Back to General Resources

House Financial Services Subcommittee Hearing on Insider Trading

House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets

“Insider Trading and Stock Option Grants: An Examination of Corporate Integrity in the COVID-19 Pandemic”

Thursday, September 17th, 2020

Key Topics & Takeaways

Witnesses

  • Rick Claypool, Research Director, Office of the President, Public Citizen
  • Jill Fisch, Distinguished Professor of Business Law and Co-Director of the Institute of Law and Economics, University of Pennsylvania Law School
  • Jacob S. Frenkel, Chair of Government Investigations and Securities Enforcement, Dickinson Wright
  • Granville Martin, Senior Vice President and General Counsel, Society for Corporate Governance

Opening Statements

Chairman Brad Sherman (D-Calif.)

In his opening statement, Sherman stressed the importance of crafting legislation and regulations that govern bad actors in the financial markets. He noted cases of pharmaceutical company executives that saw massive payouts via stock options after receiving investment from Operation Warp Speed (OWS). Sherman stated that the committee should address the issue of “spring-loading,” which he defined as when executives are granted stock options shortly before a major public announcement.

Ranking Member Bill Huizenga (R-Mich.)

In his opening statement, Huizenga stated that insider trading is wrong and illegal, noting that it hurts both the integrity of capital markets as well as main street investors. He said the Committee should focus on bipartisan solutions to support job creators through strengthening broader access to capital, reducing regulation costs, and expanding investment opportunities to main street investors.

Patrick McHenry (R-N.C.)

In his opening statement, McHenry commended the SEC for pursuing bad actors in capital markets, and said the Committee should spend its time identifying solutions that strengthen the economy, support economic recovery, and help workers return to work safely.

Testimony

Rick Claypool, Research Director, Office of the President, Public Citizen

In his testimony, Claypool characterized reported instances of possible misconduct by pharmaceutical companies as concerning. To deter misconduct, he suggested a compensation mechanism by which recipients of CARES Act aid would place a significant amount of executive compensation in a collective pool. He continued that should the company later be found to have misused aid or engaged in misconduct, the pool would be used to fund their penalty fines.

Jill Fisch, Distinguished Professor of Business Law and Co-Director of the Institute of Law and Economics, University of Pennsylvania Law School

In her testimony, Fisch noted that over the past six months, capital markets have experienced unprecedented levels of volatility and trading volume, thereby creating opportunity for misconduct. She discussed disclosure integrity, the use of stock options as compensation, and insider trading. Fisch suggested a potential rethink of rule 10b5-1, saying the current market environment has created opportunity for the manipulation of disclosures for executive profits.

Jacob S. Frenkel, Chair of Government Investigations and Securities Enforcement, Dickinson Wright

In his testimony, Frenkel stated that recent activity in the capital markets has raised questions about the commitment to compliance which is a prime responsibility of corporate custodians. Frenkel stated that corporate integrity — a commitment to best practice and proper governance, including a conscientious discharge of common law fiduciary duties, and a constant focus on investor protection and market integrity– must be guiding principles of corporate board rooms and c-suites

Granville Martin, Senior Vice President and General Counsel, Society for Corporate Governance

In his testimony, Martin expressed support for legislation that prevents and punishes insider trading. He noted that public companies have responded robustly to SEC guidance emphasizing market integrity and urging companies to provide COVID-19 related disclosures.

Question & Answer

Corporate Integrity and Profiteering in the COVID-19 Pandemic

Reps. Anthony Gonzalez (R-Ohio), Carolyn Maloney (D-N.Y.), Josh Gottheimer (D-N.J.), Juan Vargas (D-Calif.), and Sherman asked the witnesses to discuss corporate integrity concerns at pharmaceutical companies developing COVID-19 vaccines funded by OPS. Fisch noted that in the case of Eastman Kodak Company, the board issued its CEO $1.75 million shares of stock options a day before the DFC announced it would loan the company $765 for vaccine development, which caused the stock price to rise over 500%. Frenkel noted that the Kodak case involves two related but separate concepts: 1) the wrongful misuse of information and 2) whether companies facing speculation in stock price or government funding should be compensating executives to the extend in which they are.

10b5-1 Rule

Reps. Bill Foster (D-Ill.) and Huizenga asked witnesses to describe and explain the implications of SEC Rule 10b5-1. Fisch explained that 10b5-1 plans were designed as a tool for executives to manage stock trading over the long term. She said the plans contain loopholes, notably they allow executives to modify and terminate plans without restrictions for situations in which material non-public information is not involved. When asked for recommendations on how to close these loopholes, Fisch suggested regulation that requires executives to announce trading plans well in advance of their implementation date, and mandate that 10b5-1 plans persist for a certain period of time.

Spring-Loading and Bullet Dodging

Reps. Jim Himes (D-Conn.) and Vargas asked witnesses to discuss the concepts of “spring-loading” and “bullet-dodging.” Frenkel explained that spring-loading refers to the practice of issuing stock options shortly before a major announcement that would likely increase the price of the stock. He continued that bullet dodging refers to delaying stock issuances until after the release of unfavorable information that would likely drive the stock price down. He noted that these concepts are more disclosure-related issues.

Best Practices

Reps. French Hill (R-Ark.) and Gregory Meeks (D-N.Y.) asked witnesses to identify what practices certain pharmaceutical companies should implement to facilitate the development of a safe and effective COVID-19 vaccine, while also preventing market misbehavior. Martin suggested increased compliance training for executives, as well as the designation of certain brokerage houses to handle company stock transactions, will increase the capacity to monitor executives with access to material non-public information.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.