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They are finished speaking, consistent with the regulations accompanying a tourist night 65, the staff will only meet members and witnesses as appropriate, when not recognized in order to avoid background noise. Members are reminded that all house rules, relating to order in the courtroom, apply in this hearing. This hearing is entitled Insider Trading, stock option grants, and examination of corporate integrity in the covid19 pandemic. We know that we have votes on the floor, we will not have any delays of this hearing in order to allow members to vote. If members should go vote, and return, and while we all have part of the alphabet to vote in, im sure there can be some accommodation made so that when they return you can ask questions, and vote with the others not appearing on other alphabetical characterizations. And when im voting, i believe mr. Meeks, has agreed to serve as chair until my return. I will now recognize myself for five minutes for an opening statement. Our Capital Markets system is unique in history up until about 150 years ago every Business Enterprise was made up of people who knew each other. We are family members who had personal trust. And a business could only be as large as a group of people who could finance and put together, and Investment Opportunities were limited to those that you happen to be able to unfold. You wouldnt trust your money with some enterprise of strangers. And of course, you didnt have liquidity, since you could tell your investment pretty much only to somebody else who knew somebody. So at that point, people could rely on personal trust. Today, investors turn your money over to anonymous insiders, corporate boards, executives, police never met. And they know, that the insiders, have more for more information, retention, and power. And they dont have the buyings or the personal trust, they rely on law to make sure that the insiders are treating the investment fairly. I will continue, we had a little tagging the problem there. We now apply that system to the covid pandemic, in which nearly 200,000 americans have lost their lives, and at 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 involving a federal program shoots up the value. Following the sort of announcement, kodiak, no ethics, and , beach saw their stock prices rise by over 400 . With this trend in mine, the sec has reminded companies in this pandemic they should not only abide by law, but practice good corporate hygiene. Tear clayton has reiterated the use in a recent letter, regarding todays hearing, which i submit for the record and it will be made part of the record without objection. But admonishments are not laws and regulations. Admonishments will not deter the truly greedy. So we have to design our laws and regulations to govern those who cannot be governed by admonishments. For example, while taxpayers have invested frequent one billion in federal contracts with nova bags and moderna. They developed a vaccine since april, executives and firms have sold over 60 Million Dollars in their companies stop. We need to know that they were not taking advantage of any inside information, that perhaps the stock had gone up too high, given the realistic possibilities. Greater concern of suspicious activity involving kodiak, with the announcement of a 750 Million Dollar government loan, that took place about the insider concern. We took a concern there on Stock Options in their granting. With all Equity Compensation insiders need to be approved by shareholders. When Shareholders Approve a plan that says Stock Options will have granted with a stock option exercise price equal to fair market value, one option they grand date believe that. Executives who get the Stock Options will live by that. If instead the market value doesnt reflect Material Information insider information, thats going to be announced the next day. Or the next week. Shareholders have been duped into approving Equity Compensation that does not reflect real fair market value. I want to thank the insiders at kodiak who have added insult to injury, first they granted Stock Options at what they knew to be an in fairly low price. Then they spent a lot of shareholder money on a Corporate Law firm to tell them it was all legal. That tells us we have to change the laws, because if any major firms 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 has knowledge of the material on transactions. That the insiders know about. So i look forward to exploring this with our witnesses, we will now hear from the Ranking Member for four minutes, for his opening statement. Thank you mister chairman. Its the definition of insanity doing over and over again expecting different results, so here we are once again, holding a hearing on an issue that weve already had held a hearing on. Additionally three of these bills attached to this hearing had not only had a hearing, theyve been passed by the house of representatives. So i asked a committee why are we spending precious time in resourcing on bills that have already passed the house 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, 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 mrs. 401 k . We also agree that Insider Trading should be punished to the fullest extent of the law. However the subcommittee should not be used as a name and shame game for companies for one doing that they have perceived to have happened. And yes the facts surrounding one company at first certainly appeared to be suspicious. And need to be fully investigated, thats not our job. Securities and Exchange Commission is tasked with ensuring market integrity, under the securities of change back to 1934, the fcc already has the problem prague were to bring in fact, during fiscal year 2019, the commission brought 862 Enforcement Actions to hold individuals, issuers, and Financial Institutions accountable. Sending a clear message to market assistance. Let the result speak from the themselves. Eight six 862 enforcement accidents to more than 4. 3 billion dollars, and penalties. Obtain nearly 600 bars or suspensions against market participants. Suspended treating training 271 issuers, and return nearly 1. 2 billion dollars to investors. Instead of playing judge, jury, and executioner in the court of public opinion. The committee should be focused on the Bipartisan Solutions that support job creators of all sizes. Particularly hard hit Small Businesses. These proposals would strengthen broader access to capital, reduce regulatory costs and burdens, and improve access to investors to better put their money to work. Create more Investment Opportunities for everyday mainstream investors. Im not just going to curse the political darkness, im trying to light a policy candle here. Heres a partial list of what we should be discussing and working on today. H. R. 40 eight 60, they amendments act introduced by the Ranking Member. We have my legislation, which is Small Business acts something weve dealt with now for four congress is in a row hr 1909, helping angels leaders start of. Hr 28 99 mainstream probacked,. Very loud or milk, hr 39 87 relieving stress. H. R. 40 76 modernizing disclosures for investors act reduce by wagner. Another one of my bills, hr 20 9 19 improving Investment Research for. Representative style has won, on helping starteds continue to grow act. Regulation acts introduced by the subcommittee, congressman i could go on and on but the list as you can see exhaustive. 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 delivered 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 Led along the full house. And which bans a practice that i think will discover is 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. Insider trading is wrong, we can all agree on that. The fcc, 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 current economic recovery, and help workers come back safely to the workforce, after the virus. After we get testing and treatment going. Today, i introduced a bill to do just that. The gig worker actually 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 gig workers are critical in our technical technologically driven world. My bill allows gig workers such as rideshare drivers, or food delivery careers, to share the same economic benefits. The upside potential of removing the businesses are helping to improve. Todays hearings should be focused on that type of solution, not just a rear facing set of issues in election year. Thank you so much. Ill point out that spring loading is legal, until this Committee Makes it illegal, and its just as out of order mr. Chairman, if we wish to debate the church had been debate. You should not reply about everyone else is opinion. That is not in good form for the chair. And you are not recognized, you did make your points clear. But when people question whether this is a legitimate hearing, it is appropriate to spend to spend ten or 20 seconds responding. Today we welcome the testimony of, dr. Joe finish, mr. Jacob, and mr. Gavin martin. Mr. Claypool is a Research Director for public citizens, president s office. Where he focuses on corporate crime and wrongdoing, and the ways in which create power destroyed our democracy. Doctor 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 investigation and security enforcement, practice at dickinson right. He also previously served as senior counsel for the fcc division of portland. And mr. Martin is Senior Vice President , and general counsel for the society for Corporate Governance, where he leads the societies efforts related to corporate governments and regulations. Witnesses are reminded that your alltestimony will be limited to five minutes. Time will go off at the end of your time, and i will ask you to respect our rules here by wrapping up your oral testimony. Without objection, your written statements will be made part of the record. We will now recognize our first witness, mr. Claypool. Thank you chair, Ranking Members, on behalf of more than 500 of the members and supporters of public citizen, many of whom are investors and who like all americans are hopeful for the Timely Development and safe and affordable covid19 treatments. We welcome this probe and to Insider Trading during this pandemic. The reported events are concerning, chair men concert Covid Concerns well. Additionally, all 45 of its covid19 trial who received its Vaccine Development antibodies. This is good news, the good news that pushed up the companys stock price 30 to an allhigh time of 87 dollars. Prior to the announcement, several executives modified existing plans, and the days following the announcement, the ceo and other executives and funds controlled by the board, sold about 90 Million Dollars with company shares. Remember, its taxpayer money funding 100 of the work to develop a covid19 vaccine, all of. It a study published by coalition, stock market value for the eighth biotech companies, grew by 130 billion dollars between january in august. Executives and insiders from just three of these companies, so that least 370 million and company stocks. Inflated by news of government awards and trial results. Meanwhile, npr is reporting thats a number of fcc inches cider trading Enforcement Actions has committees to its lowest point in decades. Public citizenry served documented at the fcc. And across the federal government. If the agency is following the Trump Administration orders to stand down, as we risk government wide profit than that alone deserves a hearing. As for legislation, we look forward to full house passage requiring the fcc and cfpb to provide monthly reports on consumer and Investor Protection activities. Ideally, the fcc will want to report a significant enforcement increase against opportunistic insiders we applaud the house for approving this reform bill offered by representative jim hines. Establishing a clear law against a legal training, will serve prosecutors well, we also applaud placid of the gap bill by representative maloney. And the ten five you one trading plan offered by chair waters. One particularly promising return is compensation that requires recipients cares act to play six and a collective pool. To the corporation later found misuse cares act or ate from a successful law or engage in any other misconduct that results and finds, and the pool of senior managers would be used to fund the funds. Such a concept already exists and separate bills sponsored by representatives, it is crucial for congress to condition the true lease and federal aid. Reportedly with the intention of helping workers so that is not diverted in the pockets of pandemic profiteer. We applaud this committees contributions of the heroes act and look forward to working with you. As you is to get the next round for help. I welcome your questions with written responses were well event. The chair this is maybe first time in decades, a witness has concluded less than five minutes. The witness did not choose to yield his remaining time to. Me and accordingly i would recognize doctor. Doctor . Are you maybe on mute . Do i have an . Oh yes. Okay thank you sorry, chairman 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, im not a doctor. So thank you for the promotion. I want to take just a few minutes to put the reported of events to which cherub chairman sherman and Rick Claypool referred in a little way in the past six months as we all know the pie markets have experienced unprecedented levels of volatility. And trading activity. I know fcc jake clayton has provided this subcommittee in earlier testimony with the data. On both the high levels of trades and the incredible price swings that weve seen. Not just in pharmaceutical companies but across the range of industries that have been affected by the pandemic. And these fluctuations obviously create the opportunity for men amputation, for misconduct, for self dealing, theyve also drawn considerable media attention. Ive written about securities fraud, sec enforcement, and Insider Trading. I know one focus in my opening remarks on a view of the regulatory structure and the challenges that the market environment and poses on the regulatory structure. The activities that i understand the subcommittee to be interested in today, involve three district setting of issues. Disclosure integrity, the use of Stock Options, and Insider Trading. I will address disease shoes intern, i will briefly conclude by addressing potential areas of regulatory reform. So the first issue is disclosure integrity. From new stories that weve heard, say that issuers have made distorted inaccurate or overly optimistic disclosures, to drive up their stock prices. And this can be for various reasons. Ranging from enabling a insiders to sail and make a lot of money, increasing the value of Stock Options, or facilitating the issuers axes to the Capital Market. Now, let me be clear, existing securities regulation requires disclosure to be accurate. So often misleading statements, particularly those that are made with an effort to distort stock prices, or create opportunities for personal gain, that constitutes security fraud. An issue or or corporate official that makes false claims, claims about a pharmaceutical products under development, or mistakes the results of a Clinical Trial, can face both an sec enforcement action and private civil litigation. And false statements can subject the issuer and individual corporate officials to criminal liability. This is not a gray area. The existing market environment however, creates a challenging this closure environment. The scope of the pandemic, the lockdown, and the effect on the worlds economy, are unprecedented. Pandemic related information has the potential to have an enormous impact on the economy, and on stop prices. Everyone is watching to see whats happening with these companies. And the sec itself has encouraged issuers to provide as much information as possible about pandemic related risks on businesses. But at the same time, we dont actually know what the truth is. The Scientific Community and Public Health community its still evaluating all of this. So its hard for businesses to project whats gonna happen in the future, whats gonna be the effect on their stock prices and so forth. So simply put, issuers during the challenging environment, they are pressuring into this close as much information as possible, but premature disclosure of uncertain information may in hindsight prove inaccurate. At the same time, stock prices are reacting dramatically. Chairman chairman identify the possibility that stock prices may be too high at the time that executives received Stock Options. The concept of stock prices, reflect fundamental values, and a fundamental value of these companies is knowable, at any given point right now. Its something that its very challenging from a market regulatory perspective. Now, let me say, my time is running short, as a law professional im always long winded, so 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 statement, even if those statements are forwardlooking. Even if those statements are not based on hard science about what a vaccine or whether reprised is going to do. The law however, doesnt permit executives from creating Trading Opportunities through their public statements. And here i think the potential, chairman sherman if i can 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 itself gained, its really promising, and its a narrative that legislation havent fully recognized. Id be happy to talk about that more in response to questions. Thank you. Thank you for your testimony, you are now recognized, mr. Frenkel. I thank you, good afternoon chairman sherman, and distinguished members of the subcommittee. Thank you for giving me the opportunity to testify when Critical Issues that impact our Capital Markets. My perspective comes from 32 years of professional experience in Capital Markets enforcement. Investigations, governance and integrity issues, including my work at the securities Exchange Commission division on enforcement, as a federal prosecutor on public corruption in security violation, as an practical are in the fence for more than 21 years. I believe in 2020, off for like 20 or more years ago, most corporate boards and managements want to get it right. Nevertheless, we still see Capital Markets activity that gives rise to questions about commitment to compliance and fundamental kamala duties that our responsibility of corporate custodians. This committee has identified Insider Trading, plans and stock option grants. Spring loading and bullet dodging. There are issues of interest for more than a legislation. Beyond these underlying a bowl violations and concerns, i suggest to the committee respectfully, that covid19 solutions related Capital Markets activities also should advise scrutiny on several other issues. I include, first, regulation of the fta and its applicability of the private insurance. We saw the effect, two weeks ago, when the ceo disclosed on a non public color range, about its expansion of the vaccine Clinical Trials as a result of an unexpected deal in the Clinical Trial participant. He was it wouldve been an obligation, to prompt public disclosure, to what appeared to be an unintentional selective disclosure. Second, is the secs tenday trading suspension authority. Which operates like a court and posed temporary restraining order. However, it is not an enforcement action. But operates is an administrative arrow to the heart of legitimate small entrepreneurial Public Companies. For trading suspensions, the issue is content. The icc takes months, if not longer, to resolve the challenge. Legislation should dictate a precise and narrow timeframe for making the decision. Third its delegation of authority and unauthorized goes on mastication. About the sec. For decades, the alone made the decision. Postmates the authority was delegated into the enforcement division, but others viewed that out of control practice, in a previous sec administration. Although sec chairman clayton has seen a delegation of authority, i believe that congress intended for commissioners to decide whom to investigate, and to make the sound decision of on earth writing a subpoena power much like a federal judge reviews and improve search warrant applications. And fourth, inaudible disclosure policies and whether they should apply revising panels. The question for consideration, has one level of transparency should exist, enable capitol hill and the public to assess possible conflicts of interest among scientific and technical peer review advisers for non subjects is several. These are not instead of but are in addition to important issues already identified at the 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 projection, and the overall market integrity. I believe that is too narrow. Corporate integrity a commitment to best practices in broad recoveries, include a conscientious discharge of common learned to didgeridoo teas. And a constant focus on Investor Protection, and market integrity. Was, is during the pandemic, and always will be a must be guiding principle of the corporate boardrooms. For the u. S. Capital markets insistent. I compliment the committee for highlighting the importance of these issues, with this hearing, i look forward to answering your questions as 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 i will be turning the gavel to him in about 40 minutes. Does that work for you . Very well, im about to head, out and i will be back. Okay, see you in 15, 20 minutes. I will not recognize mr. Martin. , mr. Martin . I did not unmute myself, you think id be used by now six months into this. Apologies. Im also wearing a tie for may and for the first time in many months. I took the opportunity to do that. Chairman, Ranking Members of the committee thank you for the opportunity to testify today in the general counsel. The society of professional association approximately 3500 incorporates and secretaries serving the public for Public Companies. Four members of the board, and Corporate Governance in this closure, we traditionally focus on security and Corporate Law issues. In the last several years have brought up respect for environmental and social issues, diversity, climate change, they have been along the key issues which investors and sub leaders have been a disclosure on. But the company increasingly provides. Let me state clearly, as a society in a public emory, we have Insider Trading regulation in line enforcement, its inaudible in the interest of all Public Companies. The Market Committee could for mcdaniel benefit for expensive in the. We support the laws that are necessary to prevent and punish such conduct. Most Public Companies have abducted adopted policies and prevent illegal Insider Trading. Policies which include coalition, trading in a preclearance procedure transaction, imposition of trading blackout periods, and limitations on the plans. It is worth noting that the companies who are restricting executive and selling stock generally began several weeks prior to the end of the fiscal quarter and last until a day or two after the publication of quarterly earnings. As a result, Company Officers typically left open windows for years with these a witness lasting just a few weeks. Section ten be, the associated role, has long for hated stock sale of the, as in ten. It has specified in sales, in a need of a base is, when a person making a sales his, quote aware of that information, when the sill was made. This will also provides for a section ten be in trading allegations for certain traits that are made into preexisting rating train which provides what the rules. The rules affirmative defense is only available to however, if they are putting good faith. Real ten be five one does not provide a vacuum. , it also doesnt provide a case under section ten. Be which requires additional transactions i still comply with the limitations of the rules, for the profitable sections. In addition, sections that if eyeliner, ship in the exchange act including foreign for which must gain violent connection with these transactions. Finally, some sections also require section two. I will support a longer related disclosure allegations and establish Company Practices providing our view a comprehensive and effective, help. Like so many other aspects of our lives, covid19 presided me when the rub challenges to these companies. Including related to Insider Trading in law compliance. As if companies go with the implications, the sec issued guidance, and market integrity urging companies to provide detailed covid related exposure. Based on a review, citing members disclosures legally Cover Companies that respond to this guidance. Covid related disclosure has been a widening of topics. In addition to maybe Many Companies reassessing their, policy compliance program. All of the executives are now possibly leading interception of covid related mp. Prepandemic such concerns just imply for the operations in the middle. Let me turn to some of the. In general we cannot restructure for executive conversation, having said that, we deserve the use of Stock Options by starters in other early stages of the company calling essential. For the directions compensation, or best positions, inside of the business. Investors express a view of the appropriateness of compensation that requires planned sales, many cases annually. Transparent help under the current regulatory form. Some of the people see this and this is harry giving the section ten, the 20, five already prohibited Insider Trading. A significant dent as material. It is already prohibited further illegal, if possible. We believe the regulation an Insider Trading, almost, and we believe in regulation Insider Trading and subjected for some confusion, having said that, the sec study mandated by could contribute to a common and will founded understand man of the plans and whether any changes are warranted. Ive hr 6 24. Thank you for the invitation, to testify and im happy to answer any questions. Thank you, i now recognize this person for five minutes. I want to commend the chair and the Ranking Member for altering legislation that has already passed the house. Dealing with, instructing the fcc 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 fcc. It is the hope that these hearings will inspire the senate to act on that bipartisan legislation. Or just as good, get the sec to do what the legislation directs them to do whether it statue directs them to do it or not. Insiders hold Material Information that is not known to the general public. We have Insider Trading rules, that deal chiefly with transactions between the insider and outsiders. Through the market. We have much weaker rules dealing or no rules, dealing with Insider Trading and options or stocks. Between the insider and the corporation itself. I know that the mine nordic can be in the boardrooms of this country by saying its illegitimate to have a hearing of this subcommittee except for the purpose of that hearing is to make it easier to to markets talk to the public. And there is a rule for us making it easier to raise capital it is certainly legitimate for the subcommittee to explore explore the loopholes because insiders may be able to take advantage of the general public and the general investing public we do have good laws on traditional false statements. The sec has done many thousands of enforcement transactions, dealing with traditional Insider Trading. But with insiders make use of material undisclosed information, in Stock Options transactions. And other transactions with the company, according to code ex lawyers, frankly including in our discussions with the scc they generally be legal or wrongful. As you know, the day before the federal government announced its plans to provide kodiak a 765 Million Dollar loan. The company ceo was granted 175 correction, 1. 7 5 million Stock Options. Stock option plans need to be legally approved by shareholders. And the Shareholders Approve the plan that said, that the option exercise price for these employee Stock Options need to be set at fair market value. But heres where the shareholders may have gotten tricked, because thats defined as the latest Closing Price of the shares. Under normal circumstances that is normal market value. In this case, court back uncle disclosed to the market had just landed 765 Million Dollars. Considering kodiak Share Price Rose by over 500 , within hours after these options were granted. This seems to be a situation where the shareholders were fooled by the term a fair market value. Which turned out to be a much a value that didnt reflect the knowledge. Would you agree that legislation is appropriate to close this loophole, by prohibiting users that use fair market value to help set Employee Stock option exercise prices from doing so . Based on the market price, that doesnt reflect information the company is about to disclose . Thank you chairman sherman, Stock Options obviously are a form of executive compensation. As compensation they have a number of problems, one of the problems that we see right now, is theres a huge amount of volatility in prices. Prices are reacting as you observed, prices may be overreacting to information as well. I think a Compensation Structure that looks at market price as an indication affair value is particularly problematic in this environment. That being said, the whole regulatory structure is designed to put safeguards into place. Not just a shareholder vote but also the role of the compensation. Thank you my time has expired, and i recognize Ranking Member of the subcommittee. The thank you mister chairman, i appreciate the opportunity. I would like unanimous consent to submit a letter for the record, that is from this security Exchange Commission, clayton, and see seed by me. I would like to put that into a record. Without objection for the second time, since i already put it in the record, now its there twice thats good. Appreciate it. Maybe ill just start with professor fish had left off. In this letter, the chairman is very clear about some of his concerns about the 25 one plans and in fact, a couple of the headings on this an insider changing policies terms an administration of rules 10b 51 plans. He does say also in the letter, that there is a joint Explanatory Statement fiscal year 2020 appropriations act, on the growth cheri purchases and are considering this another issue relating to 10b 51. As planned as a part of that report, issuing a and pricing Stock Options, he specifically said that it grant may also be inconsistent with existing accounting standards. In short, the trading price of the stock is not in fair market value. He then goes on to ask to make sure that Senior Executives and board members, keeping that in mind, but also have the division of corporate finance. Enforcement to look at it. Professor fish, i dont know if you care to address that very briefly anymore than what you have started to go down that path. Thank you. I guess what i did want to say is, youre absolutely right. Scc good corporate hygiene 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 stop, and with respect to 10b 51 i think those are all important issues. I want to distinguish between good corporate hygiene, good Corporate Governance, even matters of a directors judiciary duty. And Insider Trading. Because theres two different competence, theres lots of companies to be over paying their executives right now, based on salary or 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 value, and the problem is not necessarily in the option form itself. The chairman says that that may be inconsistent with existing accounting standards. Is that something that the pco beneath the tackle . Thats an interesting question im not sure how you come up in this market environment with a concept of fair value. And how to order a Compensation Committee to do that. Chairman sherman it is right, if the Company Knows tomorrow its going to release Material Information, the company is obviously going to suspect the stock price will be affected. If you look at kovacs training price from the time before the first press reports until today, its all over the place. 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. The scc clearly is very concerned about it, the chairman mr. Claypool was i would say disparaging the chair, whether it was clayton or i dont think i have ever heard a scc chair even close to think that Insider Trading, or that enforcement is somehow not acceptable. That just was wrong headed on that, mr. Martin, you specifically Companies Participating in government assistant programs to the cares act, have some guidance that has been put up. Corrected and through that, do you believe its clear enough . Yes i do i think the Company Response to the scc guidance, both statements respect in Insider Trading and statements. By the chairman and were well received, it was very clear the Corporate Community what you saw was a big increase and needed increase in covid related disclosure. Which the chairman was very focused on, along with the director we can provide a few statistics about the increase over that disclosure. Appropriately the, and i think professor fish was alluding to this, companies were really struggling at the beginning. And to some degree still are with understanding with the significance and particular events are. To their own Business Operations and indeed their stock prices. Something extremely and companies have struggled with that, and the response significantly has been too very dramatically increase the amount of disclosure on covid. For example, just at the end of march a study found that 50 of as of march 30th. I believe the the jen gentlemen the time has expired. If you already voted . No i have not but i think i have time, so i will use my time now. I will nominally miss porter have you already voted . Or are you voting by proxy . Please dont you miss pewter. I have already voted sir. Since mr. Mix has not returned, and with your permission, i will make you temporary chair as i go vote. And mister chairman i guess im looking to see if there is a republican that is on as well. Challenges inaudible Committee Hearings could continue on what were doing extended voting. inaudible im going to miss porter will look act as our temporary chair. And ask mr. Meeks to mr. Hines to proceed for five minutes. Great thank you mister chairman, thank you very much to our witnesses for today. This is an area of intense inaudible my office has devoted a lot of time to crafting what was as the Ranking Member pointed out, a bar bipartisan religiously shun that passed the house in late 20 2019. The Insider Trading prohibition act, very interested in that, 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, it may not be exactly the way you want to promote business investment. There is arguably nothing quite so important to business and basement has confidence in the Capital Market. The confidence on the part of shareholders and others that they are playing and a fair market, which is why i have been very devoted to crafting specific statute on the topic of insiders trading. There is a need for do it. My republican friends know that only 14 of americans directly own stocks. As the stock market has rocketed in the last couple of years, directly are very small percentage of americans have been able to participate in the upside. It is true that half of americans of course indirectly owns some start, we should all be looking to increase the number of americans who feel like they have a stake in their economy. And credible cool to that of course, 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 kodiak, i understand they are a conflict. 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 long time in the bill defining transactions, purchase andq sales of securities. The fact that we are talking about spring loading and bullet dodging, that pertains to essentially a transaction. But its an indirect transaction. It is inconvenience of value, because a stock option is valuable. And so my question is, im not quite sure to start with which, maybe i start with mr. Frenkel. My question is, do you think we can all per Insider Trading law, to be about the conveyance of value, and with that capture what were talking about here . Or do we need an entirely separate statue for a value that is conveyed via option plans and programs, as opposed to the purchase of sales and securities . inaudible mr. Your on mute. Im sorry thank you. I apologize for being on mute. I think in the context of Insider Trading laws, the focus is always has always historically been on the purchase of sales and the conveyance of information. To me, as mr. Fisch indicated, sprinkled an invalid doctrine are as part of the information. Insiders are always going down taxes to informations, because of the imbalance of the rest of the market. And i believe its more of an issue of timing and broader disclosure obligations and then Insider Trading itself. I understand that. And i guess the point im making, i understand that were really talking more about compensation sandal purchase or sale of security, but at the end of the day, what is happening, its a decision about a conveyance of value is being made possibly when there is an invalid of information. So its not clear to me that there is a radical categorical difference between an executive who is going to approve a stock option plan for weeks from now, but knowing that theyre about to receive a loan accelerates that decision. There is not a categorical difference between that, and that executive right now purchasing stock. There are differences of timing and etc, but its effectively the same thing. It is conveying value wrongly because its not information that has it had, right . Yes. And congressman your corrected identifying the issue as being the use an application of that information, as being subject to an imbalance favoring their collaborative executive. I still believe, this is an issue beyond Insider Trading, because it really does not relate to the trade itself. It goes through the disclosure agents, in my view. Yes, my time is expired, but i think i would be grateful if in this hearing we got down to how can we address legislatively screen loaning and bullied digitally most appropriately. But my time is expired, so i yield back, and i thank you. The chair now recognizes mr. Gone, solace gentleman from ohio. Thank you madam chair, thank you everybody for your testimony tonight. I want to start with something that mr. Claypool brought up, and it peaked my interest. I am curious for everybodys take on it. You highlighted them mature in a situation where we are getting good news, the stock rose significantly and they sold stock. Nothing in of itself wrong with that. But it does raise a question around Covid Support and a specific Covid Support question, to me anyway, in any additional disclosures that we might wind as a result of that. I think these are unusual times and when we have federal government basically finding 100 percent of our on a product, it is incredibly important, god willing, that maybe there should be additional scrutiny there. I guess i will start first, with mr. Martin. Do you have any thoughts on how we could better inform investors with respect to the sort of announcements or any chances you mike make on a temporary basis, as a result of covid . Well, i think the existing framework that necessitates a disclosure of Material Information to the investors who follow, is the appropriate mechanism. You know, to the extent that there is trading around or in advance of such disclosure, thats how ready. So its not evident to me how unemployment obtain framework can do, we on with the existing framework can do for the disclosure of Material Information to investors. And so im sorry, but i dont have any particular intelligent ideas as an alternative to that. Thats a financier. I just wanted your perspective on it. And now, another thing from mr. Claypool testimony which i take issue with. Its around the normative judgment or be repurchasing stocks and theres a quoting here, when managers repurchase dog, they are confessing they have new no new promising ideas in which to invest. Mr. Martin, again, when you think of that statement . I mean, i will just say, i dont want to be overly combatant but as somebody whos been an investor for my entire adult life when companies i have invested in repurchase dog that means that i own more of the company now, so that actually benefits all shareholders. And that is my personal belief. But i would be curious for your perspective on it as well. Well, i agree with that. Repurchase is are a real legitimate tool for companies. Of course, you know, companies can raise or lower their dividend as needed. And Share Repurchase is are entirely legitimate use of shareholder funds. In order to aim for the benefit of existing shareholders. So i know that there are strong feelings about that, particularly in a way of some tax legislation from a few years ago. I just disagree with that perspective, and would hope that congress will maintain the discretion that the companies have to make those capital plannings decisions in the boards and senior managements, are left to make those kinds of determinations. Thank, you hire cory with everything you just said. And i yield back. Thank you. I am now gonna turn over the chair of this hearing, to my colleague, did distinguish general from new york, mr. Meeks. You just need to unmute yourself, mr. Meeks, and you will be all set. Thank, you congresswoman. Thank you for holding it down for us. I now will yield five minutes to the gentleman from illinois, your question. Thank you, and my audible individual . You are. All right. All right id like to take a plane or offer indigo little bit leapers on this plan. Some of the stories that weve seen in Pharma Companies developing covid related products apparently involving executives modifying these plans right before something announcements, which causes just to skyrocket. Some of these, apparently, resulted in what might otherwise be considered suspiciously timed trades, but are giving at least a partial safe harbor because they were involved in some plans. So very quickly, can you quickly describe what 10b51 plans are in what they try to accomplish . Thank you. So 10b51 plans are designed primarily as a tool for executives to manage bears stop trading over the long term. So today, executives increasingly are being paid and stop, stop options, restrictive stop, obviously they have liquidity needs. And the idea we find behind the 10b51 plan is that it allows you to sell stock on a regular basis. Right. They are usually used for the sales aside. And not worry about the fact that before you sell the stock you come into possession of material and non Public Information and youre there by the precluded to selling. Once you put that plan in place, once you commit to sail, you are insulated from liability, even if, you have knowledge at the time that that actually 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 trump is him on issues very sporadically. In the time of this closure that they make as a disclosed substance of these plans at all. So that is a first problem. The second problem, its that the law allows you to modify or to terminate your 10b51 plan. And it doesnt restrict that termination to situations where you dont have material non Public Information. So lets say i have a 10b51 plan, and im planning to sell my stock this week, i learned good news about my company or its going to get a federal grand, or promising drug trial, and i say ok, hang on, im gonna terminate my plan, im not going to sell. Obviously im making use of inside information. But im not trading. Im declining to trade. And as a result, its a loophole thats not covered by existing law. Is there a downside to mandatory disclosure of these . Either in realtime or a quarterly intervals, or some standardize time . Frankly, sir, i dont see a downside. And in fact, theres been a couple of empirical studies that have looked at the issue of disclosure practices, and found the issue 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 stop or start this program . So, that would absolutely be useful refinement as well. So we havent yet chopped in this hearing about other trading liabilities, that is a provision in the original Securities Exchange act of 1934 that is supposed to limit the abilities of executives to benefit from short term trading by not allowing them to change within a short time period. I think you can apply that same approach to the 10b51 plan. Given the intent behind this plans you should have to put the plan in place for a period of time, and ideally, the plan should persist for a period of time. So that there is a less likelihood that executives will try to take advantage of short term information asymmetry. And do i need the other witnesses, do you have any comments on these areas with potential improvements or fixing loopholes . Or other risks . All right, deafening silence. I appreciate all your help. As the son of a law professor i just have a lot of sympathy for your light, anyway, we will have that discussion off line, and with that i yield back. Thank you very much. I think the gentlemen for your questions, and commend the others to see if we can rebuild as we focus on the problems he illustrates. I want to thank miss porter and miss beaks for acting in chair during my absence. Thank you mister chairman, and what a good discussion. I of course command and thank all the members who worked on Insider Trading topics over the years, in particularly a friend, mr. Himes, from connecticut. Youve been such a leader and the subject our subcommittee has navigated. It is a very challenging subject. We need the information for the Capital Markets flexibility and youth, and really identify the criminal behavior. So thanks, jim himes, for your work, in the bipartisan work that we have done together. Mr. Martin, i want to talk a little bit about the societies survey on members regarding Insider Trading quick trading policies. You say 90 of your members will follow preclearance policies, can you highlight what your best practices would indicate that could have prevented or broad clarity, or remediated, some of the challenges that we read about in recent days and weve talked about over the course of this period . Sir, so, in general i think theres a sweet of policies that corporates employment to with the outset that 20 years ago, i think it was mr. Franklin who noted the change in most corporate suites to take Insider Trading and avoiding it, and regulating it companies are taking very seriously. So theres policy that they insisted to address that. Compliance training with executives, that requires the executive to acknowledge the existence of the policies they understand. Was the limitations are, including obviously, you cant trade while in possession of the designation of particularly brokerage houses, how to handle all transactions in company stock. That allow section 16 executives and others who may have mp i to be flagged. So those accounts can be monitored you mentioned the survey that the society conducted about two years ago. That indicated approximately 90 of the Company Survey by inhouse legal. I mentioned in my opening remarks, virtually every company imposes blackout periods. In advance of quarterly earnings. But its more stringent, those windows will be closed in the event that new Material Information develops, it could be a leadership change. It could be something with respect to a new product and then of course figure regulate the adoption of 10b 51 one pot plans when they can be adopted and cooling off periods theres a suite of policies that companies have become much more conversant and frequent users of. Because trying to avoid their executives becoming embroiled in Insider Trading allegations. Or Enforcement Actions, is incredibly time consuming and expensive for companies. The incentives are really lined up for companies to try to avoid those kinds of outcomes. My limited experience in this area is also in a very active company, thats growing and doing acquisitions and having to protect management agendas. A very period periodic final process, the number of days someone can actually trained their stock is very limited per quarter. 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 long term growth based compensation to executives, other than Stock Options . I know people have done studies on that. I dont think weve done particular studies on them, obviously the question of how long investing periods are, is pertinent to your question. And i can speak for my own personal experience, im out of time. Those investing periods for some executives have been pushed up. Thank you i want to follow up to you on that, i appreciate mr. Chairman. Best regards ask silent discussion. Thank you and i recognize my fellow california. Thank you very much mister chairman and i appreciate it very much the words of my good friend. I was a little surprised when this hearing started, when i heard the Ranking Member and others say basically, theres nothing here to see. Why cant we just move along, and there seems like there is a lot here to see. At least from my perspective. I appreciate the effort that the pharmaceutical companies are putting forward, as a result of a covid19 vaccine. Of course they should be compensated. I believe that they should be, but, also concerned about the large amounts of money that theyre making when the rest of the country is having such a difficult time. I guess im very concerned about the legal but wrongful steps of this. It really does seem to me that if what kodiak did was legal its certainly wrongful. I do not have great confidence in the scc at the moment. Their enforcement is way down, i think that we have something here. Professor fish, could you comment on that . Is there nothing to see here, should we move along . I dont i commend the subcommittee for raising what i think are very important topics. And i wouldnt say that you should all move along. I think the number of the comments that suggested though is that youre actually focusing on to related, but separate ideas. One is the conveyance or the wrongful conveyance, or the wrongful misuse of information. And the other is the sort of, compensation, and whether companies that are facing speculation under stock price. And also companies that are the subject of government funding. Whether they should be compensated in their executives to the degree that they are. So Stock Options and some of the reason Stock Options experiences a combination of the two. I think numbers of this subcommittee might be equally upset if these executives who get a huge grants just in the form of salary. Obviously theres nothing wrong with a Compensation Committee deciding to pay and executive millions of dollars. Before the news of a government grant has been publicly released. The Compensation Committee knows about the government grant. Its not a misuse of non Public Information, but you might think it smells bad. This is taxpayer funding this, isnt something the executives should profit with. But thats a little bit different from the stop treating or the inside repeating concept. Professor i think it does small pretty bread. If you could speak a little bit about the spring loading and bullet dodging youre talking about earlier. Comments that have been made so far with protect and bullet i think the focus where the bullet dodging piece of it temporarily depressing the stock price. By releasing information a stock option grant date as opposed to, until after the option they. I think one of the courts since the courts and delaware if im not mistaken a number of years ago. Referred to spring loading in particular spring loading. As being a matter of corporate disclosure, unclean heart. But not necessarily a violation of law. I think what were talking about here, and to how to provide some sort of disclosures around these concerns. I said also addressed the issue of scc enforcement in this area while the scc maybe down i would submit someone defend these investigations. The commission is very aggressive, more than 40 treating suspensions there specifically related to issuers. In the covid19 solution space. The commission really has been very vigilant, on the other end, as it has been dealing with staff reductions that also has impacted its ability to be as broad in its application of choice of cases. But i think the gestation of the investigation, i think were still seeing a very active vision to sort of a reprioritization over the last 18 months. Not to be confrontational or be difficult, but i would disagree with that. Especially when you see what happened with kodiak. I dont know how you explain that to the american public. Thank you my time has expired. Now recognize the recent former chair of the subcommittee, gentlelady from new york. I thank the gentleman for yielding, thank you for this important hearing. Mr. Franco i would like to address my question to me, earlier this year the house passed my legislation. With overwhelming bipartisan support. The bill would close the loophole on our current law, that would allow Corporate Executives to trade on information before it is disclosed to the public. Right now significant corporate event the company has to disclose that significant event to the public by filing a four eight k, within four days of the event occurring. Of course during this fourday gap, executives that the company know about the event, but their investors dont. My bill would address that problem by simply prohibiting executives from treating during this fourday gap given the recent controversial activities, that my colleague congressman just mentioned. The Companies Like i believe its now more than ever to close this loophole. Since the start of the pandemic in mid march, there have been over 10,008 k filings with the sec. Mr. Franco would you agree that during this crisis when firms have made important announcement its especially important that we close this loophole . I would agree entirely, i think the your legislation is right on point and i think it also goes to the point that mr. Martin had made, regarding corporate blackout periods certainly there is a v. Abuse but using the example that mr. Vargas had raised. From the statement the sec has not yet let alone completed this investigation can come to an entirely different conclusion in the finding some internal investigation. I believe the questions that were pose 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 youre proposed legislation around teaching disclosures is right on point, and essentially, legislate the blackout period. Which is something that really doesnt pose that level of control, that the market really warns. Also, as chair of the committee on oversight reform i launched an investigation with chairwoman waters, angle, and clyde mann, into the administration 765 million loan to kodiak. As part of our investigation, the Oversight Committee continues to investigate the reasoning behind the u. S. Internal Development Finance corporation decision. To provide alone, and whether they violated their own policies and procedures. And whether code act shared any material non Public Information before the announcement was made public. This was the international Development Finance corporation, that gave in to a domestic corporation. Thats a violation there, and to a company that had no experience, zero and vaccines. Kodiak itself has acknowledged that it is under and divest ignition by the scc this follows the unusual spike in the trading of stock, just one day prior to the july 28th announcement, on july 27th. More than 1. 6 million shares of kodiak were traded, more than six times the average daily volume of shares a day during the previous 30 days. And while the entry increase and trading activity is reportedly a result of kodiak inadvertently releasing the news of the loan, to local news outlet. Why did they do that . Kodiak waited until the following day to publicly disclose the announcement. Unless its stockholders were paying attention to social media, kodiak effectively kept millions of shareholders in the dark, from the spike in trading activity. So doctor frank will do you see this as a potential violation of regulation ftc . Which states that when theres a quote, non intentional disclosure be the ashore must publicly disclosed the information promptly. And if not, canada sort of trading Activity Still be harder for harmful to chair holders on the market . The answer is yes, there is a potential for violation, which i believe the scc would include in the scope of its investigation. Look at the price of the stock, were also dealing with issues such as potential stock manipulation. Also tipping were that the people are treated, and where people are potentially involved in the put option side. I think all of these things that something that the scc will look at in the scope of its investigation. When do you expect your investigation to be completed . I believe the gentle ladys time has expired. If there can be a one sentence answered well hear it and they were gonna go on. The investigation and allegations such as this, easily could run nine months to 12 to 15 months. Thank you. I yield back, thank you mister chairman. Gentleman from new york. Thank you mister chairman, thank you for doing this holding this important hearing. Ive been listening off and on to some of the witnesses and some of my colleagues questions. I think that what we have here is in the middle of this pandemic just killed hundreds of thousands of americans, i know that it devastated among other things. The question that prevents itself to us, though its credibility. When we have a time of everybody questioning, especially when we have the president of the United States questioning scientists and doctors, are we going to have a vaccine, will we not . Whether or not anything is on the up and up. As we deal with these pharmaceutical companies, trying to get a vaccine and i agree that we need one sooner rather than later. I agree that individuals to be compensated for the appropriate amount of work that they do. 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 a doctor said in testimony yesterday, i applaud all doctors and scientists working on this crucial project. The importance of the vaccine is as i indicated the president just yesterday contradicted the cdc director about when a vaccine would be ready. So i think we need to be building up the confidence of the American People. That brings me to where we are now, and corporate governments to step up. Because they understand the credibility issue, and will play an important part here also. I believe that leaders of these Companies Need to have these structures for introducing states and professional vaccine. We also need laws that can arraignment arrangements while protecting the integrity for Capital Market. Ill start with professor fish, what are some of the ways you think we can use Corporate Governance, and by to financial regulations to provoke encouragement, a safe and effective vaccine . While also protecting some of the market misbehavior, and i hear a lot of italics talking about. Congressman i wish i had an answer for that question, i think 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 the vaccine, the whole world will say yes this is worth an awful lot of money to us. Corporate governance, only gets two so far. Right now i think 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 companies should be precluded from awarding Stock Options until they filed an eight k. A company may not know, its baby step with respect to testing province. Its the kind of pan out. Am i going to mislead investors if i say were making progress, and by going to mislead investors if i dont talk about the progress . So thats why i talked about this disclosure environment being very tall challenging to manage. I do you think it comes down to Corporate Governance practices, a lot of those government practices are internal. How much is the board riding on this. How much is the board paying attention, both to what the company is saying, and to what its executives are doing. To a certain degree, thats not about Insider Trading. Its not about fraud, its about best practices. Thank you. Can i just add something there . Im sorry congressman. I would just add that a lot of companies have been trying to figure out how we can have inaudible they add some of those disclosure committees to try to add the right kinds of perspectives to get out what doctor fisher is saying. How do you assess the materiality of particular developments prepandemic would not have risen to that level. Thank you let me ask another quick question. What im noticing theres been a growing trend for companies to go public not by using the traditional ipo process, rather through a reverse immersion with a special purpose acquisition company. And i have serious concerns about this try, and i wanted to know do you see any particular implications Insider Trading, or other issues with this . Just curious what youre gonna say, yes or no if you have some concerns . Yes i can certainly address i very briefly. Nice. If the chairman will allow. Thank. You, thank you mister chairman. The issue with rivers marriages is not just, facts its also the group of first mergers that essentially dorman Public Companies. There is a hot topic issue for the sec, its been there for probably 30 years if not lo,

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