[House Report 115-891]
[From the U.S. Government Publishing Office]


115th Congress    }                                  {        Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                  {        115-891

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



 
       PROMOTING TRANSPARENT STANDARDS FOR CORPORATE INSIDERS ACT

                                _______
                                

 August 3, 2018.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 6320]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 6320) to require the Securities and Exchange 
Commission to carry out a study of Rule 10b5-1 trading plans, 
and for other purposes, having considered the same, report 
favorably thereon without amendment and recommend that the bill 
do pass.

                          PURPOSE AND SUMMARY

    On July 10, 2018, Representative Maxine Waters introduced 
H.R. 6320, the ``Promoting Transparent Standards for Corporate 
Insiders Act.'' The bill requires the U.S. Securities and 
Exchange Commission (SEC) to conduct a study as to whether SEC 
Rule 10b5-1 should be amended, as further described below, and, 
if so, to amend Rule 10b5-1, subject to notice and comment, in 
a manner consistent with the results of such study.
    Under Rule 10b5-1, directors and other major insiders of 
issuers registered under the Securities Exchange Act of 1934 
who have access to material nonpublic information are able to 
establish a written plan that details when they will be able to 
buy or sell shares at a predetermined time on a scheduled 
basis. The bill requires the SEC to consider whether certain 
types of amendments to Rule 10b5-1 would enhance the rule and 
directs the SEC to consider certain factors, including how any 
such amendments to Rule 10b5-1 would clarify and enhance 
existing prohibitions against insider trading, the impact of 
any such amendments on attracting candidates for insider 
positions, the impact on capital formation, and the effects on 
a company's willingness to operate as a public company.

                  BACKGROUND AND NEED FOR LEGISLATION

    In 2000, the SEC promulgated Rule 10b5-1 (``Rule''). Rule 
10b5-1 addresses the issue of when insider trading liability 
arises in connection with a trader's ``use'' or ``knowing 
possession'' of material nonpublic information. This rule 
provides that a person trades ``on the basis of'' material 
nonpublic information when the person purchases or sells 
securities while aware of the information. However, the rule 
also sets forth several affirmative defenses, to permit persons 
to trade in certain circumstances where it is clear that the 
information was not a factor in the decision to trade.
    ``Insider trading'' is a term subject to many definitions 
and connotations and it encompasses both legal and prohibited 
activity. Illegal insider trading refers generally to buying or 
selling a security, in breach of a fiduciary duty or other 
relationship of trust and confidence, while in possession of 
material, nonpublic information about the security. The Rule 
adopted by the SEC in 2000 gives corporate employees a means to 
buy and sell without fearing potential securities fraud 
charges. Under the rule, an insider can put in place a plan to 
trade company shares when the person does not have inside 
information. That allows a corporate employee to ``carry out 
those pre-planned transactions at a later time, even if they 
later become aware of material nonpublic information.''
    Some critics of the Rule as currently written argue 
insiders can maneuver around the Rule and trade on material, 
nonpublic information. Further, some observers have highlighted 
in the press notable trades by insiders that critics claim 
raise concerns regarding the efficacy of Rule 10b5-1 plans, and 
others have found that insiders may outperform other 
shareholders despite utilizing Rule 10b5-1 plans, which 
presumably operate in a manner to ensure that insiders are 
trading in a manner more consistent with shareholders who do 
not possess material nonpublic information. Nonetheless, as a 
general matter, Rule 10b5-1 serves an important function by 
providing greater clarity regarding what trades are presumed to 
have been made on the basis of material nonpublic information, 
while providing insiders with an affirmative defense where 
trades are executed pursuant to an establish Rule 10b5-1 plan. 
The SEC's adopting release for Rule 10b5-1 noted that ``the 
revised defense is designed to cover situations in which a 
person can demonstrate that the material nonpublic information 
was not a factor in the trading decision.'' Providing clarity 
regarding insider trading is important to our capital markets 
because equity compensation is the preferred way to reward 
executives and encourage performance, which means those 
rewarded with such shares must be able to sell them at 
appropriate times.
    Because Rule 10b5-1 became effective 2000, this bill 
directs the SEC to study whether amendments to Rule 10b5-1 are 
necessary. In particular, the SEC shall consider whether the 
Rule should be amended to, among other things: limit the 
ability of insiders to adopt a Rule 10b5-1 plan during the 
issuer's trading windows; limit the ability of insiders to 
adopt multiple, overlapping trading plans; establish a 
mandatory delay between adoption of the trading plan and 
execution of the first trade, and if so, whether such delay 
should be the same for trading plans adopted during the 
issuer's trading window as opposed to outside such window and 
whether any exceptions to such a delay are appropriate; limit 
the frequency of modifications or cancellations to trading 
plans; require insiders to file with the SEC trading plan 
adoptions, amendments, terminations, and transactions; and 
require boards of issuers who have adopted trading plans to 
adopt certain policies, periodically monitor trading plan 
transactions, and ensure that the issuer's policies discuss use 
of the plans in the context of equity hedging, holding, and 
ownership.
    At the time of the Rule's adoption in 2000, the SEC noted 
the following benefits, ``. . . the rule should increase 
investor confidence in the integrity and fairness of the market 
because it clarifies and strengthens existing insider trading 
law. Second, the rule will benefit corporate insiders by 
providing greater clarity and certainty on how they can plan 
and structure securities transactions.'' Some eighteen years 
later, it is appropriate to review the results of the Rule and 
to consider if amendments may be appropriate to consider how 
any amendments to Rule 10b5-1 clarify and enhance existing 
prohibitions against insider trading, the impacts of such 
amendments with regards to attracting candidates for insider 
positions, the impacts on capital formation, the effects on a 
company's willingness to operate as a public company, and any 
other considerations necessary and appropriate for the 
protection of investors. The bill directs the SEC to report to 
the House Financial Services Committee and Senate Banking 
Committee the findings of the study within one year of 
enactment. Additionally, if the SEC finds that amendments are 
necessary, the bill directs the SEC to revise Rule 10b5-1 
consistent with the results of the study, subject to public 
notice and comment.

                                HEARINGS

    The Committee on Financial Services held no hearings 
examining matters relating to H.R. 6320.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
July 11, 2018, and ordered H.R. 6321 to be reported favorably 
to the House by voice vote.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole vote was on a motion by Chairman Hensarling to report the 
bill favorably to the House without amendment. The motion was 
agreed to by voice vote, a quorum being present.

                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    PERFORMANCE GOALS AND OBJECTIVES

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 6320 
will mandate the SEC to conduct a study on SEC rule 10b5-1 in 
order to determine if the rule needs to be amended in order to 
better prevent insider trading.

   NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                 CONGRESSIONAL BUDGET OFFICE ESTIMATES

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, July 17, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3555, H.R. 6177, 
H.R. 6319, H.R. 6320, H.R. 6321, H.R. 6322, H.R. 6323, and H.R. 
6324.
    If you wish further details on these estimates, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                             Mark P. Hadley
                                        (For Keith Hall, Director).
    Enclosure.

Securities and Exchange Commission Legislation

    On July 11, the House Committee on Financial Services 
ordered eight bills to be reported related to the rules, 
regulations, and operations of the Securities and Exchange 
Commission (SEC). The bills are:
           H.R. 3555, the Exchange Regulatory 
        Improvement Act, would require the Securities and 
        Exchange Commission (SEC) to issue regulations 
        regarding its definition of what constitutes a facility 
        used by a national securities exchange;
           H.R. 6177, the Developing and Empowering our 
        Aspiring Leaders Act of 2018, would direct the SEC to 
        conduct a rulemaking to expand what types of asset 
        acquisitions are considered qualifying investments for 
        a venture capital fund;
           H.R. 6319, the Expanding Investment in Small 
        Business Act, would require the SEC to conduct a study 
        on the limitation on the amount of outstanding 
        securities a closed-end fund may hold from a single 
        issuer and still be classified as diversified;
           H.R. 6320, the Promoting Transparent 
        Standards for Corporate Insiders Act, would require the 
        SEC to conduct a study of various proposals to change 
        agency rules regarding the use of written trading plans 
        by certain securities traders;
           H.R. 6321, the Investment Adviser Regulatory 
        Flexibility Improvement Act, would require the SEC to 
        revise the definitions of a small business and small 
        organization applicable for assessing the effect of the 
        agency's rulemakings under the Investment Advisers Act 
        of 1940 on those entities;
           H.R. 6322, the Enhancing Multi-Class Share 
        Disclosures Act, would direct the SEC to issue a rule 
        requiring securities issuers with multi-class stock 
        structures to make disclosures regarding the voting 
        power of certain individuals;
           H.R. 6323, the National Senior Investor 
        Initiative Act of 2018, would direct the SEC to 
        establish a taskforce to identify challenges that 
        senior investors face and to report on its findings 
        every two years; and
           H.R. 6324, the Middle Market IPO 
        Underwriting Cost Act, would direct the SEC to study 
        the costs associated with small and medium-sized 
        companies undertaking an initial public offering and to 
        report on its findings.
    Using information from the SEC regarding the costs of 
similar activities, CBO estimates that implementing seven of 
those bills--H.R. 3555, H.R. 6177, H.R. 6319, H.R. 6320, H.R. 
6321, H.R. 6322, and H.R. 6324--would each have a gross cost of 
about $1 million for the agency to conduct the required studies 
and rulemakings and to issue reports. CBO estimates that 
implementing the eighth bill--H.R. 6323--would have a gross 
cost of $7 million over the 2019-2023 period for the SEC to 
establish and carry out the functions of the taskforce 
established under the bill.
    However, the SEC is authorized to collect fees sufficient 
to offset its annual appropriation; therefore, CBO estimates 
that the net effect on discretionary spending of implementing 
each of those bills would be negligible, assuming appropriation 
actions consistent with that authority. H.R. 6323 also would 
require the Government Accountability Office (GAO) to conduct a 
study on the economic costs of the financial exploitation of 
senior citizens and CBO estimates that implementing that 
section would cost GAO less than $500,000; such spending would 
be subject to the availability of appropriated funds.
    None of the bills would affect direct spending or revenues; 
therefore, pay-as-you-go procedures do not apply for any of the 
eight bills.
    None of the bills would increase net direct spending or on-
budget deficits in any of the four consecutive 10-year periods 
beginning in 2029, CBO estimates.
    None of the bills contain intergovernmental mandates as 
defined in the Unfunded Mandate Reform Act (UMRA) and would not 
affect the budgets of state, local, or tribal governments. All 
of them would require the SEC to take actions that could raise 
the agency's administrative costs and the fees it collects to 
offset those costs. If the SEC increased fees, it would 
increase the cost of an existing mandate on private entities 
required to pay those fees. CBO estimates that none of the 
bills would increase fees in an amount that would exceed the 
annual threshold for private-sector mandates established in 
UMRA ($160 million in 2018, adjusted annually for inflation).
    The CBO staff contacts for this estimate are Stephen Rabent 
(for federal costs) and Rachel Austin (for mandates). The 
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       FEDERAL MANDATES STATEMENT

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                      ADVISORY COMMITTEE STATEMENT

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  APPLICABILITY TO LEGISLATIVE BRANCH

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         EARMARK IDENTIFICATION

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    DUPLICATION OF FEDERAL PROGRAMS

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   DISCLOSURE OF DIRECTED RULEMAKING

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires no 
directed rulemakings within the meaning of such section.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This section cites H.R. 6320 as the ``Promoting Transparent 
Standards for Corporate Insiders Act.''

Section 2. SEC study

    This section cites that the SEC shall conduct a study of 
whether Rule 10b5-1 should be amended to more effectively 
regulate insider trading. It also requires the SEC to prepare a 
report to the Committee on Financial Services of the House of 
Representatives and the Committee on Banking, Housing, and 
Urban Affairs of the Senate and to revise the rule, subject to 
public notice and comment, consistent with the results of the 
study. If the SEC finds that no amendments are necessary, the 
Commission would not be expected to revise Rule 10b5-1.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows: H.R. 6320 does not 
repeal or amend any section of a statute. Therefore, the Office 
of Legislative Counsel did not prepare the report contemplated 
by Clause 3(e)(1)(B) of rule XIII of the Rules of the House of 
Representatives.

                                  [all]