
opposing adoption of a Federal insider-trading statute thought 
that the Act should not impose liability on an insider who 
gives information to a trader for an ``indirect'' personal 
benefit, limiting liability only to insiders who receive direct 
payments in exchange for the information. To see why the Act 
correctly imposes liability in both cases, consider how market 
participants would respond to a rule limiting liability only to 
insiders who accept cash for divulging information to illicit 
traders. Rather than direct payments, insiders can be expected 
simply to seek other consideration--reputational benefits, 
future employment, and the like--in exchange for their 
information.
    For three reasons, Congress should not design our law in 
this way. First, it would permit easy evasion of insider-
trading law by those creative enough to demand different forms 
of payment for improper conduct. Second, it would favor our 
most-connected market participants over smaller investors, 
since those with ample relationships on Wall Street will find 
it easiest to trade information for indirect consideration. 
Finally, it would make our insider-trading law a trap for those 
who cannot afford sophisticated corporate counsel, who could 
easily advise paying clients how to avoid liability under this 
rule.
    Most observers agree that our outdated, judge-made insider-
trading law is ill-suited for today's markets. Congress should 
move promptly to update our insider-trading law to reflect the 
reality of our markets--and to ensure that traders who take 
advantage of ordinary American investors are held accountable.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED FROM ROBERT J. 
                          JACKSON, JR.

Q.1. How would the Securities and Exchange Commission, Federal 
prosecutors, defense lawyers, the financial industry, and the 
American people all benefit if Congress were to finally define 
the standards for insider trading liability?

A.1. Our antiquated, judge-made insider trading laws are 
hopelessly out of step with modern stock markets. The result is 
that fraudsters have been able to avoid accountability for the 
harm they have caused investors, while honest market 
participants are confused about the basic rules of the road. 
This makes investors more hesitant to finance American 
companies than they would be if they were confident in the 
fairness of our markets, and analysts unsure about how they can 
legally do their work. \1\ Congressional action in this area 
would be beneficial for investors, insiders, and analysts 
alike.
---------------------------------------------------------------------------
     \1\ See, e.g., Merton H. Miller and Charles W. Upton, ``Strategies 
for Capital Market Structure and Regulation'', in Merton H. Miller, 
Financial Innovations and Market Volatility 127 (1991) (explaining that 
market makers will widen spreads in the presence of informed trading); 
Lawrence R. Glosten and Talis J. Putnins, ``Welfare Costs of Informed 
Trade'', (AFA San Francisco Meetings, 2016) (documenting welfare costs 
of informed trading).

Q.2. Why should a trader who trades based on their own 
information independently developed from publicly available 
sources have no fear of liability under the Insider Trading 
---------------------------------------------------------------------------
Prohibition Act?

A.2. None of the Act's prohibitions comes close to implicating 
investors who independently obtain information from public 
sources. The Act prohibits trading on the basis of information 
obtained or communicated ``wrongful[ly],'' that is, through 
``theft, conversion[ or] bribery,'' violations of Federal law 
protecting ``computer data'' or ``intellectual property,'' 
misappropriation, or breach of fiduciary duty. \2\ During years 
of experience as an investment banker, corporate lawyer, and 
regulator, I have not yet come upon an investor that properly 
uses tactics fitting those descriptions in connection with 
their research. \3\
---------------------------------------------------------------------------
     \2\ Insider Trading Prohibition Act, 117th Cong., S. 3990, Section 
2.
     \3\ Those opposing passage of the Act have repeatedly raised the 
concern that its prohibitions will ``chill vital information-
gathering.'' Bainbridge, supra note 20, at 243 n. 83 (quoting 167 Cong. 
Rec. H. 2462 (daily ed. May 18, 2021) (statement of Rep. Huzienga)). 
But I am unaware of an actual example of information-gathering to which 
the Act would apply that its opponents think it should not--save 
speculative claims that prosecutors will be ``tempted'' to make weak 
arguments under the Act that courts will readily reject. Id. at 236-37 
(suggesting that prosecutors will argue that information overheard in 
public was ``stolen'' or ``converted'' for purposes of the Act).

Q.3. How would the Insider Trading Prohibition Act resolve the 
current ambiguity regarding whether trading on information 
obtained through cybersecurity hacks constitutes illegal 
---------------------------------------------------------------------------
insider trading?

A.3. As the Committee knows, our public companies are in a 
constant battle to protect Americans' most private information 
from cyberattacks. \4\ And there is troubling evidence that 
hackers who succeed in stealing data also trade before the hack 
is known to the public--so that our markets help finance the 
very cyberattacks that our Government and companies are working 
so hard to prevent.
---------------------------------------------------------------------------
     \4\ SEC Commissioner Robert J. Jackson, Jr., ``Corporate 
Governance: On the Front Lines of America's Cyber War'' (March 15, 
2018) (in 2017, more than 90 percent of American public companies 
suffering a cybersecurity breach did not promptly disclose that fact to 
investors on securities filings).
---------------------------------------------------------------------------
    Most investors would expect these hackers to be held 
accountable for insider trading. But our antiquated, judge-made 
insider-trading law requires the Government to show that 
information was obtained in breach of a duty or by way of 
deception. Since many hackers attack not through deception but 
by brute-force tactics, trading on a successful hack may not be 
illegal under the insider-trading law we have today.
    The Insider Trading Prohibition Act would close this gap by 
specifying that trading on information obtained through a 
``violation of any Federal law protecting'' ``computer data'' 
or the ``intellectual property or privacy of computer users'' 
gives rise to liability under our securities laws. \5\ As 
practitioners have explained, this provision reflects the 
``most significant impact'' of the Act, and it is hard to see 
why Congress should not move swiftly to address the risk that 
hackers can profit from trading in this way. \6\
---------------------------------------------------------------------------
     \5\ Insider Trading Prohibition Act, 117th Cong., S. 3990, Section 
2.
     \6\ Davis Polk, ``Client Memorandum: House Passes Insider Trading 
Bill'' (May 25, 2021).
---------------------------------------------------------------------------
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
        SENATOR CORTEZ MASTO FROM ROBERT J. JACKSON, JR.

Q.1. Many bills concerning Congressional insider trading are 
being considered--I am cosponsor of Senator Ossoff's Ban 
Congressional Stock Trading Act. When evaluating these 
different bills, what should lawmakers primarily consider to 
ensure the language has the most foresight? And some lawmakers 
have diversified into digital assets-how should lawmakers 
consider stopping Congressional insider trading in those 
securities?

A.1. Thank you for your leadership regarding the restriction of 
trading by sitting Members of Congress. I agree with the 
overwhelming majority of Americans: Members must not be 
permitted to engage in trading on the basis of information 
obtained in connection with their work on behalf of the 
American public, and evidence of such trading undermines 
Americans' confidence in our markets and in Congress. \1\
---------------------------------------------------------------------------
     \1\ Karl Evers-Hillstrom, ``Three in Four Voters Support Banning 
Lawmakers From Trading Stocks: Poll'', The Hill (Jan. 6, 2022).
---------------------------------------------------------------------------
    By requiring Members to hold their assets in a qualified 
blind trust, the Ban Congressional Stock Trading Act seeks to 
put distance between Members and decisions regarding the 
acquisition or disposition of those assets. \2\ Drawing from 
our existing ethics laws, the Act would use the uniform system 
of qualified blind trusts to achieve that goal. \3\
---------------------------------------------------------------------------
     \2\ Ban Congressional Stock Trading Act of 2022, S. 3494, at 2; 
see also, Bud W. Jerke, ``Comment, Cashing in on Capitol Hill: Insider 
Trading and the Use of Political Intelligence for Profit'', 158 U. PA. 
L. Rev. 1451, 1452 (2010) (arguing for this approach over a decade 
ago).
     \3\ See Ethics in Government Act of 1978, Pub. L. 95-521, 5 U.S.C. 
app. 4 102(f)(3) et seq. (providing the definition, and procedure for 
certification, of qualified blind trusts).
---------------------------------------------------------------------------
    In theory, qualified blind trusts limit knowledge of the 
trust's assets and trading activity to the trustee. In 
practice, however, the history of qualified blind trusts, 
particularly in the legislative branch, raises questions 
whether those restrictions are consistently observed. \4\ In 
response to your question about how policymakers might 
anticipate concerns regarding future developments in this area, 
then, I note that the use of qualified blind trusts for this 
important purpose would rely heavily on the rules governing 
such trusts--and enforcement of those rules against both 
trustees and Members. Thus, lawmakers should consider whether 
modifications to those rules, and the procedures and resources 
for enforcing them, are necessary in order for qualified blind 
trusts to serve the purposes specified for them by the Act.
---------------------------------------------------------------------------
     \4\ See, e.g., Preventing Unfair Trading by Government Officials: 
Hearing Before the Subcomm. on Oversight and Investigations of the H. 
Comm. on Financial Services, 111th Cong. (2009) (proposed statement of 
Alan J. Ziobrowski, Robinson College of Business, Georgia State 
University), at 4-5 (noting that Members who have voluntarily placed 
assets in qualified blind trusts have not always observed these 
limitations, and contending that the ``rules [must] be tightened to 
clearly define a blind trust[,] making them absolutely blind''; see 
also Len Costa, ``A Wink and a Nod'', Legal Aff. (2006) (describing 
this history).
---------------------------------------------------------------------------
    Alternatively, Congress might consider drawing on the 
experience of certain public companies seeking to reduce the 
risk of opportunistic trading. Some companies, for example, 
require insiders to specify any purchases or sales of assets to 
occur in a given year irrevocably in advance and then divide 
those transactions equally over each trading day of the year, 
eliminating the discretion that gives rise to opportunistic 
trading. Alternatively, any trades might be specified well in 
advance and executed on a random date chosen by a third party. 
\5\ Although these approaches would have their own costs, they 
would avoid reliance on trustees to keep information about 
trading activity confidential from Members.
---------------------------------------------------------------------------
     \5\ See, e.g., M. Todd Henderson, ``Every CEO Should Follow Mark 
Zuckerberg's Stock-Trading Example'', Wall St. J. (Dec. 27, 2021) 
(documenting these practices).

Q.2. Judges have defined a fair bit of what constitutes 
information-sharing, insider trading from acceptable forms of 
data-gathering and research that are part of any healthy, 
functioning financial marketplace. How do you think the Insider 
Trading Prohibition Act clarifies these differences?
    What mechanisms need to be in place to ensure consistency 
and equality of enforcement?

A.2. The distinction between improperly obtained information 
and socially productive research is a famously fine one. \6\ As 
your question suggests, the courts have struggled with that 
distinction for generations. Since the principal authority for 
prohibiting insider trading is a Depression-era statute 
sounding in fraud, the courts have emphasized a breach of duty, 
or a deception, as a predicate for liability. The result is 
confusion that leaves both defendants and investors unclear 
about what the law is--which both discourages valuable research 
and raises questions among investors about the fairness of our 
markets.
---------------------------------------------------------------------------
     \6\ Henry G. Manne, ``Insider Trading and the Stock Market'' 
(1966); A.C. Pritchard, ``Justice Lewis F. Powell, Jr., and the 
Counterrevolution in the Federal Securities Laws'', 52 Duke L.J. 841, 
931 (2003).
---------------------------------------------------------------------------
    Under current law, for example, whether an insider who 
shares information with a trader is held liable depends on 
whether the insider received a personal benefit from tipping 
the trader. And whether such a benefit exists in any particular 
case is a subject on which judges often disagree. For example, 
the Second Circuit concluded in 2014 that a personal benefit 
must be ``objective, consequential, and represent[] at least a 
potential gain of a pecuniary or similarly valuable nature'' to 
sustain insider-trading liability. \7\ The next year, the Ninth 
Circuit came to the opposite conclusion in a similar case. \8\ 
Thus, for years defendants and investors had to do their work 
without knowing what the law of insider trading was. And that 
is regarding an insider-trading question that the Supreme Court 
eventually ``easily resolve[d].'' \9\
---------------------------------------------------------------------------
     \7\ United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014).
     \8\ United States v. Salman, 792 F.3d 1087 (9th Cir. 2015) 
(Rakoff, J., sitting by designation) (``To the extent Newman can be 
read to go so far, we decline to adopt it.''). To underscore the 
uncertainty under current law as to whether a personal benefit exists 
in any particular insider-trading case, I note that the author of the 
Ninth Circuit's Salman opinion ordinarily sits in the Southern District 
of New York, which is within the jurisdiction of the Second Circuit. 
That is: the law in this area is so unclear that a judge from the 
Second Circuit, sitting by designation in the Ninth Circuit, wrote an 
opinion declining to adopt the views of the Second Circuit.
     \9\ Salman v. United States, 580 U.S. 89, 94 (2016) (emphasis 
added); see also United States v. Blaszczak, 947 F.3d 19, 35 (2d Cir. 
2019) (declining to extend Newman to the fraud provisions of Title 18).
---------------------------------------------------------------------------
    The Insider Trading Prohibition Act makes clear that an 
insider who shares information for a ``direct or indirect 
personal benefit'' can be held liable for trading on the basis 
of that information. Contrary to concerns about the scope of a 
law that reaches those who reveal corporate secrets for 
``indirect'' benefits, the Act adopts the Supreme Court's view 
that payments for wrongdoing are not always rendered in cash. 
\10\ Whether insiders receive a check, or future employment, 
for divulging information is irrelevant to whether investors 
face a level playing field. It should be irrelevant to our 
insider-trading law, too.
---------------------------------------------------------------------------
     \10\ Salman, 580 U.S. at 94.
---------------------------------------------------------------------------
    During the hearing, I was puzzled that those expressing 
concerns about the scope of the Act omitted from their analysis 
the extensive due-process protections that insider-trading 
defendants enjoy--protections that most litigants can only 
envy. \11\ Before the SEC brings a civil enforcement action, 
the Commission's Staff must usually obtain a Formal Order of 
Investigation from the most senior officers of the agency. \12\
---------------------------------------------------------------------------
     \11\ For example, one article advocating against passage of 
Federal insider-trading legislation speculates that the statute would 
``likely'' expand the scope of liability because it will open new paths 
for ``aggressive prosecutors'' to pursue cases under novel theories. 
Stephen P. Bainbridge, ``A Critique of the Insider Trading Prohibition 
Act of 2021'', 2021 U. Ill. L. Rev. Online 231 (2022). Although the 
article describes these outcomes as ``likely'' on a dozen occasions, it 
makes no mention of the extensive procedural safeguards designed to 
address those concerns, so one cannot say what weight this critique 
gives to the institutional context in which these decisions are made. 
Id.
     \12\ Securities and Exchange Commission, Informal and Other 
Procedures, 17 CFR 202.5(d).
---------------------------------------------------------------------------
    Following an investigation, the Staff ordinarily gives the 
defendant and her counsel the opportunity to make written 
submissions directly to the Commissioners regarding the 
defendant's views of the Staff's allegations. \13\ Months or 
years later, the Staff may make a recommendation that the case 
be litigated or settled. \14\ And that action can only be 
adopted by a majority vote of the Commissioners themselves, 
usually following a closed Commission meeting in which the 
merits of the matter are discussed in detail. \15\
---------------------------------------------------------------------------
     \13\ Id.; see also, ``Securities and Exchange Commission Division 
of Enforcement Office of Chief Counsel'', Enforcement Manual 4 (2017). 
This process, known as providing a potential defendant with a ``Wells 
Notice,'' is named for John A. Wells, who oversaw an advisory committee 
charged with examining the ``due process implications of [SEC] 
enforcement practices.'' SEC, ``Advisory Committee on Enforcement 
Policies and Practices: Request For Comment'' (issued March 2, 1972). 
By rule, materials submitted by a defendant in response to a Wells 
Notice must be ``forwarded to the Commission in conjunction with a 
Staff memorandum.'' Securities and Exchange Commission, Informal and 
Other Procedures, 17 CFR 202.5(c).
     \14\ Robert Khuzami, Dir., Division of Enforcement, Testimony on 
Examining the Settlement Practices of U.S. Financial Regulators 
(testimony before Comm. on Fin. Servs. of the U.S. House of 
Representatives) (May 17, 2012) (noting that the investigative process 
usually takes ``months or years'' before producing a recommendation).
     \15\ Division of Enforcement Office of Chief Counsel, supra note 
21, at 23 (noting that Staff should be ``prepared to answer the 
questions that are likely to be asked by the Commissioners'' in such a 
meeting).
---------------------------------------------------------------------------
    These are important procedures that ensure that Commission 
action reflects close consideration of the facts of each case--
and they all occur before civil proceedings, to which 
additional procedural protections attach, commence. Procedures 
of this kind should give commentators comfort that the SEC's 
enforcement of the Act will reflect detailed analysis of each 
case by each Member of the Commission.

Q.3. As an SEC Commissioner, you provided ways to think about 
the problem of enforcing the laws against insider trading. Does 
the Insider Trading Prohibition Act address the issues you 
identified?

A.3. Yes. In particular, the Insider Trading Prohibition Act 
would ensure that hackers who steal Americans' data from 
publicly traded companies cannot profit from trading before the 
hack is known to the public. Under current law, it is unclear 
whether such trading would be actionable, because that law 
requires the Government to show that information was obtained 
in breach of a duty or by way of deception. Since many hackers 
attack not through deception but by brute-force tactics, 
trading on a successful hack may not be illegal under the 
outdated, judge-made law of insider trading we have today.
    While serving as an SEC Commissioner, I pointed this out 
along with Preet Bharara, the former U.S. Attorney for the 
Southern District of New York. We argued that ordinary 
investors would be astonished to discover that Federal 
securities law lets hackers profit from the destruction they 
cause. The Insider Trading Prohibition Act would close this 
gap, leaving no doubt that trading on the basis of information 
obtained through cyberattacks is prohibited by Federal 
securities law. Congress should act promptly to ensure that 
such trading cannot finance those who seek to steal Americans' 
most private information.
    Still, important gaps in our insider-trading law remain. As 
I noted at the hearing, foreign companies domiciled in 
countries like China and Russia now raise significant funds 
from American investors by listing on U.S. stock exchanges. 
\16\ Unlike executives at American corporations, however, 
insiders at foreign firms are not subject to immediate 
disclosure of transactions in their company's stock. So there 
is risk that foreign-firm insiders can take advantage of 
ordinary investors through opportunistic trading. \17\
---------------------------------------------------------------------------
     \16\ As a formal matter, these firms often list on U.S. Exchanges 
by way of American Depository Receipts or American Depository Shares, 
which generally represent an interest in the shares of a company 
domiciled outside the United States that have been deposited with a 
U.S. bank or trust.
     \17\ Under Section 16(a) of the Securities Exchange Act of 1934, 
officers and directors of U.S. public companies are required to 
publicly disclose certain transactions in their company's stock on the 
SEC's Form 4. In 2002, Congress passed the Sarbanes-Oxley Act, 
mandating that insiders at U.S. companies report their trades under 
Section 16(a) within 2 business days and file Form 4 electronically. 
U.S. Sec. and Exch. Comm'n, Final Rule, Ownership Reports and Trading 
by Officers, Directors and Principal Security Holders (2002). But the 
SEC exempted foreign private issuers from these requirements in an 
effort to encourage those issuers to list on U.S. exchanges. See Steven 
Davidoff, Rhetoric and Reality: A Historical Perspective on the 
Regulation of Foreign Private Issuers, 79 U. Cin. L. Rev. 619, 621 
(2011).
---------------------------------------------------------------------------
    In a paper recently featured in The Wall Street Journal, I 
worked with the Wharton School's Daniel Taylor and Bradford 
Lynch to study that question. \18\ Drawing on a unique dataset 
of tens of thousands of paper filings with the SEC describing 
sales of stock over a 5-year period, we analyzed whether 
foreign-firm insiders are able to avoid losses on their U.S.-
traded stocks by selling before prices fall. \19\
---------------------------------------------------------------------------
     \18\ Liz Hoffman, ``Chinese Executives Sell at the Right Time, 
Avoiding Billions in Losses'', Wall St. J. (April 5, 2022) (``Chinese 
corporate insiders have avoided billions of dollars in losses by making 
well-timed share sales over the past several years, according to an 
academic analysis of securities filings.'').
     \19\ See Robert J. Jackson, Jr., Bradford Lynch, and Daniel J. 
Taylor, ``Holding Foreign Insiders Accountable'' (April 2022).
---------------------------------------------------------------------------
    The results are striking. Our data show that foreign-firm 
insiders avoid substantial losses by selling shares shortly 
before stock-price declines. This activity is concentrated in 
firms domiciled in China and Russia. Indeed, when insiders of 
U.S.-listed Chinese companies sell shares, the median company's 
stock price falls by 23 percent during the 12 months following 
the sale; when insiders at Russian companies sell, the median 
firm's stock drops 21 percent over the next year. We estimate 
that insiders at Chinese-domiciled, U.S.-listed companies alone 
have avoided over $10 billion in losses as a result of well-
timed stock sales.
    That's why the Holding Foreign Insiders Accountable Act of 
2022, which was introduced in the Senate this month, is so 
important. The bill would require foreign-firm insiders to 
disclose their trades under the same rules that apply to 
executives at American companies. \20\ Allowing foreign firms 
to be less transparent about insider-trading activity than 
their U.S. counterparts is the kind of gap in our law that 
creates doubt as to whether our markets create the level 
playing field investors deserve. Congress should move promptly 
to close that gap.
---------------------------------------------------------------------------
     \20\ Holding Foreign Insiders Accountable Act of 2022, S. 4127, 
Section 2(a).

Q.4. Can insider knowledge gained from a corporate friend 
constitute insider trading under the Insider Trading 
---------------------------------------------------------------------------
Prohibition Act?

A.4. Yes; in particular, the Act specifies that trading on 
information conveyed by a corporate insider can give rise to 
insider-trading liability if the information is communicated 
wrongfully. The Act also makes clear that trading on 
information from a corporate tipper is prohibited if the tipper 
breaches her fiduciary duty to shareholders ``for a direct or 
indirect personal benefit.'' \21\
---------------------------------------------------------------------------
     \21\ Insider Trading Prohibition Act, 117th Cong., S. 3990, 
Section 2.
---------------------------------------------------------------------------
    Contrary to concerns about the scope of a law that reaches 
those who reveal corporate secrets for ``indirect'' benefits, 
the Act properly adopts the Supreme Court's commonsense view 
that payments for wrongdoing are not always rendered in cash. 
Rather than encourage insiders to reveal information for 
noncash consideration, the Act properly reaches insiders who 
choose to divulge secrets for personal gain.

Q.5. Can the hackers of corporate and investor databases face 
insider trading charges under the Insider Trading Prohibition 
Act?

A.5. Yes--and some of those hackers will escape liability under 
our insider-trading laws unless Congress acts. As your question 
suggests, there is troubling evidence that hackers who succeed 
in stealing data also trade before the hack is known to the 
public--so that our markets help finance the very cyberattacks 
that put Americans' privacy at risk.
    The Insider Trading Prohibition Act would close this gap by 
specifying that trading on information obtained through a 
``violation of any Federal law protecting'' ``computer data'' 
or the ``intellectual property or privacy of computer users'' 
gives rise to liability under our securities laws. \22\ As 
practitioners have explained, this provision reflects the 
``most significant impact'' of the Act, and it is hard to see 
why Congress should not move swiftly to address the risk that 
hackers can profit from trading in this way. \23\
---------------------------------------------------------------------------
     \22\ Insider Trading Prohibition Act, 117th Cong., S. 3990, 
Section 2.
     \23\ Davis Polk, ``Client Memorandum: House Passes Insider Trading 
Bill'' (May 25, 2021).

Q.6. Which of the Bharara Task Force recommendations requires 
---------------------------------------------------------------------------
Congressional action to implement?

A.6. The task force was comprised of a bipartisan group of 
securities-law experts from academia, private practice, and the 
judiciary, as well as former senior officials of both the SEC 
and the Department of Justice. The group studied submissions 
from the Financial Industry Regulatory Authority, the National 
Association of Criminal Defense Lawyers, and the U.S. Chamber 
Institute for Legal Reform.
    On the basis of these submissions, the task force 
unanimously concluded that ``[r]eform that simplifies, 
clarifies, and modernizes insider trading form is necessary and 
long overdue,'' and that action by Congress is ``the best 
vehicle for such reform.'' The task force was also unanimous in 
its view that, while other measures such as SEC rulemaking 
``could provide incremental benefits,'' ``any steps short of a 
new statute will continue to be burdened by the uncertainty 
that accompanies existing common law.'' \24\
---------------------------------------------------------------------------
     \24\ ``Report of the Bharara Task Force on Insider Trading 21'' 
(January 2020).
---------------------------------------------------------------------------
    I agree. Decades of judicial decisions have left the law of 
insider trading in a confused state that treats like cases 
differently on the basis of distinctions that make little 
economic sense. The reason, of course, is that the courts are 
interpreting a statute that makes no mention of insider 
trading, and so is a poor fit for this purpose. Both investors 
and insiders deserve to know what the law permits and what it 
prohibits with respect to trading on material nonpublic 
information, and at this stage only Congressional action can 
provide meaningful answers to those questions.

Q.7. The Bharara Task Force recommendation focused on 
``wrongful'' use of material nonpublic information, not 
exclusively on ``deception'' or ``fraud.'' Why is that 
distinction important?

A.7. Not all socially harmful insider trading involves fraud or 
deception. To see why, consider the case of a hacker who steals 
Americans' data from a publicly traded company. As this 
Committee knows, our companies are in a constant battle to 
protect themselves from hackers. There is troubling evidence 
that hackers who succeed in stealing data also trade before the 
hack is known to the public--so that our markets help finance 
the very cyberattacks that put Americans' privacy at risk.
    But not all hacking involves fraud or deception. Instead, 
many hackers attack our companies through brute-force tactics 
that simply overwhelm our defenses. So, as the Second Circuit 
has explained, it is not clear that under current law trading 
on information obtained in this way gives rise to insider-
trading liability. \25\ Yet such trading might finance socially 
counterproductive attacks on American companies. \26\
---------------------------------------------------------------------------
     \25\ SEC v. Dorozhko, 574 F.3d 42, 47 (2d Cir. 2009).
     \26\ Mitts and Talley, supra note 4, at 14.
---------------------------------------------------------------------------
    That's why it is so important that Congress make clear that 
``wrongful'' trading--which the Act defines to include trading 
on information obtained in violation of law protecting computer 
data--is prohibited. And that's why a Depression-era statute 
that prohibits fraud is poorly suited to address insider 
trading in modern American stock markets.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK FROM ROBERT 
                        J. JACKSON, JR.

Q.1. What are the medium and long-term ramifications on our 
capital markets by not having laws prohibiting insider trading 
written into statute?

A.1. The uncertainty created by our outdated, judge-made 
insider-trading law leads investors to question the fairness of 
our markets while leaving legitimate market participants unsure 
about the rules of the road. Congress' failure to act has often 
left ordinary investors asking whether financial markets are 
stacked in favor of those who skirt the rules--and invited 
questions about how analysts can do their jobs. This makes 
investors more hesitant to finance American companies than they 
would be if they were confident in the fairness of our markets, 
and analysts unsure about how they can legally do their work.

Q.2. Do other industries that trade in nonsecurities, such as 
energy, currencies, and agriculture commodities, experience 
insider trading perpetuated by bad actors? Would it be 
beneficial to ensure that insider trading statutes exist in 
these markets?

A.2. Yes: commodities markets experience trading on the basis 
of misappropriated confidential information--and that trading 
can harm investors. That's why Congress, in the Dodd-Frank Act, 
amended the Commodity Exchange Act to include Section 6(c)(1), 
which gives the U.S. Commodity Futures Trading Commission 
(CFTC) new enforcement authority mirroring the SEC's authority 
under Rule 10b-5. \1\
---------------------------------------------------------------------------
     \1\ See Dodd-Frank Wall Street Reform and Consumer Protection Act 
of 2010, Pub. L. No. 111-203, 124 Stat. 1376, (2010), 7 U.S.C. 
6c(a)(1); compare 17 CFR 180.1 with id. 240.10b-5.
---------------------------------------------------------------------------
    The SEC has pursued insider-trading cases under Rule 10b-5 
for more than a generation, producing the confused common law 
that risks harm for investors and insiders alike. By contrast, 
the CFTC's use of its enforcement authority under Section 
6(c)(1) is relatively new. The courts have only begun to 
identify the questions in this area that may require 
Congressional clarification. \2\ To the degree that such 
questions produce the kinds of consistent confusion that now 
characterizes insider-trading doctrine under our securities 
laws, further Congressional action may be warranted.
---------------------------------------------------------------------------
     \2\ See, e.g., CFTC v. Monex Credit Company, No. 18-55815 (9th 
Cir. 2019) (providing an analysis of the ``extent of [the CFTC's new 
enforcement] powers'' under Dodd-Frank).
---------------------------------------------------------------------------
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK FROM M. TODD 
                           HENDERSON

Q.1. What are the medium- and long-term ramifications on our 
capital markets by not having laws prohibiting insider trading 
written into statute?

A.1. Response not received in time for publication.

Q.2. Do other industries that trade in nonsecurities, such as 
energy, currencies, and agriculture commodities, experience 
insider trading perpetrated by bad actors? Would it be 
beneficial to ensure that insider trading statutes exist in 
these markets?

A.2. Response not received in time for publication.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK FROM DAVID R. 
                             BURTON

Q.1. What are the medium- and long-term ramifications on our 
capital markets by not having laws prohibiting insider trading 
written into statute?

A.1. Response not received in time for publication.

Q.2. Do other industries that trade in nonsecurities, such as 
energy, currencies, and agriculture commodities, experience 
insider trading perpetrated by bad actors? Would it be 
beneficial to ensure that insider trading statutes exist in 
these markets?

A.2. Response not received in time for publication.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM JOHN C. 
                          COFFEE, JR.

Q.1. Please provide any additional comments on the benefits of 
insider trading legislation.

A.1. During the April 5th hearings on the Insider Trading 
Prohibition Act, there was disagreement about the wisdom of the 
Act's inclusion of the ``personal benefit'' standard. The draft 
bill retains it, but others (such as the Bharara Task Force on 
Insider Trading) strongly recommended that it be deleted. This 
debate may seem abstract, but a recent example drives home its 
importance. The facts of a well-known case, United States v. 
Newman, 773 F.3d 438 (2nd Cir. 2014), illustrate how 
sophisticated hedge funds can evade the insider trading 
prohibition if the ``personal benefit'' requirement is 
retained. There, one portfolio manager at a hedge fund tipped 
another portfolio manager at a different hedge fund that he had 
learned from sources inside two companies that their soon-to-
be-announced earnings would be down. Both traded on this 
material nonpublic information, with one earning $4 million and 
the other earning $68 million--for a total of $72 million based 
on this exchange of material nonpublic information. This is 
modern, big-time insider trading, and the Insider Trading 
Prohibition Act would unfortunately permit these practices to 
continue.
    Both defendants in Newman were convicted after a 6-week 
trial at the district court, but their convictions were 
reversed by the Second Circuit, which found that the evidence 
was insufficient to show that the tippee paid or directed any 
personal benefit to the tipper for the information. Indeed, 
such payments will be rare to nonexistent because sophisticated 
traders (such as these) know better than to demand or pay any 
such benefit. Rather, they understand that reciprocity is 
expected. In effect, there is an implicit ``favor bank'' on 
Wall Street, which requires those seeking material information 
to exchange future tips in return for the tip that they just 
profited from. Norms of reciprocity are common in many 
industries, including the world of investment professionals. 
All understand that to get information you have to provide 
information: to receive it, you have to pay back later with a 
reciprocal tip. Illustrating this understanding is the fact 
that the inside information in Newman flowed from one hedge 
fund to another almost instantly upon receipt--without anyone 
seeking to negotiate a personal benefit.
    As a result, the Insider Trading Prohibition Act leaves a 
giant loophole because it will seldom (if ever) be the case 
that one sophisticated trader will be so stupid as to pay (or 
promise) a ``personal benefit'' to another trader. They have 
learned that ``personal benefit'' is the necessary critical 
element under existing insider trading law, which they can 
evade by not paying or promising such a benefit. Thus, in the 
Newman case, $72 million was made in a day by sophisticated 
parties who have found a way to outflank the law. The result is 
an unjustifiable disparity: smaller investors (or less 
sophisticated ones) can be convicted, but the giants escape 
liability.
    All this can be easily corrected (and the statute then 
passed) if the words ``for a direct or indirect personal 
benefit'' were deleted from proposed Section 16A(c)(1)(D). With 
this deletion, the proposed Act would be beneficial and would 
cure a variety of ambiguities under current law. Absent this 
deletion, the proposed Act would enable sophisticated hedge 
funds to continue to evade the law with impunity.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED FROM JOHN C. 
                          COFFEE, JR.

Q.1. How would the Insider Trading Prohibition Act help our 
courts reach more consistent and fair outcomes regarding what 
kind of conduct qualifies as illegal insider trading?

A.1. The Act does extend the law of insider trading desirably 
in a few new directions, most notably with respect to computer 
hacking and other forms of theft or embezzlement of 
information. A single statutory standard may also curb the 
tendency for different Circuits to create their own rules (as 
may have happened in decisions such as United States v. 
Martoma, 894 F.3d 64 (2nd Cir. 2017)).
    On the other hand, by continuing to recognize the 
``personal benefit'' standard in its Section 16A(c)(1)(D), this 
statute would permit hedge funds and other professional 
investors to engage in insider trading with impunity by simply 
not promising, paying, or requesting any personal benefit. All 
they need to do to escape liability is shown in United States 
v. Newman, 773 F.3d 438 (2nd Cir. 2014), where one hedge fund 
tipped another hedge fund about information that it had just 
learned from inside the company and the two funds made a total 
of $72 million in just a day of trading. Although the portfolio 
managers were prosecuted and convicted at the district court 
level, the Second Circuit overturned the conviction of the two 
portfolio managers on the grounds there was no evidence that 
they had received, paid or promised any personal benefit in 
return for the material information. As a result, sophisticated 
traders now know that they can exchange material nonpublic 
information, so long as they do not give or promise any 
personal benefit. They will continue to tip each other, 
however, because Wall Street resembles a ``favor bank'' in 
which you must make deposits of information in order to make 
withdrawals. Even if there may be an expectation of a future 
reciprocal tip, this is not enough to support a criminal 
conviction (where the proof must satisfy the ``beyond a 
reasonable doubt'' standard). Hence, the statute, as currently 
written, will encourage some sophisticated parties to persist 
in insider trading--and successfully.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
         SENATOR CORTEZ MASTO FROM JOHN C. COFFEE, JR.

Q.1. I am happy (indeed, enthusiastic) to endorse legislation 
to ``ban Congressional stock trading.'' I have not seen, 
however, the text of either your bill or Senator Warren's bill 
and am making no comparative assessment of them.
    Many bills concerning Congressional insider trading are 
being considered--I am a cosponsor of Senator Ossoffs (D-GA) 
``Ban Congressional Stock Trading Act''.
    When evaluating these different bills, what should 
lawmakers primarily consider to ensure the language has the 
most foresight?

A.1. You need to cover stock equivalents, including instruments 
such as ``total return'' swaps, single stock futures, all 
options, and other derivatives that match the performance of 
the security. Some of these equivalents will make a 
professional intermediary the record or beneficial holder of 
the instrument; this should not matter or provide a defense. Of 
course, the bill need not (and probably should not) cover index 
funds or broadly diversified mutual funds as it would be rare 
for material nonpublic information from any company to enable 
traders to profit on such broader funds. Conceivably there is a 
possibility that Members of Congress might invest in indexes or 
other diversified funds if they knew in advance what the 
Federal Reserve was about to do on interest rates; but this 
might be better addressed by the Federal Reserve, and there is 
to date no indication of such trading.

Q.2. What language must be necessary for these bills?

A.2. If you provide for criminal liability in your statute, a 
scienter standard must be specified. I would suggest 
``knowingly'' and would strongly advise against the use of a 
negligence standard for criminal liability. It is against the 
tradition of Anglo-American criminal law to provide for 
negligence-based criminal liability, and you would invite broad 
opposition on civil liberties grounds. In this light, you 
should also provide for civil liability where negligence can be 
used as the requisite standard. Here a variety of sanctions 
could be provided, including forfeiture of a portion of the 
Member of Congress' salary or other benefits, treble damages, 
and/or censure by Congress. It is also important to provide 
this disclosure of apparent violations not be delayed. If a 
Member of Congress were facing an impending election, the 
critical issue for such person might be to delay disclosure of 
the violation until after the election (in the belief that the 
voters would have forgotten the misconduct by the time of the 
next election). Thus, any allegation discovered by the staff 
for which they believe they have credible evidence should be 
promptly disclosed. One advantage of civil liability is that 
enforcement is much more likely and less costly.
    One last issue needs to be faced: should the proposed bill 
exempt Rule 10b5-1 plans (which permit corporate officers to 
give voting discretion to an intermediary who can then freely 
trade so long as it has not been tipped material nonpublic 
information). The analogy here would be to permit a Member of 
Congress to appoint a broker or bank as an agent who would 
trade a discretionary account. I would recommend against 
permitting Rule 10b5-1 plans to be so exempted, as recent 
experience has shown that executive officers who have 
established such plans receive a well above-market rate of 
return on them (suggesting that some material information is 
leaking to the agent).

Q.3. Some lawmakers have diversified into digital assets--how 
should lawmakers consider stopping Congressional insider 
trading in those securities?

A.3. If we are talking about cryptocurrencies here, I do not 
currently see the need to prohibit Members of Congress from 
investing or trading in them. Still, I might favor a more 
limited prohibition on the purchase of cryptos from a 
controlling person or affiliate of such a currency. There is 
considerable evidence that a few cryptocurrencies have been 
manipulated (for example, Tether). You may also be concerned 
that the founder of a currency wants to advertise it by showing 
that a Member of Congress invests in it. But this is a 
different problem from insider trading and involves the 
ethically dubious appearance of a Congressperson advertising 
for a product. My one concern about Members of Congress 
investing or trading in cryptos would be trading based on 
nonpublic knowledge about the Federal Reserve's intentions with 
respect to interest rates. To date, I am aware of no such 
example of trading in anticipation of Federal Reserve interest 
rate announcements, and thus it may be premature to legislate 
this broadly with respect to ownership of cryptos.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK FROM JOHN C. 
                          COFFEE, JR.

Q.1. What are the medium- and long-term ramifications on our 
capital markets by not having laws prohibiting insider trading 
written into statute?

A.1. Although we have long had SEC Rule 10b5 to combat insider 
trading, its coverage is imperfect and permits sophisticated 
traders to engage in insider trading with relative impunity so 
long as they do not give, receive, or promise any personal 
benefit. Currently, this ``personal benefit'' requirement is 
recognized and codified by proposed Section 16A(c)(1)(D), which 
unfortunately implies that the most sophisticated traders can 
find a way to lawfully engage in egregious insider trading. It 
would be very easy to delete the ``personal benefit'' 
requirement from the above Section, and then the statute would 
prescribe virtually all forms of trading that were based on 
material nonpublic information.
    If insider trading can persist so long as no personal 
benefit is given or promised, this will imply that ``agency 
costs'' in corporate governance will remain high because 
managers can secretly profit without disclosure. At bottom, 
most forms of insider trading involve a theft or embezzlement 
of information. Stealing is never efficient and always injures 
investors, but it could be largely precluded if the ``personal 
benefit'' standard were deleted from Section 16A(c)(1)(D).

Q.2. Do other industries that trade in nonsecurities, such as 
energy, currencies, and agriculture commodities, experience 
insider trading perpetrated by bad actors? Would it be 
beneficial to ensure that insider trading statutes exist in 
these markets?

A.2. Good question! There is little empirical data on the 
extent of informed trading in other markets. The Commodity 
Futures Trading Commission (CFTC) now has a recently revised 
statute that now precludes insider trading, but I am not aware 
of how often it has been used. In general, trading in the 
commodities markets is not on a firm-specific basis, and thus 
specific shareholders of a company are not prejudiced. 
Conceivably, there can be insider trading in cryptocurrency and 
related derivative markets, but generally the greater danger in 
these markets is market manipulation, which would require a 
different statute and probably can be prosecuted to some extent 
under existing law. Nonetheless, your question is a good one to 
which a thorough and adequate answer cannot today be given.
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