Themselves after they are finished speaking to mute themselves. Members andtes witnesses as appropriate when not recognized in order to avoid background noise. Members are reminded that all house rules related to order of the court applied to this hearing. Insidering is titled, trading and stock option grants the examination of corporate integrity in the covid19 pandemic. We know we have votes on the floor. We will not have any further delays of the hearing in order to allow members to vote. Rather members should go vote haveeturn and while we all part of the alphabet to vote in, i am sure there could be some accommodation made so if it is your turn to ask questions, you can vote with others not of your same alphabetical characterization. Believe mr. Ting, i meeks has agreed to serve chair until my return. I will recognize myself for five minutes for an opening statement. System isl market unique in history. Up until 150 years ago every Business Enterprise was made up of people who knew each other, were family members, who had personal trust and a business could only be as large as a group of people could finance and put together an Investment Opportunities were limited to those which happen to be able. You would not trust your money with an enterprise of strangers and you did not have liquidity since you could sell your investment pretty much only to somebody else. At that point people could rely on personal trust. Today investors turn their money ,ver to anonymous insiders corporate boards and executives who they have never met. They know that the insiders have more information, attention and power. Vyings oft have the personal trust. They rely on law to make sure insiders are treating investors fairly. I would i will continue. We had a little technical problem. We apply that system to the covert pandemic in which nearly 200,000 americans have lost their lives and in which many pandemicected by this are having sudden increases or decreases in their value. Many pharmaceutical firms, even the suggestion of involving a federal program can cause a shares to shoot up in value. Following this sort of announcement, kodak, novavax, and back start each soft stock prices rise by over 400 . The fcc has mind reminded companies that in this pandemic they should not only abide by law but practice good corporate hygiene. Chair clayton has reiterated these views in a recent letter regarding todays hearing which i submit for the record and will be made part of the record without objection. Admonishments are not laws and regulations. Admonishments will not deter the truly greedy. We have to resign our laws and to govern those who cannot be governed by mere admonishments. Taxpayers havele in federal. 1 billion contracts with novavax and moderna to develop a vaccine. They have sold over 60 Million Dollars in their companys stock. We need to know that they were not taking advantage of any inside information, that perhaps their stock has gone up too high given the possibilities. Isreader greater concern the activity involving kodak with the announcement of a loan that raised insider trader concern. In particular we have a concern on Stock Options and their grant dates. Compensationty insiders needs to be approved by shareholders. When Shareholders Approve a plan that says that Stock Options will be granted with a stock option exercise price equal to fair market value on grant date, executives whoat get these Stock Options will live by that. If instead the fair market value does not reflect Material Information, Insider Information that will be announced the next week, thennext shareholders have been duped into approving compensation that does not reflect fair market value. I want to thank the insiders at kodak who have added insult to injury. First they granted Stock Options at what they knew to be an unfairly low price and then they spit shareholder money on Corporate Law firms and told him it was legal. Tot memo tells us we have change the law because of any major firm can say this is legal, it should not be. And so we have to deal with the issues of what is called spring loading where Shareholders Approve a Compensation Plan based on fair market value. It has to be fair market value when the market has knowledge of the material transactions that the insiders know about. I look forward to exploring this. Ith our witnesses we will now hear from the Ranking Member for four minutes for his opening statement. Thank you, mr. Chairman. The definition of insanity is doing the same thing expecting different results. Here we are once again holding a hearing on an issue we have already held a hearing on. Three of these bills attached to this hearing have not only had a hearing, they have been passed by the house. I asked the committee why are we spending precious time and resources on bills that have already passed the house of representatives nine months ago just because we keep having hearings on bills that have already passed does not mean the senate is going to take them up. Insider trading is not only wrong, it is illegal and not only does it hurt the integrity of our Capital Markets, it also hurts our main Street Investors as well as mr. Mss 401 k . We agree Insider Trading should be punished for the full 16 of the law. The subcommittee should not be used as a chain game for companies for wrongdoing that they perceived to have happened. The facts surrounding one company appear to be suspicious and need to be investigated. That is not our job. The securities and Exchange Commission is tapped with ensuring market integrity. And under the exchange act of 1934 the fcc has the power to bring Enforcement Actions in instances of Insider Trading. During 2019 the commission brought 862 Enforcement Actions to hold individual issuers and others accountable, sending a clear message to market participants. Last years results speak for themselves. Actions,cement and obtained a judgment totaling more than 4. 3 billion in penalties. Nearly 600 bars or suspensions against participants, suspended trading in securities of 271 issuers and returns nearly 1. 2 billion to investors. Instead of playing judge, jury and executioner, the committee should be focused on the Bipartisan Solutions that support job creators of all sizes, particularly Small Businesses. These proposals would strengthen broader access to capital, reduce costs and burden and improve access for investors to better put their money to work and create more opportunities for everyday investors. I am not just going to curse the political darkness. I will try to live a policy candle. Here is a partial list of what we should be discussing today. 860 introduced by the Ranking Member. We have my legislation which is a Small Business mergers some act, something we have dealt with for four congress is in a row. Hr 1909, helping lead our startups. Hr 2899, the main street growth act. 3987, alleviating stress to help investors act. 4076, modernizing disclosures for investors act introduced by ms. Wagners dear hr 2919, improving investment issuers act. Representative style, helping startups continue to grow act. The improvement act introduced by the subcommittee by its Ranking Member hollingsworth. I could go on and on. The list is exhaustive. We have much more to do. Instead of Holding Hearings on legislation the house has already acted on, lets move forward on Bipartisan Solutions that deliver the results the people deserve from the Financial Services committee. We know there are problems. We need to address those problems. This is not going to do it, unfortunately. One part of this hearing is on my bill to deal with spring loading which is not been considered and which bans a practice that is wrongful and unfortunately legal. We have a strong purpose to have this hearing. I recognize the Ranking Member for one minute. Insider trading is wrong. We can agree on that. The fcc is doing a really good job to pursue bad actors. What we should be spending our time on as my friend just said, we should be spending time on identifying solutions to strengthen our Economy Economic recovery and Health Workers come workforcey to the after the virus, after we get testing and treatment going. Today i introduce a bill to do just that. Gig worker Equity Compensation act. It is not to be bound by traditional constraints such as an office or set hours or traditional employeremployee relationships. In workers are critical and our technologically driven world. My bill allows gig workers such as rideshare drivers to share in the same economic benefits, the potential of owning the businesses they are helping to improve. Todays hearing should be focused on that type of solution, not just a rear facing set of issues in election year. Thanks so much. I will point out that spring loading is legal until this Committee Makes it illegal and it is just as wrong. If we wish to debate, the chairs can debate but you should not opine about everyone elses opinion. That is not in good form for the chair. You are not recognized. When people question whether this is a legitimate hearing, it is appropriate to spend 10 or 20 seconds responding. Today we welcome the hegemony of chill fis ool, dr. And mr. Gavin martin. Researchool is a director where he focuses on corporate crime and wrongdoing and the ways in which Corporate Power distorts our democracy. The distinguished professor of business law and codirector of the institute of law and economics at the university of pennsylvania law school. Is chair of the enforcement practice at dickinson wright. He previously served as senior counsel for the fccs division of enforcement. Mr. Martin is Senior Vice President and general counsel for the society for Corporate Governance where he leads the efforts related to Corporate Governance, laws and regulations. Witnesses are reminded that your oral testimony will be limited to five minutes. A chime will go off at the end of your time and i ask you to respect our rules by wrapping up your testimony. Without objection, your statements will be made part of the record. Recognize our first witness, mr. Claypool. You. Ank chair sherman, Ranking Members. On behalf of more than 500,000 members, many of whom are investors and are hopeful for the development of affordable treatment, we welcome this probe into Insider Trading. The events are concerning. The chair described the concerns well. Moderna therapeutics announced that all 45 participants in the first phase of his trials develop antibodies. The good news that pushed up the stock price 30 to an alltime high of 87. Prior to the announcement, several executives modified new plans. In the days following the announcement, the ceo and other executives sold about 90 million worth of company shares. It is taxpayer money funding 100 of this to develop a vaccine for covid19. A study published found that stock market value for the Biotech Companies in the s p 500 grew by 130 billion between january and august. Executives from three of these 370nies sold at least million in Company Stocks. Reporting withs a number of Enforcement Actions has plummeted to its lowest point in decades. Thearch has documented enforcement at the fcc and across the federal government. If an agency is following the trump administrations orders and numerous policies such as any executive order and subsequent memo, that deserves a hearing. As for legislation, we look forward to passage of a bill requiring the fcc to provide monthly reports on consumer and investor protection. Ideally the fcc will want to report an increase against opportunistic inquiries. We applaud the house were proving the Public Citizen trading reform bill. It establishes a clear law against illegal trading. Passage of the bill offered by Carolyn Maloney and the trading plan offered by chair waters. One is compensation deferral meccas is a that requires citizens place a significant percent of compensation in a collective pool. Company be found to later engage in any misconduct, then the tenure managers will fund the finding. It already exists in separate those sponsored by Tulsi Gabbard and katie porter. It is crucial for congress to commission the federal aid with the intention of helping workers so that it is not the burden of pandemic propagator. We applaud the heroes act and look forward to working with you when you fashion the next round of recovery. I welcome your questions. This may be the first time in decades the witness has concluded in less than five minutes. The witness did not choose to yield his remaining time to me and i will recognize the doctor. We are going to break away from this momentarily to keep our commitment to live congressional coverage. The u. S. House is coming for a solutions to the many challenges facing our nation. Give them wisdom and insight to engage in their deliberations. Bless those throughout our nation who are suffering from the pandemic, fires, hurricanes and flooding. You are other you are our refuge and strength. Increase our faith that we might not fear, though the earth should change, though the waters roar and foam , though the winds swirl and destroy all in their paths. Please, accompany us through it all. Lord, have mercy. May all that is done that is done this day be for your greater honor and glory. Amen. The speaker pro tempore pursuant to section 4a of House Resolution 967, the journal of the last days proceedings is approved. The chair will now lead the house in the pledge of allegiance. I pledge allegiance to the flag of the United States of america and to the republic for which it stands, one nation, under god, indivisible, with liberty and justice for all. The chair lays before the house a communication. The clerk the honorable the speaker, house of representatives. Madam, pursuant to the permission granted in clause 2h of rule 2 of the rules of the u. S. House of representatives, the clerk received the following message from the secretary of the senate on september 17, twenlt, at 4 03 p. M. That the Senate Passed senate 3051. With best wished i am, signed, sincerely, cherl l. Johnson, clerk of the house cheryl l. Johnson, clerk of the house. The speaker pro tempore pursuant to clause carries brought. Constitutes securities fraud. False statements that are made can subject the officials to criminal liability. This is not a gray area. Premature disclosure of uncertain information may prove inaccurate. At the same time, stock prices are reacting dramatically. Chairman sherman identified the possibility that stock prices were too high. The concept of stock prices reflect fundamental value or that the value of these companies is knowable at any given point right now. It is something that is very challenging from a market regulatory perspective. And as is running short a law professor, i am always longwinded. I will cut to the chase in response to your question about Stock Options and insidertrading. Let me say a couple of words about regulatory reform. The law doesnt prohibit accurate statements even if the statements are forwardlooking. Onn if they are not based hard science about what a vaccine is going to do. The law doesnt permit executives from Trading Opportunities through their public statements. If i could just take a minute to wrap up the potential which the of a plan current market environment has exposed is creating a potential regulatory gap. A potential opportunity for profitable manipulation of disclosures in order for the potential of self gain is a promising area. Thatt is an area legislation has not fully recognized. I would be happy to talk about that more. Thank you for your testimony. Thank you and good afternoon, chairman and Ranking Member and distinguished members. Thank you for giving me the opportunity to testify on Critical Issues impacting our markets. Our perspective comes from 32 years of experience in Capital Markets enforcements, investigations and integrity issues including my work at the as a prosecutor, as a practicing defense and governance lawyer. Unlikeve that in 2020, 20 or more years ago, most corporate birds dashboards and managements want to get it right. Nevertheless, we still see activity that gives rise to questions about commitment to dutiesnce and commonlaw that are the responsibility of corporate custodians. Identifiedtee has trading spring loading and bullet dodging. Concern,iable areas of i suggest the committee respectfully that covid19 solutions related to Capital Market activities should provide scrutiny of other issues. Regulatione first, and its inapplicability to private issuers. We saw the exception to weeks ago when the ceo of astrazeneca disclosed about its suspension of vexing Clinical Trials as result of an unexplained illness and a trial is a pet. There likely would have been an obligation of prompt Public Disclosure of what appeared to be an unintentional selective disclosure. Daynd is that secs 10 trading Suspension Authority that works like a temporary restraining order. Buts not enforcement action benefits as an administrative arrow to the heart of legitimate small Public Companies. The sec takes months if not longer to resolve the challenge. They should take a narrow timeframe for making the decision. For decades, the commission alone made the decision. Authority was the delegated into the division from an outofcontrol practice in the previous sec administration. Although the sec chairman has reined in this delegation of authority, i believe the congress intends for the commissioners to decide who to investigate and to make the solemn decision much like a federal judge reviews and approves search warrant applications. Policies disclosure and whether they should apply to nih advisory panels. What level of transparency should exist to enable you on capitol hill and the public to assess possible conflicts of interest who are not subject to the committee act. These are not instead of, but are in addition to the important issues already identified by the subcommittee. I hope we will be able to discuss each of these issues this afternoon. Weally, you have asked address the importance of corporate integrity during the covid19 pandemic and the impact it has on investor protection. I believe that is too narrow. Corporate integrity, a commitment to best practices including a conscientious discharge of commonlaw was,iary responsibilities is during the pandemic, and always will be of importance for u. S. Capital markets participants. A complement the committee for highlighting the importance of these issues. Thank you. Mr. Meeks will be taking over as i need to vote. Inould encourage him to vote the next few minutes, as i will be turning the gavel over to him. Very well, i will go vote now and be back. With that, i recognize mr. Martin. I did not unmute myself. You would think that i would be used to this. Apologies, i am also wearing a tie for the first time in a few months. Chairman and Ranking Members, thank you for the opportunity to testify. I am general counsel for the society of Corporate Governance. 3500 secretaries serving 1000 Public Companies. Our members support the work of corporate boards on governance and disclosure matters. We typically focus on Corporate Law issues. Representedhave. Ther issues at the outset, let me state that iety [indiscernible] in the market we are in, insiders can benefit. Most companies have adopted policies to prevent illegal Insider Trading. A preclearancee procedure of transactions, blackout times, and limitations on the adoption of plans. Generallyut times began several weeks prior to the end of the fiscal quarter and they last until a day or two after the publication of quarterly earnings. Employeest, corporate will have windows lasting just a few weeks. Prohibits on the basis of mmpi obtained through a breach of trust. They testified that the sale of security when the person making the sale was aware of that information when the sale was made. A rule provides an affirmative defense to Insider Trading allegations when trades are made pursuant to a written plan that complies with the rule. Is rule of formative defense only available to plans entered into in good faith. The rule does not operate in a vacuum. It does not operate the elements of the case. Additionally plans must still comply with limitations of rule 144. Executives are subject to the filing ownership forms under the exchange act including one that must be filed in connection with each transaction. Wheres are also acquired required where appropriate. The prohibition on insider training along with related disclosure obligations from established Company Practices provide a comprehensive and effective Legal Framework and we dont believe changes are warranted. Covid presented new and abrupt challenges including relating to Insider Trading compliance. Grapple s review, we believe Public Companies have responded robustly to guidance. Id related discussion disclosure has been widespread. Revisited their including executives that are currently in position of covid related mmpi. Positionoes not have a on the appropriateness of the structure of executive compensation. Boards of directors are best positioned to decide on the appropriateness of such grants. These occur in many cases annually. Believe the trading gap bill is unnecessary given that the rules already prohibit trading by insiders. We would note the bill would further already prohibited further illegal. We believe the regulation has been presented with some conclusion. The study mandated could contribute to a, and wellfounded understanding of the plants and whether any changes are warranted and we support the enactment of hr 624. Take it for the opportunity to testify. Im happy to answer any questions. Thank you. I now recognize myself for five minutes. I want to commend the chair and Ranking Member for offering legislation that is already past the house dealing with instructing the sec to focus on Insider Trading and certain aspects thereof. One of the purposes of this hearing is to join forces with the Ranking Member and the chair to make that statement very clear to the sec. It is a hope that these hearings will inspire the senate to act on that legislation or just as with thethe sec to do legislation directs them to do whether the statute directs them to do it or not. Insiders hold Material Information that is not known to the general public. Rulese Insider Trading that deal chiefly with transactions between the insider and outsiders. Through the market. Or noe much weaker rules rules dealing with insider anding and options or stock the corporation itself. It can be very popular in the boardrooms rooms of this country by saying it is illegitimate to have a hearing of this subcommittee except that the purpose is to make it easier to market stocks to the public. There is a rule making it easier for us on this nest insiders to raise capital. It is certainly legitimate for the subcommittee to explore loopholes that cause insiders to be able to take advantage of the general public and general investing public. Laws onve good traditional false statements. Many thousandse of enforcement transactions dealing with traditional Insider Trading. When insiders make use of material undisclosed information in stock option transactions and other transactions within the company according to the even in frankly include our discussions with the sec and generally be legal though wrongful. Know, the day before the federal government announced its plans to provide kodak a 700 62 5 million loan, the ceo was 1. 7 5 million Stock Options. Plans legally need to be approved by shareholders and the Shareholders Approved a that said that it needs to be set fair market value. Heres where they may have gotten tricked. That is defined as the latest Closing Price of the shares and under no circumstance is that fair market value. In this case, kodak had just million the surprised by over the share price roast by over 500 . This seems to be a time when the shareholders were full by fair market value which did not reflect the knowledge. Would you agree that legislation is appropriate to close this loophole by requiring them to set options prices based on a market price that does not reflect information the company is about to disclose . Thank you. Stock options are a form of executive compensation. We of the forms problems see right now is the huge amount of volatility in prices. Prices may be overreacting to information. A Compensation Structure that as anat market price indication of fair value is problematic in this environment. Structureregulatory is designed to put safeguards into place. Thank you, by time is expired. I recognize the Ranking Member of the subcommittee. Thank you. I appreciate the opportunity. I would like unanimous consent to submit a letter for the that is from the sec chairman addressed to you and cced by me. Orderedut objection, so since i already put it in the record. Now its there twice. Thats good. Maybe i will just start with where the professor had left off. Letter, the chairman is very clear about the concerns about the 10 b 51 plans. Of a couplet short trading,gs are insider terms and administration of rules, 10 b 51 plans, he does that there ister a joint Explanatory Statement concerning the fy 2020 appropriations act on the growth Share Repurchases and are considering this and other to the plants as part of the report. Issuing and pricing Stock Options specifically says that a inconsistento be with existing accounting standards because the trading price of the stock is not an indicator of fair market value. He goes on to ask to make sure that Senior Executives and Board Members keeping that in mind but also having the position of Corporate Finance enforcement. Professor, i dont know if you would care to address that briefly anymore than what you had started to go down that path. Thank you. Thati did want to say is youre are absolutely right and of course the fcc chairman is right. Good corporate hygiene requires a corporation to think seriously expliciting written policies in place with respect to its option grants, executive trading in the Company Stock and the 10 b 51 plan. As are all important issues. I want to distinguish between good corporate hygiene and matters of the directors fiduciary duties and Insider Trading. They are two different concepts. Based on salary or bonuses that are tied to stock prices without using Stock Options. The problem is not the overpayment, it is using stock prices as a metric of value and the problem is not necessarily in the option form itself. Maybe chairman says that inconsistent with existing accounting standards. Is that something the [indiscernible] needs to tackle . Im not sure how you come up with the concept of fair value and how a Compensation Committee does that. The chairman is right, Company Knows tomorrow it is going to release Material Information. It is obviously going to suspect the stock price is going to be affected. If you look at kodaks trading price from the time before the first press report until today, it is all over the place. I dont know at which point we can say that reflects fair market value. That point has been made. It is more than just one company. Clearly is very concerned about it. Was mr. Claypool paraging the chair sec chairer heard it come close to thinking that sec trading or enforcement is not acceptable. That was just wrongheaded. Martin, you specifically Companies Participating through the cares act have some guidance that has been put up. Correct and true that. Do you believe it is clear enough . Yes, i do. I think Company Response to the sec guidance both the statements with respect to Insider Trading and subsequent statements by the chairman and director for wellreceived. It is very clear the corporate community. A big andaw was needed increase in covid related disclosure. Along with the director, we can provide a few statistics about the increase of that disclosure. Appropriately, i think professor fish was alluding to this, companies were struggling with what theding significance of particular events are to their own visits operations and stock prices. Companies have struggled with that. Their response significantly has been to very dramatically increase the amount of disclosure on covid. For example, just at the end of ch, a study found gentlemans the time has expired. Have you already voted . No, i have not but i think i have time. Only have you already voted . I have already voted sir. Has not since mr. Meeks returned, i will make a temporary chair as i go vote. Mr. Chairman, i am looking to see if there is a republican who is on as well who could take the while we have the challenges of a Committee Hearing while we are doing committee voting. I am going to call upon ms. Porter to act as our temporary chair and ask mr. [indiscernible] to proceed for five minutes. Great. Thank you very much to our witnesses today. Has is an area my office devoted a lot of time to crafting what was Bipartisan Legislation in late 2019. With the Insider Trading prohibition act. Very steep and the complexity of defining Insider Trading. Wanthave a question, but i to suggest to my republican friends this is far from a waste of time. Wayay not be exactly the you want to promote Business Investment, but there is arguably nothing quite so important to Business Investment as confidence in the Capital Market. The confidence on the part of shareholders and others that they are playing in a fair market which is why i have been devoted to crafting on top of Insider Trading. There is a need for this. A republican friends know that only 14 of americans directly own stocks. Assists got market has skyrocketed, a small percentage of americans have been able to participate in that. Only half of americans indirectly own some stock in Pension Plans and retirement but we should all able to increase the number of americans who believe they have a stake in their economy and critical to that is making sure we can pull in the eye and say this is a fair and level playing field. I dont want to get into the complexities of all that has occurred at kodak. I understand they are complicated. There is nothing wrong with stock prices going up work stock option plans. What is wrong is when corporate advantage of inside information. Is, we spend a lot of time in the bill finding transactions. Purchase and sales of securities. The fact we are talking about spring loading, that pertains to a transaction but an indirect transaction. It is the conveyance of value because a stock option is valuable. Is, do you think we can alter Insider Trading law, broaden it to be about the conveyance of value and would that capture what we are talking about here or do we need an entirely separate statute for a value that is conveyed via option plans and programs as opposed to purchaser sale security . Thank you. I apologize for being on mute. The context of Insider Trading focus hasthat the always historically been on the purchase and sale and conveyance of information. To me, as the professor had indicated, spring loading and bullet dodging our a part of effective compensation as they are about information. Employees are always good to have access to information that is imbalanced with respect to the rest of the market. The issue is more of timing and broader disclosure implications to Insider Trading itself. I understand that. I understand we are talking more about compensation than purchase or sale of security. At the end of the day, what is happening is a decision about the conveyance of the value is being made possibly when there is an imbalance of information. It is not clear to me there is a radical categorical difference between an executive who is going to approve a stock option plan three weeks from now but knowing they are about to receive a loan accelerates that decision. There is not a categorical difference between that and going out and purchasing the stock. There are differences in timing but it is effectively the same thing. It is conveying value wrongfully because inside information is had. I would agree. You are correctly identifying the issue as being the use and application of that information as being subject to imbalance favoring the corporate executive. An issueelieve it is that goes beyond Insider Trading. It goes to disclosure issues in my view. My time has expired. I would be grateful if at this hearing, we got down to how can we address legislatively spring loading and bullet dodging most appropriately . I wheeled back and thanked the witnesses. The chair recognizes mr. Gonzalez from ohio. Thank you. Thank you for your testimony today. I want to start with something that mr. Claypool brought up. I am curious for everyones take on it. You highlighted the modernity situation. Moderna it does raise a question around and additional disclosure that you might want as a result of that. These are unusual times and when we have the federal government funding 100 of r d on an important product god willing, maybe there should be additional scrutiny. I would start with mr. Martin. Do you have any thoughts on how we could better inform investors with respect to the sorts of announcements or any changes you might make on a temporary basis as a result of covid . Framework existing would necessitate the disclosure of Material Information to investors. To the extent that there is trading around or in advance of such disclosure, that is already illegal. It makes no difference to me what an alternative framework can do beyond what the existing framework does which is to mandate the disclosure of Material Information to investors. I dont have any particularly intelligent ideas as an alternative to that. Thats a fine answer i just wanted your perspective. Another thing from mr. Claypools testimony, this when i would take issue with which is around repurchasing of stocks. When managers repurchase stock, they are contesting they have no new promising ideas of which to invest. Think of that statement . Toill just say, i dont want set you up to be overly combative, but someone who has been an investor for my entire adult life, and companies i have invested in repurchase stock that means i own more of the company. That actually benefits all shareholders is my personal belief. I would be curious for your perspective. I agree with that. Share repurchases are a legitimate tool for Capital Planning for companies. Course, companies can raise or lower their dividend as needed. Repurchases are an entirely legitimate use of shareholder funds. Benefit of existing shareholders. I know that there are strong feelings about that particularly in the wake of tax legislation a few years ago. I just disagree with that hope thate and would congress would maintain the discretion that companies have to make those kinds of capital and boardscisions and Senior Management are left to make those kinds of determinations. Thank you, i agree with everything you just said and i yield back. I am now going to turn over the chairing of this hearing to my colleague mr. Meeks. You need to unmute yourself and you will be all set. Thank you. Thank you for holding it down for us. I now moved to yield five minutes for the gentleman from illinois. Thank you. And my audible and visible . You are. Ok. Professor, i would like to take you up on your offer to dig deeper on 10 b 51 plans. What we have seen with Pharma Companies developing covid includedapparently executives modifying these plans which caused the stop to skyrocket. This might be otherwise considered suspiciously timed traits but they were given safe harbor because of 10 b 51 plans. Could you describe what a 10 b 51 plan is and what it plans to be and accomplish . Yes. B 51 plans are designed as a tool for executives to manage their stock trading over the long term. Today, it executives are b 51 pd increasingly in stock. Aows you to sell stock on a regular basis. It is usually on the sales side. Ifore you sell the stock, you come into possession of nonpublic information and you would be precluded from selling. Once you commit to sell, you are insulated from liability even if you have knowledge that at the time the sale occurs. The loophole is the fact that these plans dont have to be disclosed. Practice among issuers varies dramatically in the types of disclosures they make. Is the lawproblem allows you to modify or terminate your 10 b 51 plan and it doesnt restrict that inmination on situations which you dont have material nonpublic information. Lets say i have a 10 b 51 plan and i am planning to sell my stock. I have good news about my company and i say hang on, im going to terminate my plan im not going to sell. Use ofly, i am making Insider Information but i am not trading, i am declining to trade. Its a loophole that is not covered by existing law. Is there a downside in mandatory disclosure of these either in realtime or real quarterly intervals or some standardized time . I dont see a downside. Been empirical studies that look at disclosure practices and found that the issuers who disclose these plans voluntarily also have better general Corporate Governance. An signal seems to be of good corporate hygiene. What about requirements that separate the decision time from the actual purchases . So that you have to declare months or longer an advance that youre going to start or stop a program . That would absolutely we havent yet talked in this hearing about 16 b and short swing trading liability. That is a provision in the original sec act of 1934. Its supposed to limit the ability of executives to benefit from shortterm trading. You could apply the same approach to a 10 b 51 plan. You should have to put the plan into place for an amount of time and that it persists for an amount of time so is less wouldhood that executives try to take advantage of shortterm information asymmetry. Witnesses have comments on the subject of loopholes and risks . Deafening silence. I appreciate all of your help. Professor, i a law have a lot of sympathy for your life. Anyway, we could have that discussion offline. With that, i yield back. Thank you very much. Thank our guests for acting as chair in my absence and i recognize mr. [indiscernible] thank you and what a good discussion this is. I want to commend and thank all of the members who worked on Insider Trading topics over the years particularly mr. Heinz of connecticut. This is a very challenging subject the balance over flexibility and use and identifying criminal behavior. Thank you jim himes for your work and the partisan work we have done together. Mr. Martin, i want to talk a little bit about the Society Members regarding insider preclearance policies. Members90 of your follow up preclearance policy. Could you highlight what your breast practices would indicate that could have prevented or brought clarity to or remediated the challenges we have read about in recent days and what we have talked about over the course of this hearing . Short. Sure. There is a suite of policies that 20 years ago, and think it was mr. Frankel noted that the change in most corporate suites could take insidertrading and avoid it and regulating it as there is a suite of policies that they instituted to address that. Compliance training with executives, it requires executives to acknowledge the existence of the policies that they understand what limitations are including obviously you cant trade while in possession of mmpi. The designation of brokerage houses to handle all transactions in Company Stock that allow section 16 executives and others who may have mmpi to be flagged. Monitored. Nts can be you mentioned the survey, that the society conducted about two years ago, that indicated approximately 90 of the companies surveyed required byclearance of trade inhouse legal. I mentioned in my opening remarks virtually every company imposes blackout times but it is more stringent than just that. Windows will be closed in the event the new Material Information develops whether it is a leadership change or with respect to a new product. Of course, some companies further regulate the adoption of 10 b 51 plans when they can be coolingoff periods and things like that. Trying to avoid executives becoming embroiled in an insidertrading allegation or incredibly action is timeconsuming and expensive for companies. My limited experience has been with the very active company that is growing and doing mergers and acquisitions and having management changes. A filing process, the number of days when they can actually trade their stock is very limited per quarter. Fractionally. Is there a better way to provide longterm growth based compensation to executives other than Stock Options . We have not done particular studies on them. The question of how long vesting times are is pertinent to your question and i can speak in my own experience. I look forward to following up with you on that and mr. Chairman, i appreciate this is an excellent discussion. Thank you. I now recognize my fellow californian. [indiscernible] mr. K you very much, chairman. I appreciate the words of my good friend i was a little surprised when this hearing started when i heard the Ranking Member and others say that basically there is nothing here to see. Why dont we just move along . It seems like there is a lot to see from my perspective. Effort that the pharmaceutical companies are putting forward to prevent to create a covid19 vaccine. They should be compensated. I am mostly concerned about the large amounts of money that they are making when the countries having such a difficult time. I am very concerned about the legal but wrongful aspects of this. It really does seem to me that itwhat kodak did was legal, is certainly wrongful. I do not have great confidence in the sec at the moment. Their enforcement is way down. I think that we have something here. Professor, could you comment on that . Is there nothing to see here . Should we move along . Subcommitteethe for raising what i think are very important topics and i wouldnt say that you will should just move along. What a have suggested is that you are actuallys focusing on two separate ideas. One is the wrongful misuse of information. Compensationthe and whether companies that are facing speculation in their stock price and other companies that are the subject of government funding whether they should be compensating their executives to the degree that they are. Stock options, some of the recent stock option experiences involve a combination of the two. Memories of the subcommittee might be equally upset if these executives were getting huge grants in the form of salary. There is nothing wrong with the Compensation Committee deciding to pay an executive millions of dollars before the news of a government grant has been publicly released. The compensating committee knows about the government grant. It is not a misuse of public information. Bad,ight think it smells this is taxpayer funding, this is not something the executives should profit with. Thats a little different from the stock trading or insidertrading concept. I think it does smell but pretty bad. If you could speak a little bit about spring loading and bullet dodging . You were talking about that earlier. I would agree with the comments that have been made so far with respect to spring loading and bullet dodging. The focus has been on the spring loading component where the bullet dodging is a company temporarily depressing the stock informationeasing before stock option grant date. As opposed to the holding back the release of positive information. One of the courts a number of years ago referred to spring as being a matter of corporate disclosure Contact Contact regarding not necessarily a violation of law. The conversation is around moving the whole discussion into how to provide some form of disclosure and regulation around these concerns. The one thing respectfully that i think i should always address is the issue of sec enforcement. While the secs numbers may be the, i would submit commission is very aggressive. There have been 40 trading suspensions that are specifically related to issuers in the covid19 solutions space. The commission has been very vigilant. On the other hand, that also has asacted its ability to be broad in its application and choice of cases. Gestation ofhe investigations, we are still seeing a very active vision and a repurchase a over the last 18 months. And notme is about up to be confrontational, but i would disagree with that when you see what happened with kodak. I dont know how you explain that to the american public. Thank you, my time has expired. I now recognize the recent formers chair former chair of the subcommittee. Thank you, gentlemen for yielding. Thank you for the support and the hearing. Mr. Frankel, i would like to address my question to you. Earlier this year, the house passed my legislation the 8k trading cap act with bipartisan support. Loophole thata allows Corporate Executives to trade on information before it is disclosed to the public. Now, when there is a significant corporate event at a public company, the company has to dix disclose that significant event to the public by filing a form 8k within days of that event occurring. During this gap, executives at the company know about the event but their investors dont. My bill would address this Problem Program by preventing executives from trading during this four day gap. Given the recent activities that my colleague just mentioned, that Companies Like kodak, novak , and mode are not, i believe it is more important now than ever to close this loophole. There have been over 10,000 ak filings with the sec. Mr. Frankel, would you agree that during this crisis when firms have increasingly made important public announcements, it is especially important that we close this loophole . I would agree entirely. Legislation is right on point. It also goes to appoint mr. Martin had made before regarding corporate blackout times. There is abuse, but using the example that mr. Vargas raised with respect to kodak, i would refer to the Committee Statement from yesterday. The fact is, the sec has not yet let alone completed conducted its investigation. The sec certainly can come to different conclusions in the findings of the internal investigation. If you look at a report of the investigation, the questions posed were narrow. Or that were addressed in the course of the investigation. Back to your question, i do think that your proposed legislation around disclosures is right on point and essentially, legislates blackout time which does impose the level of control that the market warrants. I launched an investigation with chairwoman waters and others into the administration 765 seven her 65 million loan to kodak. The administration continues to investigate the reasoning behind the decision to provide the loan and whether they violated their own policies and procedures and whether kodak shared any material nonpublic information before the announcement was made public. This was the International Development finance corporation. They gave into a domestic corporation, thats a violation, and to a company that had no experience in vaccines. Kodak has acknowledged that it is under investigation of the sec. This follows the unusual spike in the trading of its stock just one day prior to the july 28 announcement. 1. 6 billion shares of kodak were traded. More than six times the average daily volume of shares per day during the previous 30 days. While the increase in trading activity is increasingly a result of kodak inadvertently releasing the news of the loan to outlets, why did they do that . Kodak waited until the following day to publicly disclose the announcement. Stockholders were paying attention to social media, kodak effectively kept millions of shareholders in the dark from the spike in trading activity. As a potential violation of regulation fd which states that when there is a nonintentional disclosure, the assured must publicly disclose the information properly and if not, can this sort of trading Activity Still be the answer is yes. There is potential for a violation. Included in the scope of the investigation i will be very brief on this. We are also dealing with potential stock manipulation. And with people whopotentially t option side. These are all things that the sec will look at. When do you expect your investigation to be completed . I believe your time has expired. A one sentencebe answer, we will hear it and then we will go on. Investigations could easily run nine months to 15 months. Thank you. The gentleman from new york. Thank you for holding this important hearing. Onave been listening off and to the witnesses. In the middleere of a pandemic that has killed hundreds of thousands of americans, it has devastated the economy. The question that presents itself to us is credibility. Everyonehave a time of questioning. You have the president of the United States questioning scientists. And lies as we deal with these pharmaceutical companies. That we need a vaccine sooner rather than later. Individuals should be compensated for the appropriate amount of work that they do. There is no magic bullet. Is an effective and safe thing that we need. As well as wearing our masks on a continual basis. All of the scientists and Companies Working on these crucial things. Of the vaccine is fortunate. President the contradicted his own cdc director. Building up the confidence of the american people. That brings me to where we are now. A role for Corporate Governance. To step up. To understand the credibility issue. I believe we need leaders of and laws thats can force a productive arrangement. What are some of the ways we can use Corporate Governance . While also protecting some of the market misbehavior . I wish i had an answer for that question. Is, inllenge we all face this environment, we really want to preserve Capital Market incentives. We want to preserve competition incentive. Comes up with a vaccine, people will say this is worth a lot of money. Only get governance you so far. Right now there is a gap between Corporate Governance and science. That is the struggle. Companies are taking baby steps. A company may not know. Especially in regards to testing process. Will it pan out . Will i mislead investors if i say we are making progress . Or if i dont talk about the progress . This environment is very challenging to manage. I think it does come down to good Corporate Governance practices. A lot of this is internal. Payingh is the board attention to what the company is saying . , that is notdegree about insidertrading. It is about best practices. Thank you. Can i add something . A lot of companies have tried to to use theirw procedures around their disclosures. They will try to add the right kind of perspectives. They would not have risen to that level. Thank you. Let me ask another quick question. Growing trend a of Companies Going public. Through a reverse merger. I have serious concerns about this. Do you have some concerns . I can certainly address that very briefly. The issue with reverse mergers, is something that is a hot topic. It is not an insidertrading issue. More of a Market Structure issue. The time of the gentleman has concluded. The next two questionnaires are both voting. We will take a 10 minute recess. When the pandemic first hit, we were in the eye of the storm