December 10, 2019

Insider Trading Reform: Could 2020 Be the Year?

Last week, the House passed the “Insider Trading Prohibition Act” by a vote of 410-13. John blogged about the bill back in June when it passed out of the House Financial Services Committee – it would broadly describe “wrongful” trading or communication of material non-public information by tying it to:

(A) theft, bribery, misrepresentation, or espionage (through electronic or other means);

(B) a violation of any Federal law protecting computer data or the intellectual property or privacy of computer users;

(C) conversion, misappropriation, or other unauthorized and deceptive taking of such information; or

(D) a breach of any fiduciary duty, a breach of a confidentiality agreement, a breach of contract, or a breach of any other personal or other relationship of trust and confidence.

The legislation would also require only that a defendant was aware or recklessly disregarded that the inside information was wrongfully obtained – rather than specific knowledge of how it was obtained or whether there was a “personal benefit” involved. It also leaves open the possibility that 10b5-1 transactions could be exempt from insider trading prosecution. Mostly, though, it pretty closely tracks current case law.

So what are the odds that this bill will become law? It appears to have “bipartisan” support – but it’s also been floating around in some form since 2015 and hasn’t made it to the finish line yet. The repetition certainly makes it easier to come up with headlines – I copied today’s from a 2017 write-up by John.

SEC Enforcement: “Cooperation” Becomes More Common

Last month, Broc blogged about the Enforcement Division’s annual report on its activities. This annual study from Cornerstone Research & NYU takes a closer look at the results for public companies & subsidiaries. Here’s some takeaways (also check out this Orrick blog saying that crypto & blockchain issues still appear to be enforcement priorities):

– While the number of enforcement actions rose more than 30% over the previous fiscal year, more than half of the new actions targeted investment advisers/investment companies or broker-dealers

– In FY 2019, the SEC noted cooperation by 76% of defendants, a record-high percentage and substantially higher than the FY 2010–FY 2018 average of 51%

– In the first half of FY 2019, the SEC brought 100% of enforcement actions as administrative proceedings; in the second half, this dropped to 84%

– Challenges to the constitutionality of protections preventing removal of the SEC’s administrative law judges (ALJs) continued in FY 2019 with a new defendant filing challenges following the August 2019 dismissal of Lucia v. SEC

– The average monetary settlement amount for public & subsidiary actions during the period was $16 million

Enforcement Stats: GAO Says SEC Needs Better Documentation

When the SEC’s Enforcement Division released its annual stats last month, Broc blogged that some of the motivation behind the report might be for the SEC to show Congress that its money is going to good use. That hunch aligns with the recent recommendation by the Government Accountability Office that the SEC needs to do a better job of documenting its procedures for generating these reports – including procedures for compiling & verifying stats and documenting their implementation.

Here’s the highlights from the GAO’s 20-page report:

Since 2009, the Division of Enforcement (Enforcement) in the Securities and Exchange Commission (SEC) has made modifications to its reporting of enforcement statistics, including by releasing a stand-alone annual report beginning in fiscal year 2017. The Enforcement Annual Report included additional data on enforcement statistics not previously reported and narratives about enforcement priorities and cases. Enforcement staff told us the annual report was created to increase transparency and provide more information and deeper context than previous reporting had provided.

Enforcement has written procedures for recording and verifying enforcement-related data (including on investigations and enforcement actions) in its central database. However, Enforcement does not have written procedures for generating its public reports (currently, the annual report), including for compiling and verifying the enforcement statistics used in the report. To produce the report, Enforcement staff told GAO that staff and officials hold meetings in which they determine which areas and accomplishments to highlight (see figure). Enforcement was not able to provide documentation demonstrating that the process it currently uses to prepare and review the report was implemented as intended.

Developing written procedures for generating Enforcement’s public reports and documenting their implementation would provide greater assurance that reported information is reliable and accurate, which is important to maintaining the Division’s credibility and public confidence in its efforts.

Liz Dunshee