[House Report 116-219]
[From the U.S. Government Publishing Office]


116th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    116-219

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



 
                    INSIDER TRADING PROHIBITION ACT

                                _______
                                

 September 27, 2019.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

         Ms. Waters, from the Committee on Financial Services, 
                        submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 2534]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 2534) to amend the Securities Exchange Act of 
1934 to prohibit certain securities trading and related 
communications by those who possess material, nonpublic 
information, having considered the same, report favorably 
thereon with an amendment and recommend that the bill as 
amended do pass.

                                CONTENTS

                                                                   Page
Purpose and Summary..............................................     3
Background and Need for Legislation..............................     3
Section-by-Section Analysis......................................     4
Hearings.........................................................     5
Committee Consideration..........................................     6
Committee Votes..................................................     6
Statement of Oversight Findings and Recommendations of the 
  Committee......................................................     6
Statement of Performance Goals and Objectives....................     6
New Budget Authority and CBO Cost Estimate.......................     6
Committee Cost Estimate..........................................     8
Unfunded Mandate Statement.......................................     8
Advisory Committee...............................................     8
Application of Law to the Legislative Branch.....................     8
Earmark Statement................................................     9
Duplication of Federal Programs..................................     9
Changes to Existing Law..........................................     9

89-006

    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1 SHORT TITLE.

  This Act may be cited as the ``Insider Trading Prohibition Act''.

SEC. 2. PROHIBITION ON INSIDER TRADING.

  (a) In General.--The Securities Exchange Act of 1934 (15 U.S.C. 78a 
et seq.) is amended by inserting after section 16 the following new 
section:

``SEC. 16A. PROHIBITION ON INSIDER TRADING.

  ``(a) Prohibition Against Trading Securities While in Possession of 
Material, Nonpublic Information.--It shall be unlawful for any person, 
directly or indirectly, to purchase, sell, or enter into, or cause the 
purchase or sale of or entry into, any security, security-based swap, 
or security-based swap agreement, while in possession of material, 
nonpublic information relating to such security, security-based swap, 
or security-based swap agreement, or relating to the market for such 
security, security-based swap, or security-based swap agreement, if 
such person knows, or recklessly disregards, that such information has 
been obtained wrongfully, or that such purchase or sale would 
constitute a wrongful use of such information.
  ``(b) Prohibition Against the Wrongful Communication of Certain 
Material, Nonpublic Information.--It shall be unlawful for any person 
whose own purchase or sale of a security, security-based swap, or entry 
into a security-based swap agreement would violate subsection (a) 
(referred to in this subsection as the `communicating person'), 
wrongfully to communicate material, nonpublic information relating to 
such security, security-based swap, or security-based swap agreement, 
or relating to the market for such security, security-based swap, or 
security-based swap agreement, to any other person if--
          ``(1) the other person--
                  ``(A) purchases, sells, or causes the purchase or 
                sale of, any security or security-based swap or enters 
                into or causes the entry into any security-based swap 
                agreement, to which such communication relates; or
                  ``(B) communicates the information to another person 
                who makes or causes such a purchase, sale, or entry 
                while in possession of such information; and
          ``(2) such a purchase, sale, or entry while in possession of 
        such information is reasonably foreseeable.
  ``(c) Standard and Knowledge Requirement.--
          ``(1) Standard.--For purposes of this section, trading while 
        in possession of material, nonpublic information under 
        subsection (a) or communicating material nonpublic information 
        under subsection (b) is wrongful only if the information has 
        been obtained by, or its communication or use would constitute, 
        directly or indirectly--
                  ``(A) theft, bribery, misrepresentation, or espionage 
                (through electronic or other means);
                  ``(B) a violation of any Federal law protecting 
                computer data or the intellectual property or privacy 
                of computer users;
                  ``(C) conversion, misappropriation, or other 
                unauthorized and deceptive taking of such information; 
                or
                  ``(D) a breach of any fiduciary duty, a breach of a 
                confidentiality agreement, a breach of contract, or a 
                breach of any other personal or other relationship of 
                trust and confidence.
          ``(2) Knowledge requirement.--It shall not be necessary that 
        the person trading while in possession of such information (as 
        proscribed by subsection (a)), or making the communication (as 
        proscribed by subsection (b)), knows the specific means by 
        which the information was obtained or communicated, or whether 
        any personal benefit was paid or promised by or to any person 
        in the chain of communication, so long as the person trading 
        while in possession of such information or making the 
        communication, as the case may be, was aware, consciously 
        avoided being aware, or recklessly disregarded that such 
        information was wrongfully obtained or communicated.
  ``(d) Derivative Liability.--Except as provided in section 20(a), no 
person shall be liable under this section solely by reason of the fact 
that such person controls or employs a person who has violated this 
section, if such controlling person or employer did not participate in, 
profit from, or directly or indirectly induce the acts constituting the 
violation of this section.
  ``(e) Exempted Transactions.--
          ``(1) In general.--The Commission may, by rule or by order, 
        exempt any person, security, or transaction, or any class of 
        persons, securities, or transactions, from any or all of the 
        provisions of this section, upon such terms and conditions as 
        it considers necessary or appropriate, if the Commission 
        determines that such action is not inconsistent with the 
        purposes of this section. The prohibitions of this section 
        shall not apply to any person who acts at the specific 
        direction of, and solely for the account of, a person whose own 
        securities trading, or communications of material, nonpublic 
        information, would be lawful under this section.
          ``(2) Automatic trading.--
                  ``(A) In general.--Not later than 180 days after the 
                date of the enactment of this section, the Commission 
                shall determine if any automatic trading transactions 
                should be exempted from any of the provisions of this 
                section and shall make such determination available to 
                the public, including on the website of the Commission.
                  ``(B) Interim application.--During the period between 
                the date of the enactment of this section and the date 
                on which the Commission makes a determination pursuant 
                to subparagraph (A), automatic trading transactions 
                shall be exempted from the provisions of this section.
                  ``(C) Automatic trading transaction defined.--For the 
                purposes of this paragraph, the term `automatic trading 
                transaction' means any purchase or sale of a security, 
                security-based swap, or security-based swap agreement 
                that--
                          ``(i) occurs automatically; or
                          ``(ii) is made pursuant to an advance 
                        election.''.
  (b) Conforming Amendments.--The Securities Exchange Act of 1934 (15 
U.S.C. 78a et seq.) is further amended--
          (1) in section 21(d)(2), by inserting ``, section 16A of this 
        title'' after ``section 10(b) of this title'';
          (2) in section 21A--
                  (A) in subsection (g)(1), by inserting ``and section 
                16A,'' after ``thereunder,''; and
                  (B) in subsection (h)(1), by inserting ``and section 
                16A,'' after ``thereunder,''; and
          (3) in section 21C(f), by inserting ``or section 16A,'' after 
        ``section 10(b)''.

                          Purpose and Summary

    H.R. 2534, the Insider Trading Act, sponsored by Rep. Jim 
Himes, formally codifies the prohibition against insider 
trading, creating a clear, consistent standard for both courts 
and market participants to follow. The bill largely codifies 
the existing case law on insider trading. However, the bill 
overturns a controversial judicially-imposed requirement that 
an individual who receives insider information know about the 
specific personal benefit received by the individual who 
discloses the information.\1\
---------------------------------------------------------------------------
    \1\See United States v. Newman, 773 F.3d 438 (2d Cir. 2014).
---------------------------------------------------------------------------

                  Background and Need for Legislation

    Insider trading is prosecuted under the general securities 
fraud section of the Securities Exchange Act of 1934.\2\ The 
definition of insider trading, which has been developed by the 
courts over several decades, refers to undisclosed trading on 
material, nonpublic corporate information by individuals who 
are under a duty of trust and confidence that prohibits them 
from using such information for their own personal gain.\3\ 
Individuals who are subject to this duty also may not disclose 
(or ``tip'') the information to outsiders (known as 
``tippees''), who then trade on the information themselves even 
though they know the information was wrongfully obtained. In 
this case, both the tipper and tippee may be liable. An 
insider's tip of confidential information to an outsider is a 
breach of the insider's duty if the insider ``personally will 
benefit, directly or indirectly, from his disclosure.''\4\
---------------------------------------------------------------------------
    \2\Section 10(b) of the Exchange Act [15 U.S.C. Sec. 78j(b)]; 17 
C.F.R. Sec. 240.10b-5.
    \3\See generally Chiarella v. United States, 445 U.S. 222, 226-230 
(1980); Dirks v. SEC, 463 U.S. 646, 653-654 (1983); Salman v. United 
States, No. 15-628, slip op. at 1 (2016); see also In re Cady, Roberts 
& Co., 40 S.E.C. 907 (1961).
    \4\Dirks, 463 U.S. at 662.
---------------------------------------------------------------------------
    In 2014 the Second Circuit held that even though a tippee 
may know that the information was wrongfully disclosed, the 
government must also prove that they knew about the specific 
personal benefit that the insiders received.\5\ This holding 
has made it significantly more difficult for the government to 
successfully prosecute insider trading cases. The bill would 
overturn this controversial court requirement and establish a 
clear, legislative standard for illegal insider trading.
---------------------------------------------------------------------------
    \5\See Newman, 773 F.3d at 452.
---------------------------------------------------------------------------
    During an April 4, 2019 hearing before the Subcommittee on 
Investor Protection, Entrepreneurship, and Capital Markets, 
Professor John Coffee of Columbia Law School testified that the 
bill ``expands liability in ways that should not be 
controversial.'' Representatives from Public Citizen and North 
American Securities Administrators Association (NASAA) both 
testified their strong support for the bill. The U.S. Chamber 
of Commerce expressed concerns that the bill could create a 
strict liability standard without any intent on the defendants' 
part and that it could ``outlaw'' the safe harbor for trades 
conducted through preestablished plans under Rule 10b5-1. The 
bill, as amended, does not impose strict liability, and instead 
requires defendants to know or recklessly disregard the fact 
that insider information was obtained illegally or that the 
trading would constitute wrongful use of the information. In 
addition, the bill clarifies that the safe harbor for insider 
trading plans is not repealed.

                      Section-by-Section Analysis


Section 1. Short title

    Section 1 states that the short title of the bill is the 
Insider Trading Prohibition Act.

Section 2. Prohibition on insider trading

    Subsection (a) amends the Securities Exchange Act of 1934 
to by adding a new section 16A.
    Subsection (a) of the new section 16A expressly prohibits 
any person from buying or selling, or causing the purchase or 
sale, of any security, security-based swap, or security-based 
swap agreement if the person knows or recklessly disregards 
that the information has been wrongfully obtained, or that a 
purchase or sale would constitute the wrongful use of that 
information.
    Subsection (b) of the new section 16A expressly prohibit 
persons covered by subsection (a) of the new section 16A from 
communicating certain material, nonpublic information to any 
other person if the other person (A) purchases or sells, or 
causes the purchase or sale of, any security, security-based 
swap, or security-based swap agreement or (B) communicates the 
information to another person who makes or causes such 
purchase, sale or entry while aware of such information, and 
such purchase, sale, or entry while aware of the information is 
reasonably foreseeable.
    Subsection (c) of the new section 16A provides certain 
standards and requirements. Paragraph (1) provides that trading 
while aware of material, nonpublic information or communicating 
this information is wrongful only if the information has been 
obtained by, or its communication or use would constitute 
(directly or indirectly): theft, bribery, misrepresentation, or 
espionage; a violation of any Federal law protecting computer 
data or intellectual property or privacy of computer users; the 
conversion, misappropriation, or deceptive taking of 
information; or a breach of a fiduciary duty, confidentiality 
agreement, contract, or other relationship of trust and 
confidence.
    Paragraph (2) of the new section 16A(c) establishes the 
bill's knowledge requirement. It provides that the knowledge 
requirement is satisfied so long as the person trading while 
aware of the information or making the communication was aware, 
recklessly disregarded being aware, or recklessly disregarded 
that the information was wrongfully obtained or communicated. 
The provision expressly states that it is not necessary that 
the person trading on or communicating the information know the 
specific means by which the information was obtained or 
communicated, or if there was any personal benefit that was 
paid or promised by or to any person in the chain of 
communication.
    Subsection (d) of the new section 16A provides that no 
person can be held liable for violating any provisions of this 
bill solely because the person controls or employs a person who 
violates the provisions of this bill, if such person or 
employer did not participate in, or directly or indirectly 
induce the acts constituting a violation of section 16A.
    Subsection (e) of the new section 16A provides the 
Securities and Exchange Commission with the authority to exempt 
any person, securities, transaction, or any class of persons, 
securities, or transactions from any or all provisions of this 
bill. It also provides an affirmative defense for any person 
who acts at the specific direction, and solely for the account 
of another person whose actions would be lawful under this 
section. Subsection (e) also provides authority for the SEC to 
exempt certain automatic trading transaction, including those 
that satisfy the requirements of Rule 10b-5-1.
    Subsection (b) of Section 2 makes certain conforming 
amendments

                                Hearings

    The Committee on Financial Services held a hearing on April 
3, 2019 entitled, ``Putting Investors First: Reviewing 
Proposals to Hold Executives Accountable,'' examining matters 
related to holding public company executives accountable to 
both investors and the general public, including H.R. 2534. 
Testifying before the Subcommittee was Professor John Coffee, 
Adolf A. Berle Professor of Law and Director of the Center on 
Corporate Governance at Columbia Law School; Melanie Lubin, 
Maryland Securities Commissioner (on behalf of the North 
American Securities Administrators Association); Remington A. 
Gregg, Counsel for Civil Justice and Consumer Rights, Public 
Citizen; and Tom Quaadman, Vice President, U.S. Chamber Center 
for Capital Markets Competitiveness, Chamber of Commerce of the 
United States of America.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
May 8, 2019 and ordered H.R. 2534 be reported favorably to the 
House by a voice vote.

                  Committee Votes and Roll Call Votes

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the Committee advises there were 
no roll call votes on H.R. 2534.

  Statement of Oversight Findings and Recommendations of the Committee

    In compliance with clause 3(c)(1) of rule XIII and clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
the Committee's oversight findings and recommendations are 
reflected in the descriptive portions of this report.

             Statement of Performance Goals and Objectives

    Pursuant to clause (3)(c) of rule XIII of the Rules of the 
House of Representatives, the goals of H.R. 2534 are to codify 
insider trading prohibitions that are currently contained in 
case law.

               New Budget Authority and CBO Cost Estimate

    Pursuant to clause 3(c)(2) of rule XIII of the Rules of the 
House of Representatives and section 308(a) of the 
Congressional Budget Act of 1974, and pursuant to clause 
3(c)(3) of rule XIII of the Rules of the House of 
Representatives and section 402 of the Congressional Budget Act 
of 1974, the Committee has received the following estimate for 
H.R. 2534 from the Director of the Congressional Budget Office:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 19, 2019.
Hon. Maxine Waters,
Chairwoman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Madam Chairwoman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2534, the Insider 
Trading Prohibition Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is David Hughes.
            Sincerely,
                                         Phillip L. Swagel,
                                                          Director.
    Enclosure.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    H.R. 2534 would define and prohibit illegal insider 
trading.\1\ It also would prohibit instances in which one 
person wrongfully communicates nonpublic, material information 
to another person in connection with securities trading, 
regardless of whether or not a payment or a promised personal 
benefit was involved. Under H.R. 2534, the Securities and 
Exchange Commission (SEC) would determine if the new insider 
trading prohibitions also apply to automated security-trading 
transactions.
---------------------------------------------------------------------------
    \1\According to the Securities and Exchange Commission, ``illegal 
insider trading refers generally to buying or selling a security, in 
breach of a fiduciary duty or other relationship of trust and 
confidence, on the basis of material, nonpublic information about the 
security.''
---------------------------------------------------------------------------
    Current law prohibits the use of ``any manipulative or 
deceptive device or contrivance'' when trading securities.\2\ 
Likewise, federal regulations prohibit people from engaging in 
``any act, practice, or course of business which operates . . . 
as a fraud or deceit'' in connection with securities 
trading.\3\ To date, the SEC has used those general anti-fraud 
provisions, informed by judicial decisions and case law, to 
prosecute instances of illegal insider trading.
---------------------------------------------------------------------------
    \2\15 U.S. Code 78j.
    \3\17 CFR 240.10b-5.
---------------------------------------------------------------------------
    CBO expects that H.R. 2534 would expand the SEC's authority 
to prosecute unlawful insider traders. The SEC might commence 
more enforcement actions and impose additional penalties if 
illegal insider trading continued at the same rate following 
enactment; but the agency would probably commence fewer 
enforcement actions if enactment of H.R. 2534 deterred illegal 
insider trading.
    Under current law, the SEC is authorized to collect fees 
sufficient to offset its annual appropriation; therefore, CBO 
estimates that any net effect on discretionary spending would 
be negligible, assuming appropriation actions consistent with 
that authority.
    Also under current law, people found guilty of illegal 
insider trading are subject to criminal and civil penalties, 
which are recorded in the federal budget as revenues. CBO 
estimates that revenue collections and associated direct 
spending of criminal penalties would not significantly change 
under the bill.
    H.R. 2534 contains private-sector mandates as defined in 
the Unfunded Mandates Reform Act (UMRA). However, CBO cannot 
estimate whether the cost of those mandates would exceed the 
threshold established in UMRA ($164 million in 2019, adjusted 
annually for inflation).
    H.R. 2534 would exempt employers from liability for insider 
trading solely for employing a person who has violated the new 
prohibitions in the bill. This exemption would be a mandate 
under UMRA because it would remove a private right of action. 
Further, the SEC would be allowed to exempt a person, 
transaction, or security from requirements in the bill, thereby 
shielding additional entities from liability. The cost of the 
mandate would be the foregone net value of awards and 
settlements that would have been granted for such claims in the 
absence of the bill. CBO cannot estimate the number of suits 
that would have been brought or the amount of potential forgone 
settlements, and, therefore, cannot determine whether the cost 
would exceed UMRA's annual private-sector threshold.
    If the SEC increased fees to offset the costs associated 
with implementing the bill, H.R. 2534 would increase the cost 
of an existing mandate on private entities required to pay 
those assessments. CBO estimates that the incremental cost of 
the mandate would be very small.
    H.R. 2534 contains no intergovernmental mandates as defined 
in UMRA.
    The CBO staff contacts for this estimate are David Hughes 
(for federal costs) and Rachel Austin (for mandates). The 
estimate was reviewed by Theresa Gullo, Assistant Director for 
Budget Analysis.

                        Committee Cost Estimate

    Clause 3(d)(1) of rule XIII of the Rules of the House of 
Representatives requires an estimate and a comparison of the 
costs that would be incurred in carrying out H.R. 2534. 
However, clause 3(d)(2)(B) of that rule provides that this 
requirement does not apply when the committee has included in 
its report a timely submitted cost estimate of the bill 
prepared by the Director of the Congressional Budget Office 
under section 402 of the Congressional Budget Act.

                       Unfunded Mandate Statement

    Pursuant to Section 423 of the Congressional Budget and 
Impoundment Control Act (as amended by Section 101(a)(2) of the 
Unfunded Mandates Reform Act, Pub. L. 104-4), the Committee 
adopts as its own the estimate of federal mandates regarding 
H.R. 2534, as amended, prepared by the Director of the 
Congressional Budget Office.

                           Advisory Committee

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

              Application of Law to the Legislative Branch

    Pursuant to section 102(b)(3) of the Congressional 
Accountability Act, Pub. L. No. 104-1, H.R. 2534, as amended, 
does not apply to terms and conditions of employment or to 
access to public services or accommodations within the 
legislative branch.

                           Earmark Statement

    In accordance with clause 9 of rule XXI of the Rules of the 
House of Representatives, H.R. 2534 does not contain any 
congressional earmarks, limited tax benefits, or limited tariff 
benefits as described in clauses 9(e), 9(f), and 9(g) of rule 
XXI.

                    Duplication of Federal Programs

    Pursuant to clause 3(c)(5) of rule XIII of the Rules of the 
House of Representatives, the Committee states that no 
provision of H.R. 2534 establishes or reauthorizes a program of 
the Federal Government known to be duplicative of another 
federal program, a program that was included in any report from 
the Government Accountability Office to Congress pursuant to 
section 21 of Public Law 111-139, or a program related to a 
program identified in the most recent Catalog of Federal 
Domestic Assistance.

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, H.R. 2534, as reported, are shown as follows:

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

                    SECURITIES EXCHANGE ACT OF 1934

TITLE I--REGULATION OF SECURITIES EXCHANGES

           *       *       *       *       *       *       *


SEC. 16A. PROHIBITION ON INSIDER TRADING.

  (a) Prohibition Against Trading Securities While in 
Possession of Material, Nonpublic Information.--It shall be 
unlawful for any person, directly or indirectly, to purchase, 
sell, or enter into, or cause the purchase or sale of or entry 
into, any security, security-based swap, or security-based swap 
agreement, while in possession of material, nonpublic 
information relating to such security, security-based swap, or 
security-based swap agreement, or relating to the market for 
such security, security-based swap, or security-based swap 
agreement, if such person knows, or recklessly disregards, that 
such information has been obtained wrongfully, or that such 
purchase or sale would constitute a wrongful use of such 
information.
  (b) Prohibition Against the Wrongful Communication of Certain 
Material, Nonpublic Information.--It shall be unlawful for any 
person whose own purchase or sale of a security, security-based 
swap, or entry into a security-based swap agreement would 
violate subsection (a) (referred to in this subsection as the 
`communicating person'), wrongfully to communicate material, 
nonpublic information relating to such security, security-based 
swap, or security-based swap agreement, or relating to the 
market for such security, security-based swap, or security-
based swap agreement, to any other person if--
          (1) the other person--
                  (A) purchases, sells, or causes the purchase 
                or sale of, any security or security-based swap 
                or enters into or causes the entry into any 
                security-based swap agreement, to which such 
                communication relates; or
                  (B) communicates the information to another 
                person who makes or causes such a purchase, 
                sale, or entry while in possession of such 
                information; and
          (2) such a purchase, sale, or entry while in 
        possession of such information is reasonably 
        foreseeable.
  (c) Standard and Knowledge Requirement.--
          (1) Standard.--For purposes of this section, trading 
        while in possession of material, nonpublic information 
        under subsection (a) or communicating material 
        nonpublic information under subsection (b) is wrongful 
        only if the information has been obtained by, or its 
        communication or use would constitute, directly or 
        indirectly--
                  (A) theft, bribery, misrepresentation, or 
                espionage (through electronic or other means);
                  (B) a violation of any Federal law protecting 
                computer data or the intellectual property or 
                privacy of computer users;
                  (C) conversion, misappropriation, or other 
                unauthorized and deceptive taking of such 
                information; or
                  (D) a breach of any fiduciary duty, a breach 
                of a confidentiality agreement, a breach of 
                contract, or a breach of any other personal or 
                other relationship of trust and confidence.
          (2) Knowledge requirement.--It shall not be necessary 
        that the person trading while in possession of such 
        information (as proscribed by subsection (a)), or 
        making the communication (as proscribed by subsection 
        (b)), knows the specific means by which the information 
        was obtained or communicated, or whether any personal 
        benefit was paid or promised by or to any person in the 
        chain of communication, so long as the person trading 
        while in possession of such information or making the 
        communication, as the case may be, was aware, 
        consciously avoided being aware, or recklessly 
        disregarded that such information was wrongfully 
        obtained or communicated.
  (d) Derivative Liability.--Except as provided in section 
20(a), no person shall be liable under this section solely by 
reason of the fact that such person controls or employs a 
person who has violated this section, if such controlling 
person or employer did not participate in, profit from, or 
directly or indirectly induce the acts constituting the 
violation of this section.
  (e) Exempted Transactions.--
          (1) In general.--The Commission may, by rule or by 
        order, exempt any person, security, or transaction, or 
        any class of persons, securities, or transactions, from 
        any or all of the provisions of this section, upon such 
        terms and conditions as it considers necessary or 
        appropriate, if the Commission determines that such 
        action is not inconsistent with the purposes of this 
        section. The prohibitions of this section shall not 
        apply to any person who acts at the specific direction 
        of, and solely for the account of, a person whose own 
        securities trading, or communications of material, 
        nonpublic information, would be lawful under this 
        section.
          (2) Automatic trading.--
                  (A) In general.--Not later than 180 days 
                after the date of the enactment of this 
                section, the Commission shall determine if any 
                automatic trading transactions should be 
                exempted from any of the provisions of this 
                section and shall make such determination 
                available to the public, including on the 
                website of the Commission.
                  (B) Interim application.--During the period 
                between the date of the enactment of this 
                section and the date on which the Commission 
                makes a determination pursuant to subparagraph 
                (A), automatic trading transactions shall be 
                exempted from the provisions of this section.
                  (C) Automatic trading transaction defined.--
                For the purposes of this paragraph, the term 
                ``automatic trading transaction'' means any 
                purchase or sale of a security, security-based 
                swap, or security-based swap agreement that--
                          (i) occurs automatically; or
                          (ii) is made pursuant to an advance 
                        election.

           *       *       *       *       *       *       *


        investigations; injunctions and prosecution of offenses

  Sec. 21. (a)(1) The Commission may, in its discretion, make 
such investigations as it deems necessary to determine whether 
any person has violated, is violating, or is about to violate 
any provision of this title, the rules or regulations 
thereunder, the rules of a national securities exchange or 
registered securities association of which such person is a 
member or a person associated, or, as to any act or practice, 
or omission to act, while associated with a member, formerly 
associated with a member, the rules of a registered clearing 
agency in which such person is a participant, or, as to any act 
or practice, or omission to act, while a participant, was a 
participant, the rules of the Public Company Accounting 
Oversight Board, of which such person is a registered public 
accounting firm, a person associated with such a firm, or, as 
to any act, practice, or omission to act, while associated with 
such firm, a person formerly associated with such a firm, or 
the rules of the Municipal Securities Rulemaking Board, and may 
require or permit any person to file with it a statement in 
writing, under oath or otherwise as the Commission shall 
determine, as to all the facts and circumstances concerning the 
matter to be investigated. The Commission is authorized in its 
discretion, to publish information concerning any such 
violations, and to investigate any facts, conditions, 
practices, or matters which it may deem necessary or proper to 
aid in the enforcement of such provisions, in the prescribing 
of rules and regulations under this title, or in securing 
information to serve as a basis for recommending further 
legislation concerning the matters to which this title relates.
  (2) On request from a foreign securities authority, the 
Commission may provide assistance in accordance with this 
paragraph if the requesting authority states that the 
requesting authority is conducting an investigation which it 
deems necessary to determine whether any person has violated, 
is violating, or is about to violate any laws or rules relating 
to securities matters that the requesting authority administers 
or enforces. The Commission may, in its discretion, conduct 
such investigation as the Commission deems necessary to collect 
information and evidence pertinent to the request for 
assistance. Such assistance may be provided without regard to 
whether the facts stated in the request would also constitute a 
violation of the laws of the United States. In deciding whether 
to provide such assistance, the Commission shall consider 
whether (A) the requesting authority has agreed to provide 
reciprocal assistance in securities matters to the Commission; 
and (B) compliance with the request would prejudice the public 
interest of the United States.
  (b) For the purpose of any such investigation, or any other 
proceeding under this title, any member of the Commission or 
any officer designated by it is empowered to administer oaths 
and affirmations, subpoena witnesses, compel their attendance, 
take evidence, and require the production of any books, papers, 
correspondence, memoranda, or other records which the 
Commission deems relevant or material to the inquiry. Such 
attendance of witnesses and the production of any such records 
may be required from any place in the United States or any 
State at any designated place of hearing.
  (c) In case of contumacy by, or refusal to obey a subpoena 
issued to, any person, the Commission may invoke the aid of any 
court of the United States within the jurisdiction of which 
such investigation or proceeding is carried on, or where such 
person resides or carries on business, in requiring the 
attendance and testimony of witnesses and the production of 
books, papers, correspondence, memoranda, and other records. 
And such court may issue an order requiring such person to 
appear before the Commission or member or officer designated by 
the Commission, there to produce records, if so ordered, or to 
give testimony touching the matter under investigation or in 
question; and any failure to obey such order of the court may 
be punished by such court as a contempt thereof. All process in 
any such case may be served in the judicial district whereof 
such person is an inhabitant or wherever he may be found. Any 
person who shall, without just cause, fail or refuse to attend 
and testify or to answer any lawful inquiry or to produce 
books, papers, correspondence, memoranda, and other records, if 
in his power so to do, in obedience to the subpoena of the 
Commission, shall be guilty of a misdemeanor and, upon 
conviction, shall be subject to a fine of not more than $1,000 
or to imprisonment for a term of not more than one year, or 
both.
  (d)(1) Whenever it shall appear to the Commission that any 
person is engaged or is about to engage in acts or practices 
constituting a violation of any provision of this title, the 
rules or regulations thereunder, the rules of a national 
securities exchange or registered securities association of 
which such person is a member or a person associated with a 
member, the rules of a registered clearing agency in which such 
person is a participant, the rules of the Public Company 
Accounting Oversight Board, of which such person is a 
registered public accounting firm or a person associated with 
such a firm, or the rules of the Municipal Securities 
Rulemaking Board, it may in its discretion bring an action in 
the proper district court of the United States, the United 
States District Court for the District of Columbia, or the 
United States courts of any territory or other place subject to 
the jurisdiction of the United States, to enjoin such acts or 
practices, and upon a proper showing a permanent or temporary 
injunction or restraining order shall be granted without bond. 
The Commission may transmit such evidence as may be available 
concerning such acts or practices as may constitute a violation 
of any provision of this title or the rules or regulations 
thereunder to the Attorney General, who may, in his discretion, 
institute the necessary criminal proceedings under this title.
  (2) Authority of a Court To Prohibit Persons From Serving as 
Officers and Directors.--In any proceeding under paragraph (1) 
of this subsection, the court may prohibit, conditionally or 
unconditionally, and permanently or for such period of time as 
it shall determine, any person who violated section 10(b) of 
this title, section 16A of this title or the rules or 
regulations thereunder from acting as an officer or director of 
any issuer that has a class of securities registered pursuant 
to section 12 of this title or that is required to file reports 
pursuant to section 15(d) of this title if the person's conduct 
demonstrates unfitness to serve as an officer or director of 
any such issuer.
  (3) Money Penalties in Civil Actions.--
          (A) Authority of commission.--Whenever it shall 
        appear to the Commission that any person has violated 
        any provision of this title, the rules or regulations 
        thereunder, or a cease-and-desist order entered by the 
        Commission pursuant to section 21C of this title, other 
        than by committing a violation subject to a penalty 
        pursuant to section 21A, the Commission may bring an 
        action in a United States district court to seek, and 
        the court shall have jurisdiction to impose, upon a 
        proper showing, a civil penalty to be paid by the 
        person who committed such violation.
          (B) Amount of penalty.--
                  (i) First tier.--The amount of the penalty 
                shall be determined by the court in light of 
                the facts and circumstances. For each 
                violation, the amount of the penalty shall not 
                exceed the greater of (I) $5,000 for a natural 
                person or $50,000 for any other person, or (II) 
                the gross amount of pecuniary gain to such 
                defendant as a result of the violation.
                  (ii) Second tier.--Notwithstanding clause 
                (i), the amount of penalty for each such 
                violation shall not exceed the greater of (I) 
                $50,000 for a natural person or $250,000 for 
                any other person, or (II) the gross amount of 
                pecuniary gain to such defendant as a result of 
                the violation, if the violation described in 
                subparagraph (A) involved fraud, deceit, 
                manipulation, or deliberate or reckless 
                disregard of a regulatory requirement.
                  (iii) Third tier.--Notwithstanding clauses 
                (i) and (ii), the amount of penalty for each 
                such violation shall not exceed the greater of 
                (I) $100,000 for a natural person or $500,000 
                for any other person, or (II) the gross amount 
                of pecuniary gain to such defendant as a result 
                of the violation, if--
                          (aa) the violation described in 
                        subparagraph (A) involved fraud, 
                        deceit, manipulation, or deliberate or 
                        reckless disregard of a regulatory 
                        requirement; and
                          (bb) such violation directly or 
                        indirectly resulted in substantial 
                        losses or created a significant risk of 
                        substantial losses to other persons.
          (C) Procedures for collection.--
                  (i) Payment of penalty to treasury.--A 
                penalty imposed under this section shall be 
                payable into the Treasury of the United States, 
                except as otherwise provided in section 308 of 
                the Sarbanes-Oxley Act of 2002 and section 21F 
                of this title.
                  (ii) Collection of penalties.--If a person 
                upon whom such a penalty is imposed shall fail 
                to pay such penalty within the time prescribed 
                in the court's order, the Commission may refer 
                the matter to the Attorney General who shall 
                recover such penalty by action in the 
                appropriate United States district court.
                  (iii) Remedy not exclusive.--The actions 
                authorized by this paragraph may be brought in 
                addition to any other action that the 
                Commission or the Attorney General is entitled 
                to bring.
                  (iv) Jurisdiction and venue.--For purposes of 
                section 27 of this title, actions under this 
                paragraph shall be actions to enforce a 
                liability or a duty created by this title.
          (D) Special provisions relating to a violation of a 
        cease-and-desist order.--In an action to enforce a 
        cease-and-desist order entered by the Commission 
        pursuant to section 21C, each separate violation of 
        such order shall be a separate offense, except that in 
        the case of a violation through a continuing failure to 
        comply with the order, each day of the failure to 
        comply shall be deemed a separate offense.
          (4) Prohibition of attorneys' fees paid from 
        commission disgorgement funds.--Except as otherwise 
        ordered by the court upon motion by the Commission, or, 
        in the case of an administrative action, as otherwise 
        ordered by the Commission, funds disgorged as the 
        result of an action brought by the Commission in 
        Federal court, or as a result of any Commission 
        administrative action, shall not be distributed as 
        payment for attorneys' fees or expenses incurred by 
        private parties seeking distribution of the disgorged 
        funds.
  (5) Equitable Relief.--In any action or proceeding brought or 
instituted by the Commission under any provision of the 
securities laws, the Commission may seek, and any Federal court 
may grant, any equitable relief that may be appropriate or 
necessary for the benefit of investors.
  (6) Authority of a court to prohibit persons from 
participating in an offering of penny stock.--
          (A) In general.--In any proceeding under paragraph 
        (1) against any person participating in, or, at the 
        time of the alleged misconduct who was participating 
        in, an offering of penny stock, the court may prohibit 
        that person from participating in an offering of penny 
        stock, conditionally or unconditionally, and 
        permanently or for such period of time as the court 
        shall determine.
          (B) Definition.--For purposes of this paragraph, the 
        term ``person participating in an offering of penny 
        stock'' includes any person engaging in activities with 
        a broker, dealer, or issuer for purposes of issuing, 
        trading, or inducing or attempting to induce the 
        purchase or sale of, any penny stock. The Commission 
        may, by rule or regulation, define such term to include 
        other activities, and may, by rule, regulation, or 
        order, exempt any person or class of persons, in whole 
        or in part, conditionally or unconditionally, from 
        inclusion in such term.
  (e) Upon application of the Commission the district courts of 
the United States and the United States courts of any territory 
or other place subject to the jurisdiction of the United States 
shall have jurisdiction to issue writs of mandamus, 
injunctions, and orders commanding (1) any person to comply 
with the provisions of this title, the rules, regulations, and 
orders thereunder, the rules of a national securities exchange 
or registered securities association of which such person is a 
member or person associated with a member, the rules of a 
registered clearing agency in which such person is a 
participant, the rules of the Public Company Accounting 
Oversight Board, of which such person is a registered public 
accounting firm or a person associated with such a firm, the 
rules of the Municipal Securities Rulemaking Board, or any 
undertaking contained in a registration statement as provided 
in subsection (d) of section 15 of this title, (2) any national 
securities exchange or registered securities association to 
enforce compliance by its members and persons associated with 
its members with the provisions of this title, the rules, 
regulations, and orders thereunder, and the rules of such 
exchange or association, or (3) any registered clearing agency 
to enforce compliance by its participants with the provisions 
of the rules of such clearing agency.
  (f) Notwithstanding any other provision of this title, the 
Commission shall not bring any action pursuant to subsection 
(d) or (e) of this section against any person for violation of, 
or to command compliance with, the rules of a self-regulatory 
organization or the Public Company Accounting Oversight Board 
unless it appears to the Commission that (1) such self-
regulatory organization or the Public Company Accounting 
Oversight Board is unable or unwilling to take appropriate 
action against such person in the public interest and for the 
protection of investors, or (2) such action is otherwise 
necessary or appropriate in the public interest or for the 
protection of investors.
  (g) Notwithstanding the provisions of section 1407(a) of 
title 28, United States Code, or any other provision of law, no 
action for equitable relief instituted by the Commission 
pursuant to the securities laws shall be consolidated or 
coordinated with other actions not brought by the Commission, 
even though such other actions may involve common questions of 
fact, unless such consolidation is consented to by the 
Commission.
  (h)(1) The Right to Financial Privacy Act of 1978 shall apply 
with respect to the Commission, except as otherwise provided in 
this subsection.
  (2) Notwithstanding section 1105 or 1107 of the Right to 
Financial Privacy Act of 1978, the Commission may have access 
to and obtain copies of, or the information contained in 
financial records of a customer from a financial institution 
without prior notice to the customer upon an ex parte showing 
to an appropriate United States district court that the 
Commission seeks such financial records pursuant to a subpoena 
issued in conformity with the requirements of section 19(b) of 
the Securities Act of 1933, section 21(b) of the Securities 
Exchange Act of 1934, section 42(b) of the Investment Company 
Act of 1940, or section 209(b) of the Investment Advisers Act 
of 1940, and that the Commission has reason to believe that--
          (A) delay in obtaining access to such financial 
        records, or the required notice, will result in--
                  (i) flight from prosecution;
                  (ii) destruction of or tampering with 
                evidence;
                  (iii) transfer of assets or records outside 
                the territorial limits of the United States;
                  (iv) improper conversion of investor assets; 
                or
                  (v) impeding the ability of the Commission to 
                identify or trace the source or disposition of 
                funds involved in any securities transaction;
          (B) such financial records are necessary to identify 
        or trace the record or beneficial ownership interest in 
        any security;
          (C) the acts, practices or course of conduct under 
        investigation involve--
                  (i) the dissemination of materially false or 
                misleading information concerning any security, 
                issuer, or market, or the failure to make 
                disclosures required under the securities laws, 
                which remain uncorrected; or
                  (ii) a financial loss to investors or other 
                persons protected under the securities laws 
                which remains substantially uncompensated; or
          (D) the acts, practices or course of conduct under 
        investigation--
                  (i) involve significant financial speculation 
                in securities; or
                  (ii) endanger the stability of any financial 
                or investment intermediary.
  (3) Any application under paragraph (2) for a delay in notice 
shall be made with reasonable specificity.
  (4)(A) Upon a showing described in paragraph (2), the 
presiding judge or magistrate shall enter an ex parte order 
granting the requested delay for a period not to exceed ninety 
days and an order prohibiting the financial institution 
involved from disclosing that records have been obtained or 
that a request for records has been made.
  (B) Extensions of the period of delay of notice provided in 
subparagraph (A) of up to ninety days each may be granted by 
the court upon application, but only in accordance with this 
subsection or section 1109(a), (b)(1), or (b)(2) of the Right 
to Financial Privacy Act of 1978.
  (C) Upon expiration of the period of delay of notification 
ordered under subparagraph (A) or (B), the customer shall be 
served with or mailed a copy of the subpena insofar as it 
applies to the customer together with the following notice 
which shall describe with reasonable specificity the nature of 
the investigation for which the Commission sought the financial 
records:

           *       *       *       *       *       *       *

  (5) Upon application by the Commission, all proceedings 
pursuant to paragraphs (2) and (4) shall be held in camera and 
the records thereof sealed until expiration of the period of 
delay or such other date as the presiding judge or magistrate 
may permit.
  (7)(A) Following the expiration of the period of delay of 
notification ordered by the court pursuant to paragraph (4) of 
this subsection, the customer may, upon motion, reopen the 
proceeding in the district court which issued the order. If the 
presiding judge or magistrate finds that the movant is the 
customer to whom the records obtained by the Commission 
pertain, and that the Commission has obtained financial records 
or information contained therein in violation of this 
subsection, other than paragraph (1), it may order that the 
customer be granted civil penalties against the Commission in 
an amount equal to the sum of--
          (i) $100 without regard to the volume of records 
        involved;
          (ii) any out-of-pocket damages sustained by the 
        customer as a direct result of the disclosure; and
          (iii) if the violation is found to have been willful, 
        intentional, and without good faith, such punitive 
        damages as the court may allow, together with the costs 
        of the action and reasonable attorney's fees as 
        determined by the court.
  (B) Upon a finding that the Commission has obtained financial 
records or information contained therein in violation of this 
subsection, other than paragraph (1), the court, in its 
discretion, may also or in the alternative issue injunctive 
relief to require the Commission to comply with this subsection 
with respect to any subpena which the Commission issues in the 
future for financial records of such customer for purposes of 
the same investigation.
  (C) Whenever the court determines that the Commission has 
failed to comply with this subsection, other than paragraph 
(1), and the court finds that the circumstances raise questions 
of whether an officer or employee of the Commission acted in a 
willful and intentional manner and without good faith with 
respect to the violation, the Office of Personnel Management 
shall promptly initiate a proceeding to determine whether 
disciplinary action is warranted against the agent or employee 
who was primarily responsible for the violation. After 
investigating and considering the evidence submitted, the 
Office of Personnel Management shall submit its findings and 
recommendations to the Commission and shall send copies of the 
findings and recommendations to the officer or employee or his 
representative. The Commission shall take the corrective action 
that the Office of Personnel Management recommends.
  (8) The relief described in paragraphs (7) and (10) shall be 
the only remedies or sanctions available to a customer for a 
violation of this subsection, other than paragraph (1), and 
nothing herein or in the Right to Financial Privacy Act of 1978 
shall be deemed to prohibit the use in any investigation or 
proceeding of financial records, or the information contained 
therein, obtained by a subpena issued by the Commission. In the 
case of an unsuccessful action under paragraph (7), the court 
shall award the costs of the action and attorney's fees to the 
Commission if the presiding judge or magistrate finds that the 
customer's claims were made in bad faith.
  (9)(A) The Commission may transfer financial records or the 
information contained therein to any government authority if 
the Commission proceeds as a transferring agency in accordance 
with section 1112 of the Right to Financial Privacy Act of 
1978, except that the customer notice required under section 
1112(b) or (c) of such Act may be delayed upon a showing by the 
Commission, in accordance with the procedure set forth in 
paragraphs (4) and (5), that one or more of subparagraphs (A) 
through (D) of paragraph (2) apply.
  (B) The Commission may, without notice to the customer 
pursuant to section 1112 of the Right to Financial Privacy Act 
of 1978, transfer financial records or the information 
contained therein to a State securities agency or to the 
Department of Justice. Financial records or information 
transferred by the Commission to the Department of Justice or 
to a State securities agency pursuant to the provisions of this 
subparagraph may be disclosed or used only in an 
administrative, civil, or criminal action or investigation by 
the Department of Justice or the State securities agency which 
arises out of or relates to the acts, practices, or courses of 
conduct investigated by the Commission, except that if the 
Department of Justice or the State securities agency determines 
that the information should be disclosed or used for any other 
purpose, it may do so if it notifies the customer, except as 
otherwise provided in the Right to Financial Privacy Act of 
1978, within 30 days of its determination, or complies with the 
requirements of section 1109 of such Act regarding delay of 
notice.
  (10) Any government authority violating paragraph (9) shall 
be subject to the procedures and penalties applicable to the 
Commission under paragraph (7)(A) with respect to a violation 
by the Commission in obtaining financial records.
  (11) Notwithstanding the provisions of this subsection, the 
Commission may obtain financial records from a financial 
institution or transfer such records in accordance with 
provisions of the Right to Financial Privacy Act of 1978.
  (12) Nothing in this subsection shall enlarge or restrict any 
rights of a financial institution to challenge requests for 
records made by the Commission under existing law. Nothing in 
this subsection shall entitle a customer to assert any rights 
of a financial institution.
  (13) Unless the context otherwise requires, all terms defined 
in the Right to Financial Privacy Act of 1978 which are common 
to this subsection shall have the same meaning as in such Act.
  (i) Information to CFTC.--The Commission shall provide the 
Commodity Futures Trading Commission with notice of the 
commencement of any proceeding and a copy of any order entered 
by the Commission against any broker or dealer registered 
pursuant to section 15(b)(11), any exchange registered pursuant 
to section 6(g), or any national securities association 
registered pursuant to section 15A(k).

                  civil penalties for insider trading

  Sec. 21A. (a) Authority To Impose Civil Penalties.--
          (1) Judicial actions by commission authorized.--
        Whenever it shall appear to the Commission that any 
        person has violated any provision of this title or the 
        rules or regulations thereunder by purchasing or 
        selling a security or security-based swap agreement 
        while in possession of material, nonpublic information 
        in, or has violated any such provision by communicating 
        such information in connection with, a transaction on 
        or through the facilities of a national securities 
        exchange or from or through a broker or dealer, and 
        which is not part of a public offering by an issuer of 
        securities other than standardized options or security 
        futures products, the Commission--
                  (A) may bring an action in a United States 
                district court to seek, and the court shall 
                have jurisdiction to impose, a civil penalty to 
                be paid by the person who committed such 
                violation; and
                  (B) may, subject to subsection (b)(1), bring 
                an action in a United States district court to 
                seek, and the court shall have jurisdiction to 
                impose, a civil penalty to be paid by a person 
                who, at the time of the violation, directly or 
                indirectly controlled the person who committed 
                such violation.
          (2) Amount of penalty for person who committed 
        violation.--The amount of the penalty which may be 
        imposed on the person who committed such violation 
        shall be determined by the court in light of the facts 
        and circumstances, but shall not exceed three times the 
        profit gained or loss avoided as a result of such 
        unlawful purchase, sale, or communication.
          (3) Amount of penalty for controlling person.--The 
        amount of the penalty which may be imposed on any 
        person who, at the time of the violation, directly or 
        indirectly controlled the person who committed such 
        violation, shall be determined by the court in light of 
        the facts and circumstances, but shall not exceed the 
        greater of $1,000,000, or three times the amount of the 
        profit gained or loss avoided as a result of such 
        controlled person's violation. If such controlled 
        person's violation was a violation by communication, 
        the profit gained or loss avoided as a result of the 
        violation shall, for purposes of this paragraph only, 
        be deemed to be limited to the profit gained or loss 
        avoided by the person or persons to whom the controlled 
        person directed such communication.
  (b) Limitations on Liability.--
          (1) Liability of controlling persons.--No controlling 
        person shall be subject to a penalty under subsection 
        (a)(1)(B) unless the Commission establishes that--
                  (A) such controlling person knew or 
                recklessly disregarded the fact that such 
                controlled person was likely to engage in the 
                act or acts constituting the violation and 
                failed to take appropriate steps to prevent 
                such act or acts before they occurred; or
                  (B) such controlling person knowingly or 
                recklessly failed to establish, maintain, or 
                enforce any policy or procedure required under 
                section 15(f) of this title or section 204A of 
                the Investment Advisers Act of 1940 and such 
                failure substantially contributed to or 
                permitted the occurrence of the act or acts 
                constituting the violation.
          (2) Additional restrictions on liability.--No person 
        shall be subject to a penalty under subsection (a) 
        solely by reason of employing another person who is 
        subject to a penalty under such subsection, unless such 
        employing person is liable as a controlling person 
        under paragraph (1) of this subsection. Section 20(a) 
        of this title shall not apply to actions under 
        subsection (a) of this section.
  (c) Authority of Commission.--the Commission, by such rules, 
regulations, and orders as it considers necessary or 
appropriate in the public interest or for the protection of 
investors, may exempt, in whole or in part, either 
unconditionally or upon specific terms and conditions, any 
person or transaction or class of persons or transactions from 
this section.
  (d) Procedures for Collection.--
          (1) Payment of penalty to treasury.--A penalty 
        imposed under this section shall be payable into the 
        Treasury of the United States, except as otherwise 
        provided in section 308 of the Sarbanes-Oxley Act of 
        2002 and section 21F of this title.
          (2) Collection of penalties.--If a person upon whom 
        such a penalty is imposed shall fail to pay such 
        penalty within the time prescribed in the court's 
        order, the Commission may refer the matter to the 
        Attorney General who shall recover such penalty by 
        action in the appropriate United States district court.
          (3) Remedy not exclusive.--The actions authorized by 
        this section may be brought in addition to any other 
        actions that the Commission or the Attorney General are 
        entitled to bring.
          (4) Jurisdiction and venue.--For purposes of section 
        27 of this title, actions under this section shall be 
        actions to enforce a liability or a duty created by 
        this title.
          (5) Statute of limitations.--No action may be brought 
        under this section more than 5 years after the date of 
        the purchase or sale. This section shall not be 
        construed to bar or limit in any manner any action by 
        the Commission or the Attorney General under any other 
        provision of this title, nor shall it bar or limit in 
        any manner any action to recover penalties, or to seek 
        any other order regarding penalties, imposed in an 
        action commenced within 5 years of such transaction.
  (e) Definition.--For purposes of this section, ``profit 
gained'' or ``loss avoided'' is the difference between the 
purchase or sale price of the security and the value of that 
security as measured by the trading price of the security a 
reasonable period after public dissemination of the nonpublic 
information.
  (f) The authority of the Commission under this section with 
respect to security-based swap agreements (as defined in 
section 206B of the Gramm-Leach-Bliley Act) shall be subject to 
the restrictions and limitations of section 3A(b) of this 
title.
  (g) Duty of Members and Employees of Congress.--
          (1) In general.--Subject to the rule of construction 
        under section 10 of the STOCK Act and solely for 
        purposes of the insider trading prohibitions arising 
        under this Act, including section 10(b) and Rule 10b-5 
        thereunder, and section 16A, each Member of Congress or 
        employee of Congress owes a duty arising from a 
        relationship of trust and confidence to the Congress, 
        the United States Government, and the citizens of the 
        United States with respect to material, nonpublic 
        information derived from such person's position as a 
        Member of Congress or employee of Congress or gained 
        from the performance of such person's official 
        responsibilities.
          (2) Definitions.--In this subsection--
                  (A) the term ``Member of Congress'' means a 
                member of the Senate or House of 
                Representatives, a Delegate to the House of 
                Representatives, and the Resident Commissioner 
                from Puerto Rico; and
                  (B) the term ``employee of Congress'' means--
                          (i) any individual (other than a 
                        Member of Congress), whose compensation 
                        is disbursed by the Secretary of the 
                        Senate or the Chief Administrative 
                        Officer of the House of 
                        Representatives; and
                          (ii) any other officer or employee of 
                        the legislative branch (as defined in 
                        section 109(11) of the Ethics in 
                        Government Act of 1978 (5 U.S.C. App. 
                        109(11))).
          (3) Rule of construction.--Nothing in this subsection 
        shall be construed to impair or limit the construction 
        of the existing antifraud provisions of the securities 
        laws or the authority of the Commission under those 
        provisions.
  (h) Duty of Other Federal Officials.--
          (1) In general.--Subject to the rule of construction 
        under section 10 of the STOCK Act and solely for 
        purposes of the insider trading prohibitions arising 
        under this Act, including section 10(b), and Rule 10b-5 
        thereunder, and section 16A, each executive branch 
        employee, each judicial officer, and each judicial 
        employee owes a duty arising from a relationship of 
        trust and confidence to the United States Government 
        and the citizens of the United States with respect to 
        material, nonpublic information derived from such 
        person's position as an executive branch employee, 
        judicial officer, or judicial employee or gained from 
        the performance of such person's official 
        responsibilities.
          (2) Definitions.--In this subsection--
                  (A) the term ``executive branch employee''--
                          (i) has the meaning given the term 
                        ``employee'' under section 2105 of 
                        title 5, United States Code;
                          (ii) includes--
                                  (I) the President;
                                  (II) the Vice President; and
                                  (III) an employee of the 
                                United States Postal Service or 
                                the Postal Regulatory 
                                Commission;
                  (B) the term ``judicial employee'' has the 
                meaning given that term in section 109(8) of 
                the Ethics in Government Act of 1978 (5 U.S.C. 
                App. 109(8)); and
                  (C) the term ``judicial officer'' has the 
                meaning given that term under section 109(10) 
                of the Ethics in Government Act of 1978 (5 
                U.S.C. App. 109(10)).
          (3) Rule of construction.--Nothing in this subsection 
        shall be construed to impair or limit the construction 
        of the existing antifraud provisions of the securities 
        laws or the authority of the Commission under those 
        provisions.
  (i) Participation in Initial Public Offerings.--An individual 
described in section 101(f) of the Ethics in Government Act of 
1978 may not purchase securities that are the subject of an 
initial public offering (within the meaning given such term in 
section 12(f)(1)(G)(i)) in any manner other than is available 
to members of the public generally.

           *       *       *       *       *       *       *


                      CEASE-AND-DESIST PROCEEDINGS

  Sec. 21C. (a) Authority of the Commission.--If the Commission 
finds, after notice and opportunity for hearing, that any 
person is violating, has violated, or is about to violate any 
provision of this title, or any rule or regulation thereunder, 
the Commission may publish its findings and enter an order 
requiring such person, and any other person that is, was, or 
would be a cause of the violation, due to an act or omission 
the person knew or should have known would contribute to such 
violation, to cease and desist from committing or causing such 
violation and any future violation of the same provision, rule, 
or regulation. Such order may, in addition to requiring a 
person to cease and desist from committing or causing a 
violation, require such person to comply, or to take steps to 
effect compliance, with such provision, rule, or regulation, 
upon such terms and conditions and within such time as the 
Commission may specify in such order. Any such order may, as 
the Commission deems appropriate, require future compliance or 
steps to effect future compliance, either permanently or for 
such period of time as the Commission may specify, with such 
provision, rule, or regulation with respect to any security, 
any issuer, or any other person.
  (b) Hearing.--The notice instituting proceedings pursuant to 
subsection (a) shall fix a hearing date not earlier than 30 
days nor later than 60 days after service of the notice unless 
an earlier or a later date is set by the Commission with the 
consent of any respondent so served.
  (c) Temporary Order.--
          (1) In general.--Whenever the Commission determines 
        that the alleged violation or threatened violation 
        specified in the notice instituting proceedings 
        pursuant to subsection (a), or the continuation 
        thereof, is likely to result in significant dissipation 
        or conversion of assets, significant harm to investors, 
        or substantial harm to the public interest, including, 
        but not limited to, losses to the Securities Investor 
        Protection Corporation, prior to the completion of the 
        proceedings, the Commission may enter a temporary order 
        requiring the respondent to cease and desist from the 
        violation or threatened violation and to take such 
        action to prevent the violation or threatened violation 
        and to prevent dissipation or conversion of assets, 
        significant harm to investors, or substantial harm to 
        the public interest as the Commission deems appropriate 
        pending completion of such proceedings. Such an order 
        shall be entered only after notice and opportunity for 
        a hearing, unless the Commission determines that notice 
        and hearing prior to entry would be impracticable or 
        contrary to the public interest. A temporary order 
        shall become effective upon service upon the respondent 
        and, unless set aside, limited, or suspended by the 
        Commission or a court of competent jurisdiction, shall 
        remain effective and enforceable pending the completion 
        of the proceedings.
          (2) Applicability.--Paragraph (1) shall apply only to 
        a respondent that acts, or, at the time of the alleged 
        misconduct acted, as a broker, dealer, investment 
        adviser, investment company, municipal securities 
        dealer, government securities broker, government 
        securities dealer, registered public accounting firm 
        (as defined in section 2 of the Sarbanes-Oxley Act of 
        2002), or transfer agent, or is, or was at the time of 
        the alleged misconduct, an associated person of, or a 
        person seeking to become associated with, any of the 
        foregoing.
          (3) Temporary freeze.--
                  (A) In general.--
                          (i) Issuance of temporary order.--
                        Whenever, during the course of a lawful 
                        investigation involving possible 
                        violations of the Federal securities 
                        laws by an issuer of publicly traded 
                        securities or any of its directors, 
                        officers, partners, controlling 
                        persons, agents, or employees, it shall 
                        appear to the Commission that it is 
                        likely that the issuer will make 
                        extraordinary payments (whether 
                        compensation or otherwise) to any of 
                        the foregoing persons, the Commission 
                        may petition a Federal district court 
                        for a temporary order requiring the 
                        issuer to escrow, subject to court 
                        supervision, those payments in an 
                        interest-bearing account for 45 days.
                          (ii) Standard.--A temporary order 
                        shall be entered under clause (i), only 
                        after notice and opportunity for a 
                        hearing, unless the court determines 
                        that notice and hearing prior to entry 
                        of the order would be impracticable or 
                        contrary to the public interest.
                          (iii) Effective period.--A temporary 
                        order issued under clause (i) shall--
                                  (I) become effective 
                                immediately;
                                  (II) be served upon the 
                                parties subject to it; and
                                  (III) unless set aside, 
                                limited or suspended by a court 
                                of competent jurisdiction, 
                                shall remain effective and 
                                enforceable for 45 days.
                          (iv) Extensions authorized.--The 
                        effective period of an order under this 
                        subparagraph may be extended by the 
                        court upon good cause shown for not 
                        longer than 45 additional days, 
                        provided that the combined period of 
                        the order shall not exceed 90 days.
                  (B) Process on Determination of violations.--
                          (i) Violations charged.--If the 
                        issuer or other person described in 
                        subparagraph (A) is charged with any 
                        violation of the Federal securities 
                        laws before the expiration of the 
                        effective period of a temporary order 
                        under subparagraph (A) (including any 
                        applicable extension period), the order 
                        shall remain in effect, subject to 
                        court approval, until the conclusion of 
                        any legal proceedings related thereto, 
                        and the affected issuer or other 
                        person, shall have the right to 
                        petition the court for review of the 
                        order.
                          (ii) Violations not charged.--If the 
                        issuer or other person described in 
                        subparagraph (A) is not charged with 
                        any violation of the Federal securities 
                        laws before the expiration of the 
                        effective period of a temporary order 
                        under subparagraph (A) (including any 
                        applicable extension period), the 
                        escrow shall terminate at the 
                        expiration of the 45-day effective 
                        period (or the expiration of any 
                        extension period, as applicable), and 
                        the disputed payments (with accrued 
                        interest) shall be returned to the 
                        issuer or other affected person.
  (d) Review of Temporary Orders.--
          (1) Commission review.--At any time after the 
        respondent has been served with a temporary cease-and-
        desist order pursuant to subsection (c), the respondent 
        may apply to the Commission to have the order set 
        aside, limited, or suspended. If the respondent has 
        been served with a temporary cease-and-desist order 
        entered without a prior Commission hearing, the 
        respondent may, within 10 days after the date on which 
        the order was served, request a hearing on such 
        application and the Commission shall hold a hearing and 
        render a decision on such application at the earliest 
        possible time.
          (2) Judicial review.--Within--
                  (A) 10 days after the date the respondent was 
                served with a temporary cease-and-desist order 
                entered with a prior Commission hearing, or
                  (B) 10 days after the Commission renders a 
                decision on an application and hearing under 
                paragraph (1), with respect to any temporary 
                cease-and-desist order entered without a prior 
                Commission hearing,
        the respondent may apply to the United States district 
        court for the district in which the respondent resides 
        or has its principal place of business, or for the 
        District of Columbia, for an order setting aside, 
        limiting, or suspending the effectiveness or 
        enforcement of the order, and the court shall have 
        jurisdiction to enter such an order. A respondent 
        served with a temporary cease-and-desist order entered 
        without a prior Commission hearing may not apply to the 
        court except after hearing and decision by the 
        Commission on the respondent's application under 
        paragraph (1) of this subsection.
          (3) No automatic stay of temporary order.--The 
        commencement of proceedings under paragraph (2) of this 
        subsection shall not, unless specifically ordered by 
        the court, operate as a stay of the Commission's order.
          (4) Exclusive review.--Section 25 of this title shall 
        not apply to a temporary order entered pursuant to this 
        section.
  (e) Authority To Enter an Order Requiring an Accounting and 
Disgorgement.--In any cease-and-desist proceeding under 
subsection (a), the Commission may enter an order requiring 
accounting and disgorgement, including reasonable interest. The 
Commission is authorized to adopt rules, regulations, and 
orders concerning payments to investors, rates of interest, 
periods of accrual, and such other matters as it deems 
appropriate to implement this subsection.
  (f) Authority of the Commission to Prohibit Persons From 
Serving as Officers or Directors.--In any cease-and-desist 
proceeding under subsection (a), the Commission may issue an 
order to prohibit, conditionally or unconditionally, and 
permanently or for such period of time as it shall determine, 
any person who has violated section 10(b) or section 16A, or 
the rules or regulations thereunder, from acting as an officer 
or director of any issuer that has a class of securities 
registered pursuant to section 12, or that is required to file 
reports pursuant to section 15(d), if the conduct of that 
person demonstrates unfitness to serve as an officer or 
director of any such issuer.

           *       *       *       *       *       *       *


                             MINORITY VIEWS

    Committee Republicans support finding and prosecuting bad 
actors for illegal insider trading, but Committee Republicans 
do not support H.R. 2534, the Insider Trading Prohibition Act, 
in its current form. There is no one insider trading law. 
Rather, Congress has allowed the courts to develop a patchwork 
body of law around insider trading that provides little clarity 
and security as to what constitutes insider trading. In fact, 
Congress' own research office stated ``the courts expansive 
view has . . . been called `a boon to prosecutors' by some 
reporters.''\1\ H.R. 2534 does not meet the sponsor of the 
bill's goals to solve the problem of ambiguity and uncertainty 
around insider trading law.\2\ Without an exclusive and 
singular prohibition on insider trading, the door will be open 
for activist judges and overzealous prosecutors and, worse, 
private plaintiffs' counsel to cherry-pick from a menu of 
insider trading claim options, producing even more 
inconsistencies within insider trading law.
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    \1\Congressional Research Service, ``the Latest Chapter in Insider 
Trading Law: Major Circuit Decision Expands Scope of Liability for 
Trading on a Tip'' Nicole Vanatko, November 14, 2017.
    \2\See, e.g., Office of U.S. Congressman Jim Himes, ``Himes 
Bipartisan Insider Trading Bill Passes Financial Services Committee'' 
(May 10, 2019) (stating that the Insider Trading Prohibition Act would 
end ``decades of ambiguity for a crime that has never been clearly 
defined by federal law''); see also ``Himes Introduces Bipartisan bill 
to Define and Prohibit Illegal Insider Trading'' (Mar. 25, 2015) 
(discussing the need for a ``clear definition of insider trading'').
---------------------------------------------------------------------------
    Insider trading law is built on a foundation of judge-made 
law around the anti-fraud provisions of the federal securities 
laws that has been developed over decades. Committee 
Republicans are sympathetic to the concerns of the Democrats 
that there is no statute in this area. To that end, Committee 
Republicans agreed to voice vote H.R. 2534 out of the Committee 
with the hope a bipartisan consensus to improve the bill could 
be achieved.\3\
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    \3\Committee Republicans have been willing to work in a bipartisan 
fashion with Committee Democrats on good legislation relating to 
insider trading. See H.R. 4335, the 8-K Trading Gap Act of 2019 
(prohibiting trading by corporate insiders relating to certain events 
prior to the filing of a Form 8-K or public dissemination of material 
information, voted out of Committee 52-0); H.R. 624, the Promoting 
Transparent Standards for Corporate Insiders Act (requiring the SEC to 
study and report on possible revisions to regulations around Rule 10b5-
1 trading plans by corporate insiders, with a 413-3 vote on the House 
floor).
---------------------------------------------------------------------------
    Committee Republicans unfortunately remain concerned about 
certain ambiguous wording throughout the bill that remains 
unchanged from prior versions. For example, the bill prohibits 
trading on information ``relating to the market'' for a 
security, security-based swap, or security-based swap 
agreement, which could be interpreted by an activist judge far 
more broadly than the drafters of the bill intend. The bill 
also does not explicitly provide a standard for the requisite 
personal benefit test,\4\ and thus runs the risk of being read 
more broadly by judges than the Supreme Court has allowed--or, 
worse, being read out of the law entirely, which is an 
overzealous insider trading prosecutor's or plaintiff lawyer's 
dream. Reading the personal benefit test out of the law would 
have real implications; for example, absent a personal benefit 
test, corporate insiders who share information with the full 
expectation of confidentiality could become subject to 
prosecution simply because that confidentiality was violated.
---------------------------------------------------------------------------
    \4\The Supreme Court has consistently ruled that in order to bring 
an insider trading case involving tippers and tippees, a tipper must 
receive a personal benefit in order to be convicted of an insider 
trading violation. See, e.g., Dirks v. Securities and Exchange 
Commission, 463 U.S. 646 (1983).
---------------------------------------------------------------------------
    In addition, while the bill has moved away from a standard 
of trading while in ``possession'' of material, non-public 
information, the current ``awareness'' standard may still be 
over-inclusive as Committee Republicans believe liability based 
on the ``use'' of material, nonpublic information bill would be 
more appropriate for ensuring that only those who actively 
trade on the information are subject to the bill, because 
individuals should not be penalized for making trades they 
already planned to make simply because they became aware of 
additional information.
    At best, the overall wording of this bill does not 
substantively change the law of insider trading; at worst, it 
is overbroad and will criminalize beneficial trading activity 
as well as chill the productive flow of information within the 
marketplace. Committee Republicans are concerned that, were 
H.R. 2534 to become law, judges interpreting H.R. 2534 may 
misunderstand that the drafters of the bill intend to apply 
this law only to cases involving insider trading and do not 
intend to expand the scope of insider trading law beyond the 
state of the law as of 2019.
    Finally, one of the biggest concerns is the failure of the 
bill to serve as the exclusive definition of improper insider 
trading. Committee Republicans have made clear the importance 
of providing clarity and certainty as it relates to Congress' 
intent with regard to insider trading.\5\ A predecessor bill 
that serves as a foundation for H.R. 2534 included an 
exclusivity provision stating that the bill ``shall provide the 
exclusive standards by which the wrongful use or wrongful 
communication of material, nonpublic information in connection 
with the purchase or sale of a security shall be 
addressed.''\6\ Unfortunately, H.R. 2534 does not include that 
exclusivity provision. Without that wording, H.R. 2534 is 
simply another insider trading law, rather than the insider 
trading law. Absent such an exclusivity clause, judges, 
prosecutors, and plaintiffs' lawyers could and likely would 
still cite to and bring cases under general antifraud 
provisions and case law, and the SEC would, theoretically, 
still be able to engage in exemptive rulemaking around the law 
that might undo the carefully constructed definition of 
improper insider trading this bill seeks to create. This would 
give overzealous prosecutors and plaintiffs' lawyers at least 
two bites at the apple using potentially varying legal 
requirements. Thus, failing to include the exclusivity 
provision runs counter to the claimed concerns of the Democrat 
drafters regarding the need to provide more certainty and 
clarity in this area.
---------------------------------------------------------------------------
    \5\See Transcript of Hearing of the House Financial Services 
Committee, May 8, 2019 (Ranking Member McHenry stating that H.R. 2534 
presents ``an opportunity for Congress to clarify what is a 
longstanding body of law'').
    \6\See S.1380 (100th Cong.), the Insider Trading Proscriptions Act 
of 1987.
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    Committee Republicans believe that if Congress is going to 
use its Article I powers to finally legislate in this area, we 
should do so correctly and completely. This bill accomplishes 
neither. As a result, Committee Republicans cannot support H.R. 
2534 as currently drafted.
                                   Lee M. Zeldin.
                                   Alexander X. Mooney.
                                   Andy Barr.
                                   Ann Wagner.
                                   Steve Stivers.
                                   Bill Huizenga.
                                   Blaine Luetkemeyer.
                                   Bill Posey.
                                   Patrick T. McHenry.
                                   Roger Williams.
                                   John W. Rose.
                                   Trey Hollingsworth.
                                   Bryan Steil.
                                   J. French Hill.
                                   Denver Riggleman.
                                   Anthony Gonzalez.
                                   David Kustoff.
                                   Barry Loudermilk.
                                   Lance Gooden.
                                   Tom Emmer.
                                   Scott R. Tipton.
                                   Ted Budd.
                                   Peter T. King.
                                   Frank D. Lucas.

                                  [all]