Insider Trading Prohibition Act

Floor Speech

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Mr. CLEAVER. Mr. Speaker, I move to suspend the rules and pass the bill (H.R. 2655) to amend the Securities Exchange Act of 1934 to prohibit certain securities trading and related communications by those who possess material, nonpublic information, as amended.

The Clerk read the title of the bill.

The text of the bill is as follows: H.R. 2655 Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, 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 Aware 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 aware of material, nonpublic information relating to such security, security-based swap, or security- based swap agreement, or any nonpublic information, from whatever source, that has, or would reasonably be expected to have, a material effect on the market price of any 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), wrongfully to communicate material, nonpublic information relating to such security, security-based swap, or security-based swap agreement, or any nonpublic information, from whatever source, that has, or would reasonably be expected to have, a material effect on the market price of any 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 aware of such information; and ``(2) such a purchase, sale, or entry while aware of such information is reasonably foreseeable. ``(c) Standard and Knowledge Requirement.-- ``(1) Standard.--For purposes of this section, trading while aware 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, a breach of any code of conduct or ethics policy, or a breach of any other personal or other relationship of trust and confidence for a direct or indirect personal benefit (including pecuniary gain, reputational benefit, or a gift of confidential information to a trading relative or friend). ``(2) Knowledge requirement.--It shall not be necessary that the person trading while aware 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 aware 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, improperly used, or wrongfully 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, or directly or indirectly induce the acts constituting a violation of this section. ``(e) Affirmative Defenses.-- ``(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 in furtherance of the purposes of this title. ``(2) Directed trading.--The prohibitions of this section shall not apply to any person who acts at the specific direction of, and solely for the account of another person whose own securities trading, or communications of material, nonpublic information, would be lawful under this section. ``(3) Rule 10b-5-1 compliant transactions.--The prohibitions of this section shall not apply to any transaction that satisfies the requirements of Rule 10b-5-1 (17 CFR 240.10b5-1), or any successor regulation.''. (b) Commission Review of Rule 10b-5-1.--Not later than 180 days after the date of the enactment of this Act, the Securities and Exchange Commission shall review Rule 10b-5-1 (17 CFR 240.10b5-1) and make any modifications the Securities and Exchange Commission determines necessary or appropriate because of the amendment to the Securities Exchange Act of 1934 made by this Act. (c) 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)''. SEC. 3. DETERMINATION OF BUDGETARY EFFECTS. The budgetary effects of this Act, for the purpose of complying with the Statutory Pay-As-You-Go Act of 2010, shall be determined by reference to the latest statement titled ``Budgetary Effects of PAYGO Legislation'' for this Act, submitted for printing in the Congressional Record by the Chairman of the House Budget Committee, provided that such statement has been submitted prior to the vote on passage.

Mr. Speaker, I rise in strong support of H.R. 2655, the Insider Trading Prohibition Act, which was introduced by my colleague, Mr. Himes.

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

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

These insiders are also generally prohibited from tipping outsiders, known as tippees, who then trade on the information themselves, even though they knew it was wrongly obtained. But because there isn't a statutory definition of insider trading, there is uncertainty around who is subject to insider trading prohibitions.

Further, with various court decisions, liability for this type of violation has shifted. For example, in 2014, an appeals court added a brand-new requirement that the tippee must not just know that information was wrongfully disclosed but must also know about the specific personal benefit that the insider received. This decision has severely hampered the SEC's ability to prosecute insider trading cases.

According to Preet Bharara, the former U.S. attorney for the Southern District of New York, this decision ``provides a virtual roadmap for savvy hedge-fund managers to insulate themselves from tippee liability by knowingly placing themselves at the end of a chain of insider information and avoiding learning details about the sources of obvious confidential and improperly disclosed information.''

I am pleased that this bill codifies existing case law and overturns this new controversial requirement, creating a clear, consistent standard for the SEC, the courts, and market participants to follow.

Last Congress, the House of Representatives passed this commonsense bipartisan bill with an overwhelmingly bipartisan vote of 410-13.

H.R. 2655, the Insider Trading Prohibition Act, is a long overdue piece of legislation that simply spells out the definition of illegal insider trading under the security laws. It creates clarity for participants in financial markets, and empowers the SEC to punish bad actors.

This bill is supported by groups, including the Council of Institutional Investors, the California State Teachers' Retirement System, the North American Securities Administrators Association, and Public Citizen.

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

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