California congressman brad sherman chaired the hearing. The subcommittee will come to order. Without objection, the chair is authorized to declare a recess at any time. The full committee not on the subcommittee are authorized to participate in todays hearing. Members are reminded to keep their video function on at all times. Members are reminded that they are responsible for muting and unmuting themselves and to mute themselves after theyre finished speaking. Consistent with the regulations accompanying the resolution, the staff will mute members and witnesses as appropriate when not recognized in order to avoid inadvertent background noise. Members are reminded that all house rules relating to order and decorum apply to this hearing. This hearing is entitled Insider Trading and stock option grants, an examination of correspondent integrity in the covid19 pandemic. We know that we have votes on the floor. We will not have any further delays of this hearing in order to allow members to vote. Members should go vote and return and while we all have our part of the alphabet to vote in, im sure there can be some accommodation made. If its your turn to ask questions, you can vote with others not of your same alphabet alphabetic characterization. When im voting, mr. Meeks has agreed to serve as chair until my return. Ill recognize myself for five minutes for an opening statement. Our Capital Market system is unique in history up until about 150 years ago every Business Enterprise was made up of people who knew each other, who 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 and Investment Opportunities were limited to those that you happen to be able to know. You wouldnt trust your money with some enterprise of strangers, and of course you didnt have liquidity since you could sell your investment pretty much only to somebody else who knew those. And so at that point, people could rely on personal trust. Today investors turn their money over to anonymous insiders, Corporate Boards, executives who theyve never met. And they know that the insiders have far more information, attention and power. And they they dont have the buyings of a personal trust. They rely on law to make sure that the insiders are treating the investors fairly. Ill continue. We had a little technical problem there. We now apply that system to the covid pandemic in which nearly 200,000 americans have lost their lives and in which many firms affected by this pandemic are having sudden increases or decreases in their value. Many pharmaceutical firms, for example, even the suggestion of involvement of federal programs can cause shares to shoot up in value. Following this sort of announcement, kodak and others saw their stock prices rise by over 400 . With this trend in mind, the fcc has remind companies that in this pandemic, they should not only abide by law but practice, quote, good corporate hygiene. Chair clayton has reiterated these views in a recent letter regarding todays hearing 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 design our laws and regulations to govern those who cannot be governed by mere admonishments. For example, while taxpayers have invested 3. 1 billion in federal contracts with moderna to develop a vaccine since april, executives at these firms have sold over 60 million in their companys stock. We need to know that they were not taking advantage of any inside information that perhaps their stock had gone up too high. Of greater concern is activity of kodak with the announcement of a government loan that raised insider trader concern. In particular, we have a concern there on Stock Options and their grant dates. When all Equity Compensation needs to be improved 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 option grant date, they believe that executives who get these Stock Options will live by that. If instead the fair market value doesnt reflect non Material Information, Insider Information thats going to be announced the next day, or the next week, then shareholders have been duped into approving Equity Compensation that does not reflect real market value. I want to thank the insiders at kodak who have added insult to injury. They granted Stock Options at what they knew to be an unfairly low price. Then they spent a lot of shareholder money on a Corporate Law firm to tell them it was legal. If any major firm can say this is legal, it shouldnt 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 with the market in when the market has knowledge of the material transactions that the insiders know about. So i look forward to exploring this with our witnesses. And we will now hear from the Ranking Member for four minutes for his opening statement. Thank you, mr. Chairman. Its famously been said, the definition of insanity is doing the same thing over and over again and expecting different results. Here we are once again holding a hearing on an issue we already had a hearing on. Theyve been passed by the representatives. So i ask the committee, why are we spending precious time and resources on bills that have passed the house of representatives nine months ago just because we keep having hearings on bills that have already passed doesnt mean that the senate is going to take them up. Dont get me wrong, Insider Trading is not only wrong, its illegal. And not only does it hurt the integrity of our Capital Markets, but it hurts our main Street Investors as well as mr. And mrs. 401 k and we agree that Insider Trading must be punished to the fullest extent. The subcommittee should not be used as a name and shame games for companies for wrongdoing and, yes, the facts surrounding one company at first certainly appear to be suspicious and need to be fully investigated. Thats not our job. The securities and Exchange Commission is tasked with ensuring market integrity and under the act of 1934, the sec has the power to bring Enforcement Actions in instances of Insider Trading. During 2019, the commission brought 862 Enforcement Actions to hold individuals, issuers, Financial Institutions and others accountable, sending a message to market participants. Last years results speak for themselves. 862 Enforcement Actions obtained judgments and orders totaling more than 4. 3 in penalties, obtained 600 bars or suspensions against market participants, suspended trading in the securities of 271 issuers and returned nearly 1. 2 billion to harmed investors. So instead of playing judge, jury and executioner in the court of public opinion, the committee should be focused on the solutions that support job creators of all sizes, particularly our hardhit Small Businesses. It would reduce regulatory costs and burdens and improve and expand access for investors to better put their money to work and create more Investment Opportunities for investors. Im not just going to curse the political darkness. Im going to try to light a policy candle here and here is a partial list of what we should be discussing and working on today. Hr4860, crowd funding amendments act introduced by the Ranking Member. We have my legislation, hr609, the Small Businesses sales and brokers simplification act. Something weve dealt with for four congresses and a row. Helping angels lead our startups, the main street growth act, alleviating stress test burdens to help investors act, modernizing disclosures for investors act introduced by the Ranking Member, another one of my bills, improving Investment Research for small and emerging issuers act, helping startups continue to grow act, regulation a plus improvement act introduced by the somebody ranking, i could go on and on. But the list is exhaustive and weve got much more to do. But instead of Holding Hearings on legislation that the house has already acted on, lets move forward on Bipartisan Solutions that deliver the results the American People deserve from the Financial Services committee. We know that there are problems. We need to address those problems. This isnt going to do it, unfortunately. I would point out that one part of this hearing is on my bill to deal with spring loading which has not been considered by this committee let alone the full house and bans a practice that i think will discover both wrongful and unfortunately legal. And so we do have a strong purpose to have this subcommittee hearing. I now recognize the Ranking Member, the gentleman from north carolina, for one minute. Look, Insider Trading is wrong. We can all agree on that. The sec i think we can all agree, 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, strengthen our economic recovery and help our workers come back, come back safely to the workforce after the virus, after we get testing and treatment going, and today i introduce a bill to do just that. The gig worker Equity Compensation act. Today an increasing share of our workforce does not want to be bound by traditional constraints such as an office or set hours or traditional employer employee relationships. These workers are critical in our technologically driven world. It allows them to share in the same economic benefits of owning the businesses theyre helping to improve. So todays hear should be focused on that type of solution not just a rearfacing set of issues in an election year. Thanks so much. Ill point out that spring loading is legal until this Committee Makes it illegal and its just as long as in regular order, if we wish to debate, the chair can debate. But you should not opine about everyone elses opinion. That is not in good form for the chair. You were not recognized. You did make your points clear. When people question whether this is a legitimate hearing, it is appropriate to spend time responding. Today we welcome the testimony of dr. Jill fish and mr. Gavin martin. Mr. Claypool is a Research Director where he focuses on corporate crime and wrongdoing in the ways in which Corporate Power distorts our democracy. Dr. Fisher is the distinguished professor at business law and codirector of the institute of law and economics at the university of pennsylvania law school. Mr. Franco is chair of the government investigations and securities enforcement practice at dickinson wright. He served as senior counsel for the secs division of enforcement. And mr. Martin is Senior Vice President and general counsel for the society of Corporate Governance where he leads the societys efforts related to governance laws and regulations. Your oral testimony will be limited to five minutes. And i will ask you to respect our rules here by wrapping up your oral testimony. Without objection, your written statements will be made a part of the record. And so we will now recognize our first witness, mr. Claypool. Thank you. Chair sherman, Ranking Member, members, on behalf of more than 500,000 members and supporters of Public Citizen many of whom are investors and hopeful for the Timely Development of safe and affordable covid19 treatments, we welcome this probe into Insider Trading. The reported events are concerning. The chair described the kodak concerns well. Additionally, moderna announced that all participants in the first phase of its covid19 trial who received its vaccine developed some antibodies. This is good news that pushed up the stock to an alltime high of 87. Several executives modified existing or adopted new plans. In the days following the announcement, moderna ceo and other executives and funds controlled by the board sold about 90 million worth of company shares. Remember, its taxpayer money funding 100 of this work to develop a covid19 vaccine, all of it. Now, a study published by a coalition, they found that stock market value for the eight Biotech Companies on the s p 500 grew by 130 billion between january and august. And executives and insiders from three of these Companies Sold at least 370 million in Company Stocks inflated by news of government awards and trial results. Meanwhile, npr is reporting that the number of sec Enforcement Actions has plummeted to its lowest point in decades. Public Citizen Research has documented declines in whitecollar crime enforcement at the fec and across the government. If the agency is following the trump administrations orders to stand down as numerous governmentled policies, then that allow deserves a hearing. As for legislation, we look forward to full house passage of the bill requiring the s. E. C. And cfpb to provide monthly reports. They will wa we applaud the house for approving the Public Citizen endorsed Insider Trading reform bill, establishing a clear law against illegal trading will serve prosecutors well. We also applaud package of the 8k trading gap bill and the 105b1 plan. One promising deterrent is compensation deferral efforts to place a percent of compensation in a pool. Should the later be found to misuse aid of a law or any other misconduct that results in fines, then the pool of senior managers deferred pay would be used to fund the fines. A concept exists in separate bills. Its crucial for congress to condition the trillions of federal aid so it is not diverted into the pockets of pandemic profiteers. We applaud the contributions to the h. E. R. O. S. Act and look forward to working with you as you fashion the next round of recovery and stimulus legislation. I welcome your questions and may draw on Public Citizen experts with withritten responses where relevant. This may be the first time in decades a witness has concluded at well less than five minutes. The witness did not choose to yield his remaining time to me and accordingly, i will recognize the doctor. Doctor, you may be on mute . Do i have it now . Yes. Okay, thank you, sorry. Chairman, Ranking Member, and members of the subcommittee, its an honor to participate in todays hearing. Thank you to chairman sherman for the kind introduction. Just a point of clarification, im just a lowly law professor, not a doctor. Thank you for the promotion. I want to take a few minutes to put the reported events to which chairman sherman and rick referred in a little bit of context. In the past six months as we all know, the Capital Markets have experienced unprecedented levels of volatility and trading activity. I know the chairman has provided this subcommittee in earlier testimony with data on both the high levels of trades and the incredible price swings that weve seen not just in pharmaceutical companies but across a range of industries that have been affected by the pandemic. And these fluctuations create the opportunity for manipulation, for misconduct, selfdealing, theyve drawn considerable media attention. Ive written about securities frauds, s. E. C. Enforcement and Insider Trading and i want to focus in my opening remarks on a review of the regulatory structure and the challenges that the market environment imposes on that regulatory structure. The activities that i understand the subcommittee to be interested in today involved three distinct sets of legal issues, disclosure, instinct, t and Insider Trading. So the first issue is disclosure integrity. Some stories weve heard say issuers have made inaccurate or overly optimistic disclosures to drive up their stock prices. This can be for various reasons, ranging for enabling insiders to sell and make a lot of money, increasing the value of Stock Options, or facilitating the issuers access to the Capital Markets. Let me be clear, existing securities regulation requires disclosures to be accurate. False and misleading statements, those that are made with an effort to distort stock prices or create opportunities for personal gain, that constitutes securiti securities fraud. A corporate official that makes false claims, claims about a pharmaceutical product that is under development or misstates the results of a trial can face an enforcement action and private civil litigation and false statements that are weighed willfully can subject the officials to criminal liability. This is not a gray area. The existing market environment creates a challenging disclosure environment. The scope of the pandemic, the lockdown, the effect on the worlds economy are unprecedented. It has the potential to have an enormous impact on the economy and on stock prices. Everyone is watching to see whats happening with these companies. And the s. E. C. Itself has encouraged issuers to provide as much information as possible about pandemicrelated risks on businesses. But at the same time we dont know what the truth is. The scientific community, Public Health community is still evaluating all of this. Its hard for businesses to predict whats going to happen in the future, whats going to be the effect on their stock prices and so forth. Simply put, issuers are in a challenging environment, theyre pressured to disclose as much information as possible, but 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 may be too high at the time that executives receive Stock Options. The concept that stock prices reflect fundamental value or that the fundamental value of these companies is knowable at any given point right now is something that is very challenging from a market regulatory perspective. Now, let me say, my time is running short and as a law professor im longwinded. I will cut to the chase and talk further perhaps in response to your questions about Stock Options and Insider Trading, but let me just say a couple of words about potential regulatory reforms. As i said, the law doesnt prohibit accurate statements, even if those statements are forwardlooking, even if those statements are not based on hard science about what a vaccine or what a product is going to do. The law, however, doesnt permit executives from creating Trading Opportunities through their public statements and here i think the potential, if i chairman, if i could just take a minute to wrap up. 30 seconds. Here i think the potential rethinking of plans which i think the 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 selfgain is a really promising area and i think its an area that legislation and registration havent fully recognized and i would be happy to talk about that more in response to questions. Thank you for your testimony. I recognize mr. Franco. Good afternoon. Thank you for giving me the opportunity to testify on Critical Issues impacting our Capital Markets. My perspective comes from 32 years of professional experience in Capital Markets enforcement, invests, governance and integrity issues including my work at the Securities Exchange commissions division of enforcement, as a federal prosecutor of public corruption and securities violations, as a lawyer for more than 21 years. I believe that in 2020 unlike 20 or more years ago, preenron, most management want to get it right. Nevertheless we still see Capital Markets activity that gives rise to questions about commitments to compliance and fundamental common law duties that are the responsibility of corporate custodians. This committee has identified Insider Trading, plans and Stock Options grants. Spring loading and bullet dodging as issues of legislation. Beyond these undeniable areas of concern, i suggest to the committee that covid19 solutions related Capital Markets activities also should invite scrutiny of several other issues. They include first, regulation and its inadisclosed on a nonpuc call arranged by j. P. Morgan about its suspension of trials as a result of an unexplained illness in a trial participant. It likely would have an obligation for prompt disclosure of what appeared to be an unintentional selective disclosure. Second, is the s. E. C. s tenday trading Suspension Authority which operates like a courtimposed restraining order. However, its not an enforcement action but operates as ang administrative arrow. It takes months if not longer to resolve the challenge. Legislation should dictate a precise and narrow time frame for making the decision. Third is delegation of authority to authorize formal orders of investigation at the s. E. C. For decades, the commission alone made the decision. It was delegated into the enforcement division. Although s. E. C. Chairman clayton has reined in this authority, congress intended for the commissioners to decide whom to investigate and to make the decision about authorizing subpoena power much like a federal judge reviews and approves search warrant applications. And fourth is conflict of interest disclosure policies and whether they should apply to nih advisory panels. The question for consideration is 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 federal Advisory Committee act. These are not instead of but are in addition to the important issues already identified by this subcommittee. I hope that we will be able to discuss each of these issues this afternoon. Finally, you have asked that we address the importance of corporate integrity during the covid19 pandemic and the impact it has on Investor Protection and overall market integrity. I believe that is too narrow. Corporate integrity, a commitment to best practices and proper governance including a conscientious discharge of duties and market integrity was, is during the pandemic, and always will be and must be Guiding Principles in Corporate Board rooms for u. S. Capital markets participants. I compliment the committee for highlighting these issues with this hearing. I look forward to answering your questions this afternoon. Thank you. Thank you. As described earlier, mr. Meeks will be taking over while i need to vote. So im hoping to encourage mr. Meeks to vote in the next few minutes since ill be turning the gavel over to him in about 20 minutes. Does that work for you . Very well. Ill run to vote now and be back. See you in 15, 20 minutes. With that, i recognize mr. Martin. Mr. Martin . I didnt unmute myself. You would think i would be used to this by now, six months into this. Im wearing a tie. The first time in many months. Thanks for the opportunity to do that. Members of the committee, thank you for the opportunity to testify today on grandville martin. The societys professional association of approximately 3500 assistant secretaries serving approximate 1,000 Public Companies, our members support the work of boards and executive managements on Corporate Governance and disclosure matters. We focus on securities and Corporate Law issues. In the last several years, broaden our perspective to including environmental and social issues. And the Public Companies increasingly provide. At the outset, they support a framework and insider training regulation and enforcement ensuring the markets retain its reputation for transparency and fairness in the interest of all Public Companies. Benefit from material and public investigation on the expense of other investors is wrong and support the laws and enforcements necessary to punish such conduct. Most Public Companies have adopted policies that prevent illegal insider training, common features including a prohibition of training and a preclearance of transactions and limitations on the adoptions of plans, its worth noting the company imposed blackout periods restricting from selling stock lasts until a day or two after the publication of quarterly earnings. As a result, Company Officers and directors will have four open windows per year with each window lasting a few weeks. Section 10b is the securities act prohibits sales on the basis of mmpi that is owed to the issuer. It specifies the sale of security is made on the basis of mmpi when the person was aware of that information when the sale was made. Rule 10 b 51 provides a defense when such trades are made pursuant to a preexisting written trading plan that applies with the rules. The rules of affirmative defense is only available if the plan was entered into in good faith. The rule does not operate in a vacuum. It does not alter the elements of a case under section 10b. Transactions pursuant to a plan must comply with the volume limitations of rule 144, the short swing profit rules 16b. Executives are subject to the filing of ownership forms of the exchange act which must be filed in connection with each transaction. The schedules 13d and 13t are required where appropriate. The prohibition on Insider Trading along with the related disclosure obligations and established Company Practices provide a comprehensive framework. We do not believe changes are warranted. Like other aspects of our lives, covid19 presents challenges to Companies Including related to Insider Trading compliance. As companies grapple with the implications of the pandemic, the s. E. C. Issued guidance emphasizing market integrity. Based on our review we believe companies have responded robustly to this guidance. Covid related disclosures have been widespread and covered a wide range of topics. Many companies reassess their Insider Trading policy compliance programs including whether their procedures were able to identify all of the executives who were now possibly in possession of covidrelated mmpi. Prepandemic, such concerns for supply change and executives were minimal. Let me turn to some of the pending legislation. In general, the society does not have a position on the appropriateness of the amount or structure of executive compensation. We will observe that the use of Stock Options by startups and other companies is common and essential. Boards of directors and their composition are best positioned to decide on options and grants. Transparent fairness exists under the current framework. We believe the trading gap bill is unnecessary given that section 10b prohibit trading by insiders if the significant event is material. The bill makes conduct that is already prohibited further illegal if possible. We believe the regulation of insid Insider Trading has been subject to some confusion having said that the s. E. C. Study mandated could contribute to a common and well founded understanding of 10b51 plans. Thanks for the invitation for the to testify and i would be happy to answer any questions. Thank you. I now recognize myself for five minutes. I want to commend the chair and the Ranking Member for authoring legislation that has already passed the house dealing with instructing the fcc to focus on insider training and certain aspects thereof. And 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 s. E. C. Its our hope that it will inspire the house to act on that Bipartisan Legislation and get the scc to do what the legislation directs them to do, whether theyre directed to do it or not. Insiders hold Material Information that is not known to the general public. We have Insider Trading rules that deal with transactions between the insider and outsiders through the market. We have much weaker rules dealing or not rules dealing with Insider Trading and options or stock between the insider and the corporation itself. Now i know that the minority can be very popular in the board rooms of this country by saying that its illegitimate to have a hearing of this subcommittee concept if the purpose of this hearing is to make it easier to market stock to the public. And there is a rule for us making it easier on business insiders to raise capital. But it is certainly legitimate for this subcommittee to explore the loopholes that cause insiders to be able to take advantage of the general public and the general investing public. We do have good laws on traditional false statements. The scc has done many thousands of enforcement transactions dealing with traditional Insider Trading. When insiders make use of material undisclosed information in stock option transactions and other transactions with the company, according to kodaks lawyers, from a frankly including and even in our discussions with the fcc and generally be legal though wrongful. As you know, the day before the federal government announced its plans to provide kodak a 765 million loan, the companys ceo was granted 175 construction, 1. 75 million Stock Options. Now, stock option plans need to be legally need to be approved by shareholders. And the Shareholders Approved a plan that said that the option exercise price for these employee Stock Options needs to be set at, quote, fair market value. But heres where the shareholders may have gotten tricked because thats defined as the latest Closing Price of the shares and thats fair market value. But in this case kodak undisclosed to the market had just landed 765 million. Considering the Share Price Rose over 500 within hours, this seems to be a situation where the shareholders were fooled by the by fair market value which turned out to be a much lower a value that didnt reflect the knowledge. Would you agree that legislation is appropriate to close this loopholes by setting exercise prices from doing so based on a market that doesnt reflect information the company is about to disclose and required to disclose . Thank you, chairman hsherman. Stock options obviously are a form of executive compensation. And as compensation, theyve got a number of problems. One of the problems that we see right now is if a huge amount of volatility in prices, prices are reacting as you observe, prices may be overreacting to information as well. So i think a Compensation Structure that looks at market price as an indication of fair value is particularly problematic in this environment. That being said, the whole strud to put safeguards into place, not just the shareholder vote, but also the role of the Compensation Committee. Thank you. My time has expired. I recognize the member of the subcommittee mr. Bill hiez ig. Thank you, mr. Chairman. I appreciate the opportunity. And i would like unanimous consent to submit a letter for the record that is from chairman clayton, addressed to you and ccd by me. I would like to put that into the record. Without objection, so ordered for a second time since i put it in there. So, thats good. Double, i appreciate it. Maybe ill just start where profess professor fish had left off. And in this letter, the chairman is very clear about some of his concerns about the 10b 51 plans and in fact sort of a couple of the headings on this for terms and administration of rules, 10b 51 plans. He does say in the letter theres a joint Explanatory Statement accompanies is appropriations act on the growth Share Repurchases and considering this and other issues related to rural 10b51 as planned part of that report issuing and pricing Stock Options. He very specifically says that a grant may also been inconsistent with existing accounting standards because in short the trading price of its stock is not a good indicator of fair market value. He then goes on to ask to make sure Senior Executives and Board Members keeping that in mind but also to have the commission of Corporate Finance and enforcement to look at it. So, professor, i dont know if you care to address that any more than you were certain to go down that path. So, thank you. I guess what i did want to say is youre absolutely right. Good corporate high joan, i think, these days requires a corporation to think seriously about having written explicit policies in place with respect to its option grants, with respect to its executive trading in the Company Stock and with respect to 10b51 plans. I think those are all important issues. I just want to disting between matters of good corporate hygiene. There are two different concepts. Lots of companies can be overpaying their executives right now based on salary or bonus tha bonuses that are tied to stock prices, without using Stock Options. The problem is the overpayment. The problem is using stock prices as a metric of value. The problem is not necessarily any option for rum itself. And the chairman says that may be inconsistent with existing accounting standards. Is that something the pcob needs to tackle. Im not sure how you come up in this market environment with a concept of fair value and how a board or a Compensation Committee goes ahead and does that. Chairman sherman is right, if the Company Knows tomorrow its going to release Material Information, the company is obviously going to suspect the stock price is going to be affected. But if you look at kodaks trading price from the time before the first press reports until today, its all over the place. And i dont know at which point the trading price, we could say with confidence, yes, that reflects fair market value. I think that point has been made. Its more than just one company. But the s. E. C. Clearly is very concerned about it. The chairman is, quite honestly, when mr. Claypool was, i would say, disparaging the chair, whether it was mary joe or jay clayton, i dont think i have ever heard a s. E. C. Chair even come close to taking that Insider Trading or enforcement is somehow not acceptable. So, that was just wrong headed on that. Mr. Martin, specifically Companies Participating in government assistance programs through the c. A. R. E. S. Act have some guidance that has been put up through that. Do you believe its clear enough . Yes, i do. I think the Company Responds to the s. E. C. Guidance, both the statements with respect to Insider Trading and subsequent statements by the chairman and director bill hammond were wellreceived. It was very clear to the corporate community. And what you saw was a big increase and needed increase in covidrelated disclosure, which the chairman was very focused on, along with the director. We can provide a few statistics about the increase of that disclosure. And appropriately, the i think professor fisch was alluding to this, companies were really struggling at the beginning and to some degree still are with understanding what the significance of particular events are to their own Business Operations and indeed their stock price. And its been extremely volatile. And companies have struggled with that, and their response, significantly, has been to very dramatically increase the amount of disclosure on covid. For example, just at the end of march, an nacd study found that the company had filed a form 10k as of march i believe the time with the gentleman has expired. Excuse me, im sorry. One last point mr. Himes, its your turn. Have you already voted . No, i have not, but i think ive got time. So, i will use my time now. I will not only ms. Porter, have you already voted, or are you voting by proxy . Please unmute, ms. Porter. I have already voted, sir. Good, im going to since mr. Meeks has not returned, and your permission, ill make your temporary chair as i go vote. And mr. Chair im looking to see if theres a republican on as well who could take the helm this is the challenges of having Committee Hearings continue on while were doing extended voting. But i would like to have one of my republican colleagues let me know. Okay. Im going to call upon ms. Porter to act as our temporary chair and ask mr. Himes to proceed for five minutes. Great. Thank you, mr. Chairman, and thanks very much to our witnesses today. This is an area of attention for me. My office has devoted a lot of time to crafts what was, as the Ranking Member pointed out, Bipartisan Legislation which passed the house with hr2534, very steep in the complexity of defining Insider Trading. I do have a question, but since it was a bipartisan bill, i want to suggest to my republican friends, this is far from a waste of time. And it may not be exactly the way you want to promote Business Investment. But there is arguably nothing quite so important to Business Investment as confidence in the Capital Markets, the confidence on the part of shareholders and others that they are playing in a fair market, which is why i have been very, very devoted to crafting a specific statute on the topic of Insider Trading. Only 14 of americans directly own stocks. As the stock market has rocketed in the last couple of years, direct will you a small percentage of americans have been able to participate in that upside. It is true that roughly half of americans of course indirectly own stock through Pension Plans and retirement plans, but we should all be looking to increase the number of americans who feel like theyve got a stake in the equity of their economy. And critical to that, of course, is making sure we can look people in the eye and say this is a fair and level playing field. I dont want to get into the complexities of all that occurred in kodak, and i understand they are complicated. Theres nothing wrong with stock prices going up, necessarily. Theres nothing wrong with stock option plans, necessarily. What is wrong is when corporate insiders take advantage of inside information. So, my question is we spend a lot of time in the bill defining transactions, purchase and sales of securities. The fact that were talking about spring loading and bullet dodging, that pertains to essentially a transaction, but its an indirect transaction. Its the conveyance of value, because the stock option is valuable. And so my question is im not quite sure which of my witnesses maybe ill start with mr. Frankel. My question is do you think we can alter Insider Trading law, run it to be about the conveyance of value, and would that capture what were talking about here . Or do we need an entirely separate statute or value that is conveyed via option plans and programs as opposed to the purchase or sale of securities . Mr. Wright, youre on mute. Thank you congress mam himes. I think in the context of the Insider Trading laws, the focus is always has always historically been on the purchase and sell and conveyance. The issues around spring loading and bullet dodging are as much a part of executive compensation as they are the information. Unciders are always going to have access to information that is imbalanced with respect to the rest of the market. That really is more an issue of timing and broader disclosure obligations than Insider Trading itself. You knono, i understand that. I guess the point im making i understand were really talking about compensation than a purchase or sell of a security. At the end of the day, what is happening is that a decision about the conveyance of value is being made possibly when there is an imbalance of information. So, its not clear to me that theres a radical categorical difference between an executive who is going to approve a stock option plan three months from now, but knowing theyre about to receive a loan accelerates that decision. Theres not a categorical difference between that and that executive going out and purchasing the stock. There are differences in timing, et cetera. Its effectively the same thing. Its conveying value wrongly because Insider Information is had, right . I would agree. And, you know, congressman, youre correctly identifying the issue as being used application of that information as being subject to an imbalance, favoring that corporate executive. I still believe it is an issue that is beyond that really should fall beyond Insider Trading because it really does not relate to itself. It really goes to disclosure issues in my view. Yeah, my time has expired, but i would be grateful if in this hearing we got down to how can we address legislatively spring loading and bullet dodging most appropriately. My time has expired, so ill yield back. The chair recognizing mr. Gonzalez, the gentleman from ohio. Thank you madam chair. Thank you everybody for your testimony today. I want to start with something that mr. Claypool brought up that kind of perked my interest. Im curious for everybodys take on it. You highlighted the moderna situation whereupon getting good news, stock price went up significantly, sold stock. Nothing in and of itself wrong with that. But it does sort of a raise a question around Covid Support specific Covid Support to me it does anyway. Specific Covid Support and what you might want as a result of that. I think these are unusual times. When we have the federal government basically funding 100 of r d on a product that is going to be incredibly important, god willing, you know, maybe there should be additional scrutiny there. I guess i would start first with mr. Martin. Do you have any thoughts on how we could better inform investors with respect to these sorts of announcements or changes you might make on a temporary basis, not permanent, but a temporary basis as a result of covid. I think the framework that necessitates the disclosure of information to investors to the filing of ak is the appropriate mechanism. You know, to the extent that there is trading around or in advance of such disclosure, thats already illegal. So, its not immediate evident 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. And so im sorry, but i dont have any particularly intelligent ideas as an alternative to that. Thats a fine answer. I just wanted your perspective on it. And now another thing from mr. Claypools testimony this one i would take issue with. It was around a normative judgment of repurchasing of stoc stocks, in particular. Theres a quote in here. When managers repurchase stock, they are confessing they have no new promising ideas on which to invest. Ill have mr. Martin again. What do you think of that statement . I mean, ill just say as i dont want to set you up to be overly combative, but as someone whos been an investor my entire adult life, when companies i invested in repurchase stock, that means i own more of the company now. So, that benefits all shareholders is my personal belief. But i would be curious for your perspective on that as well. I agree with that. Share repurchases are a legitimate tool were Capital Planning for companies. Of course, you know, companies can raise or lower their dividend as needed, and Share Repurchases are an entirely gentlemen jit mat use of shareholder funds for the benefit of existing shareholders. So, you know, i know that there are strong feelings about that particularly in the wake of some tax legislation a few years ago. I just disagree with that perspective and would hope that, you know, congress will maintain the discretion that companies have to make those kinds of Capital Planning decisions and that boards and Senior Management are left to make those kinds of determinations. Thank you. I agree with everything you just said, and i yield back. Thank you. Im now going to turn over the chairing of this hearing to my colleague, distinguished gentleman from new york, mr. Meeks. You just need to unmute yourself mr. Meeks, and youll be all set. Thank you, congresswoman porter. Thank you for holding it down for us. I now will yield five minutes to the gentleman from illinois, mr. Foster, for questions. Thank you. Am i audible and visible . You are. All right. Well, professor fisch, i would like to take you up on your offer to dig a little deeper on the plans. Some of the stories weve seen are adding pharma companies, developing covidrelated products, apparently involve executives modifying these plans right before a big announcement which caused the stock to skyrocket. Some of these, apparently, have resulted in what might otherwise be considered suspiciouslytimed traits but are given at least a partial safe harbor because they were done pursuant to 10b51 plans. Could you briefly describe what 10b51 plans are and what theyre intended to be and to accomplish . Thank you. So, yes, 10b51 plans are designed primarily as a tool for executives to manage their stock trading over the long term. So, today, executives increasingly are being paid in stock, Stock Options, restricted stock. Obviously they have liquidity needs. And the idea behind a 10b51 plan is typically what this allows you to do is sell stock on a regular basis. Theyre usually used on the sale side and not worried about the fact that before you sell the stock, you come into possession of material nonpublic information and youre thereby p precluded from selling. Youre insulated from liability even if you have knowledge at the time the deal occurs. Now, the loophole, congressman that youre referring to, is the fact that these plans number one, the plans dont have to be disclosed. And practice among issuers varies dramatically in the type of disclosure they make or whether they disclose at all. Thats the first problem. The second problem is the law allows you to modify or to terminate your 10b51 plan, and it doesnt restrict that termination to situations in which you dont have material nonpublic information. So, lets say i have a 10b51 plan. Im planning to sell my stock this week. I learn good news ability my company or its going to get a federal grant or promising drug trial. I just say, okay, hang on, im going to terminate my plan. Im not going to sell. Obviously im making use of inside information. Im not trading. Im declining to trade. And as a result, its a loophole thats not covered by existing law. Is there a down side in mandatory disclosure of these, either in real time or at quarterly intervals or some standardized time . Frankly, sir, i dont see a down side. And in fact, theres been a couple of empirical studies that have looked at issuer disclosure practices and found that the issuers who disclose these plans voluntarily also have better general Corporate Governance. In other words, disclosure seems to be a signal of good corporate hygiene, so to speak. And what about requirements that separate the decision time from the time of the actual purchases so that you have to declare months or longer in advance that you are going to start or stop this program . So, that would absolutely be a useful refinement as well. So, we havent yet talked in this hearing about 16b and short swing trading liability. Thats a provision in the original Securities Exchange act of 1934 thats supposed to limit the ability of executives to benefit from shortterm trading by buying and selling within a short time period. I think you can apply that same approach to 10b51 plans and say, look, given the intent behind these plans, you should have to put a plan into place for a period of time. And ideally, the plan should persist for a period of time so that theres less likelihood that executives will try to take advantage of shortterm information asymmetries. And do any of the other witnesses have any comments on this area of potential improvements or fixing loopholes or other risks . All right. Deafening silence. Well, a appreciate all your help. As the son of a law professor, i just have a lot of sympathy for the for your life. Anyway, well have that discussion offline, and with that i yield back. Thank you very much. Thank the gentleman for the questions. The waters being rebuilt and designed to focus on the problem he illustratesment i want to thank mr. Porter and mr. Meeks for acting as temporary chair in my absence and recognize mr. Hill. Thank you mr. Chairman. What a good discussion this is, and i want to of course commend and thank all the members who worked on Insider Trading topics over the years, but particularly my friend, mr. Himes, of connecticut who has been such a thought leader on this subject as our committee has navigates what is a very challenging subject in order to balance the needs from the information, the Capital Markets, and flexibility and use and really identify criminal behavior. So, thanks jim himes for your work and for the bipartisan work that weve done together. Mr. Martin, i want to talk a little bit about the societys survey on the members regarding Insider Trading preclearance policies. You say 90 of your members follow a preclearance policy. Could you highlight what your best practices would indicate that could have prevented or brought clarity to or remediated some of the challenges weve talked about in recent days and over the course of this hearing . Sure, so in general theres a suite of policies that implement. 20 years ago, i think it was mr. Frankel noted that the change in most corporate suites to take Insider Trading and avoiding it and regulating it, companies are taking it very seriously. So, theres a suite of policies they instituted to address that. Compliance training with executives that requires the executive to acknowledge the existence of the policies tharks understand what the limitations are, including, obviously, you cant trade while in possession of mnpi. The designation of houses to handle all transactions in Company Stock that allow section 16 executives and others who may have an mpi to be flagged. So, those accounts can be monitored. You mentioned that the society conducted about two years ago that indicated approximately 90 of the companies surveyed required clearance of tradings by inhouse legal. I mentioned in my opening remarks, virtually every company imposes blackout periods in advance of quarterly earnings. But its more stringent than just that. Those windows will be closed in the event that new Material Information develops. Could be a leadership change, could be something with respect to a new product. And of course some companies further regulate the adoption of 10b51 plans when they can be adopted and cooling off periods and things like that. So, theres a suite of policys that companies have become much more conversant and frequent users of because trying to avoid their executives becoming embroiled in an Insider Trading allegation or enforcement action is incredibly time consuming and expensive for companies. And the incentives are really lined up for companies to try to avoid those kinds of outcomes. Yeah, my limited experience in this area is also in a very active company thats growing and doing mergers and acquisitions and having executive management changes. And maybe having a very periodic ak filing process. The number of days somebody can actually trade their stock is very limited per quarter. I mean, just a fraction. Is there a better way now that weve seen the expansion of Stock Options over the past 30 years, is there a better way to provide longterm growthbased compensation to executives other than Stock Options . Have you all done your studies on that . I dont think weve done particular studies on them. You know, obviously the question of how long vesting periods are is pertinent to your question. And i can speak from my own personal experience and im out of time is that the vesting periods for some executives have been pushed out. I look forward to following up with you on that. I appreciate that, mr. Chairman. My best regards to the panel. Its an excellent discussion. Thank you. I recognize my fellow californian. Thank you very much, mr. Chairman. I appreciate very much the words of my good friend. I was a little surprised with this hearing started when i heard the Ranking Member and others say basically theres nothing here to see, why dont we just move along . And there seems like theres a lot here to see, at least from my perspective. I appreciate the effort that the pharmaceutical companies are putting forward to develop a covid19 vaccine and treatment comply. Of course they should be compensated. I believe they should be. Most concern is the large amounts of money theyre making when the rest of the country is having such a hard time. I guess im concerned about the legal but wrongful aspects of this. It really does seem to me that if what kodak did was legal, its certainly wrongful. And i do not have great confidence in the s. E. C. At the moment. Their enforcement is way down. So, i think that we have something here. Professor fisch, could you comment on that . Is there nothing to see here . Should we move along . No, i commend the subcommittee for raising what i think are very important topics, and i wouldnt say that you all should just move along. But what i think a number of the comments have suggested though is that youre actually focusing on two related but separate ideas. One is the conveyance or the wrongful conveyance or the wrongful misuse of information. And the other is the compensation and whether companies that are facing speculation in their stock price and also companies that are the subject of government funding, whether they should be compensating their executives to the degree they are. Some of the stock option experiences involve a combination of the two. And i think members of the subcommittee, at least some members, might be equally yup set if these executives are getting huge grants just in the form of salary. Theres nothing wrong with the Compensation Committee deciding to pay an executive millions of dollars before the new of a government grant has been publicly released. The Compensation Committee knows about the grant. Its not a misuse of public information. You might think gee, it smells bad. This is taxpayer funding. This isnt something the executives should profit with. Thats a little bit different from the stock trading or the Insider Trading concept. Well, professor, i think it does smell pretty bad to be pra frank. If you could speak a little bit about spring loading and bullet dodging, you were talking about earlier. I agree with all the comments that have been made so far with respect to spring loading and bullet dodging. I think the focus has been more on the spring loading component where the bullet dodging piece of it is about a company temporarily depressing the stock price by releasing information before a stock option grant date as opposed to the holding back the release of the positive information until after the option date. I think one of the courts in delaware if im not mistaken, a number of years ago referred to spring loading, really in particular spring loading, as being a matter of a corporate disclosure of conduct issue involving an unclean heart but not necessarily a view lags ola law. I think what were talking about here is 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 also address is the issue of s. E. C. Enforcement in this area because while the s. E. C. s numbers may be down, i would submit as somebody who defends these investigations, the commission is very aggressive. There have been 40 trading suspensions that are specifically related to issuers in the covid19 solutions space. So, the commission really has been very individual tavigilant. On the other hand as it has been dealing with staff reductions, that has impacted its ability to be as broad in its application and choice of cases. I think in terms of the just station of investigations, i think were seeing an active division, just sort of a reprioritization. Not to be confrontational or difficult, but i would disagree with that especially when you see what happened with kodak. I dont know how you explain that to the american public. Thank you. My time has expired. Now i recognize the recent former chair lady of this committee. Thank the gentleman for yielding and thank you for this important hearing. Mr. Frankel, i would like to address my question to you. Earlier this year, the house passed by legislation, the 8k trading gap act, with overwhelming bipartisan support. The bill would close the loophole in our current law that allows Corporate Executives to trade on information before it is disclosed to the public. And right now theres a right now when there is a significant corporate event at a public company, the company has to disclose that significant event to the public by filing a form 8k within four days of the event occurring. Of course during this fourday gap, executives at the company know about the event, but their investors dont. My bill would address this problem by simply prohibiting executives from trading during this fourday gap. Given the recent controversial activitys that my colleague congressman vargas just mentioned at the Companies Like kodak, novak, and moderna, i believe its important now more than ever to close this loophole. Since the start of the pandemic in midmarch, there have been over 10,008k filings with the s. E. C. Would you agree during this crisis when firms have increasingly made important public announcements, its especially important we close this loophole. I would agree entirely. I think the your legislation is right on point, and i think it also goes to a point that mr. Martin had made before regarding corporate blackout periods. And certainly there is abuse. But, i mean, using the example that mr. Vargas had raised with respect to kodak, i also refer to the committees statement from yesterday. The fact is the s. E. C. Has not yet, let alone completed, conducted its investigation. And the s. E. C. Certainly can come to entirely different conclusions than the findings of the internal investigation. If you look at the report of the internal investigation, i believe the questions that were posed were extremely narrow. Or at least that were addressed in the course of the internal investigation. So, yes, back to your question the guts of your question, i do think that your proposed legislation around disclosures is right on point and essentially legislates the blackout period which is something that does impose the level of control that the market really warrants. Also, as chair of the committee on oversight reform, i launched an investigation where chairwoman waters, angle and clyburn into the administrations 675 million lone to kodak. The Oversight Committee continues to investigate the reasoning bhund the corporation decision to provide the loan and whether they violated their own policies and procedures and whether kodak shared any material nonpublic material before the information was made public. They gave it to a domestic corporation. Thats a violation there. And to a company that had no experience, zero, in vaccines. Kodak itself has acknowledged that is under investigation by the s. E. C. And this follows the unusual spike in the trading of its stock just one day prior to the july 28th. On july 27th, more than 1. 6 million shares of kodak were traded, more than 6 times the average daily volume of shares a day during the previous 30 days. And while the increase in trading activity is reportedly a result of kodak inadvertently releasing the news of the loan to local news outlets why did they do that where it is headquartered . Kodak waited until the following day to publicly disclose the announcement. Unless its stockholders were paying attention to social media, kodak kept them in the dark from the spike in activity. Do you see this as a potential violation of regulation fd which states that when theres a, quote, nonintentional disclosure, the insurer must publicly disclose the information promptly. And if not, can this sort of trading Activity Still be harmful to shareholders and the market . The answer, congresswoman, is yes. Theres a potential for violation regulation which i believe the s. E. C. Would include within the scope of investigation. I would be very brief on this. Were also dealing with issues such as potential stock manipulation, but also tipping where there were other people who traded. And there were people who were involved on put option side. I believe all these things are something that the s. E. C. Will look at during the scope of this investigation. When do you expect your investigation to be completed . I believe the gentle ladys time has expired. If there can be a onesentence answer, well hear it. I think s. E. C. Investigations in allegations such as this easily could run nine months to 12 to 15 months. Thank you. I yield back. Thank you, mr. Chairman. Thank you. Thank you, mr. Chairman. Thank you for holding this important hearing. Ive been listening off and on to some of the witnesses and some of my colleagues questioning. And i think that what we have here is in the middle of this pandemic which has killed hundred of thousands of americans, and i know that it has devastated the economy and other things. The question that presents itself to us though is credibility. And when we have a time of everybody questioning, especially when you have the president of the United States questioning the scientists and doctors and were going to have a vaccine and when were not, whether everything is on the up and up. Also lies as we deal with the pharmaceutical companies in their search of trying to get a vaccine. And i agree we need one sooner rather than later. And i akbree that, you know, individuals should be compensated for the appropriate amount of work that they do. But, you know, as we know, theres no magic bullet. But a vaccine is an effective and safe thing that we need, as well as wearing our masks on a continuous basis as the doctor said in testimony yesterday. I applaud all the doctors and scientists working on this crucial project. So, what it is is the importance of the vaccine, why its so unfortunate that we have indicated the president just yesterday contradicted his own cdc director about when a vaccine would be ready. So, i think we need to be building up the confidence of the American People. So, that brings me to where we are now because theres also a role, i think, for the markets and corporate governments to step up because they have to understand the credibility issue and an Important Role to play here also. So, i believe that we need leaders of these companies to have their incentives structured toward producing safe and effective vaccine. We also need laws to protect the integrity of the Capital Market. Ill start with dr. Fisch. What are some ways you think we can use Corporate Governance and the financial regulations to promote and encourage development of safe and effective vaccine while also protecting some of the market misbehavior that i hear a lot of my colleagues talking about . Congressman, i wish i had an answer for that question. I think you know, the challenge that we all face is yes, in this environment, we really want to preserve Capital Market incentives. We want to preserve compensation incentives. If some company or some executive comes up with a vaccine, the whole worlds going to say, yes, this is worth an awful lot of money to us. But, you know, Corporate Governance only gets you so far. Right now, i think, sort of the gap between Corporate Governance and science is really wide. And thats part of the struggle. A company is taking baby steps. And i hear the debate about, well, companies should be precluded from awarding Stock Options until they file an 8k. A company may not know this baby step, this step with respect to testing progress, is it going to pan out . Am i going to mislead investors if i say were making progress . Am i going to mislead investors if i dont talk about the progress . So, thats why i talked about the disclosure environment being very challenging to manage. And i do think it comes down to good Corporate Governance practices. But a lot of the governance practices are internal. How much is the board riding herd on all this . How much is the board paying attention both to what the company is saying and what its executives are doing . To a certain degree, thats not about Insider Trading on the securities loss. Its not about fraud. But its about best practices. Thank you. Can i just add something there . Im sorry, congressman. Go ahead. Im out of time, but go ahead. I would just add that a lot of moneys have been trying to figure out how to and have revised how they use procedures around disclosure committees. They add to the disclosure committees to add the right kind of perspectives to get at what dr. Fisch is a saying. How dough y you assess the valus that would not have risen to that level . Let me ask another quick question. Theres been a growing trend for companies to go public not by using the traditional ipo process but rather through a reverse merger. I have serious concerns about this new trend and wanted to know if you see potential implications for invieder trading at all or other issues . Just curious, if you can say yes or no, you have some concerns . This jacob frankel. I could certainly aggress that very briefly. Please, if chairman will allow. Thank you. The interesting thing, mr. Chairman, the issue with reverse mergers is not facts. Its also with dormant Public Companies. Thats something thats been a hot topic issue for the s. E. C. , has been for probably 30 years if not longer, is not an Insider Trading issue. It really is more of a Market Structure issue. Thank you very much. The time of the gentleman has concluded. The next two questioners i believe are both voting. And at the suggestion of staff, we are going to take a 10minute recess and reconvene. When the pandemic first hit my strict in northern new jersey was in the eye o