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	Introduction

Insider trading in securities may occur when a person in possession of material nonpublic information about a company trades in the company's securities and makes a profit or avoids a loss. Federal statutes have provisions that either specifically forbid insider trading or have been interpreted by courts to prohibit insider trading. This report discusses some of the key statutes as well as regulations issued by the Securities and Exchange Commission (SEC or Commission) to implement the statutes. The report also discusses some of the most pertinent court decisions on insider trading.

	Overview of Federal Statutes Related to Insider Trading

		Securities Act of 1933

The Securities Act of 1933 (1933 Act) makes it illegal to offer or sell securities to the public unless the securities have been registered with the SEC. A registration statement becomes effective 20 days after it is filed with the Commission, unless it is delayed or suspended. Registration under the 1933 Act covers only the securities actually being offered and only for the purposes of the offering in the registration statement. The registration statement consists of two parts: the prospectus, provided to every purchaser of the securities, and Part II, containing information and exhibits that do not have to be provided to purchasers but are available for inspection. Section 7 of the 1933 Act, referring to Schedule A, sets forth the information that must be contained in the registration statement. This schedule requires a great deal of information, such as the underwriters, the specific type of business, significant shareholders, debt and assets of the company, and opinions as to the legality of the stock issue. Section 10(a) of the 1933 Act specifies the information which the prospectus must contain. There are also numerous regulations issued by the Commission which provide additional details about the registration process under the 1933 Act.
Certain transactions and securities are exempted from the registration process. The exempted transactions include private placements, intrastate offerings, and small offerings. Among the exempted securities are government securities, bank securities, and short-term commercial paper; all securities for which it is believed that other, adequate means of government regulation exist.

		Securities Exchange Act of 1934

The Securities Exchange Act of 1934 (1934 Act) is concerned with several different topics, one of which is the ongoing process of required disclosure by covered publicly traded companies to the investing public through the filing of periodic and updated reports with the Commission. Any issuer that has a class of securities traded on a national securities exchange or, in certain circumstances, has total assets exceeding $10 million and a class of equity securities held of record by 2,000 shareholders or 500 shareholders who are not accredited investors must register with the SEC under the 1934 Act. Every issuer required to register under the 1934 Act must also file periodic and other reports with the SEC. Section 12 of the 1934 Act requires the filing of a detailed statement about the company when the company first registers. Section 13, in turn, requires a registered company to file annual and quarterly reports with the SEC. These reports must contain essentially all material information, financial and otherwise, about the company—information that the investing public would need in making an informed decision about whether to invest in the company. Section 14 contains requirements about proxy solicitation. Some exemptions from these reporting requirements are provided. The Commission has issued extensive regulations to specify information that these reports must provide.
Failure to disclose material information is actionable. For example, Section 18(a) of the Securities Exchange Act grants an express private right of action to investors who have been injured by reliance upon material misstatements or omissions of facts in reports that have been filed with the SEC. Section 10(b) of the 1934 Act, the general antifraud provision, and Rule 10b-5, issued by the SEC to carry out the statutory fraud prohibition, provide for a cause of action for injuries caused by omissions, misrepresentations, or manipulations of material facts in statements filed with the SEC, as well as in statements other than those filed with the SEC.
One provision in the 1934 Act is specifically designed to discourage insiders in the corporation from taking advantage of their inside information in the trading of the corporation's securities. Section 16 of the 1934 Act places sanctions on insiders who use inside information in making short-swing profits. For purposes of this provision, an insider is defined as any "person who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security . . . which is registered . . . or who is a director or an officer of the issuer . . . ." Every person who qualifies as an insider under this definition must file a report with the SEC at the time of the security's registration on a national securities exchange or by the effective date of a filed registration statement or within 10 days after he becomes a beneficial owner, director, or officer. If there has been a change in the ownership of the security or if there has been a purchase or sale of a security-based swap agreement involving the equity security, the insider must file the report before the end of the second business day following the day on which the transaction has been executed.
To prevent the unfair use of inside information, Section 16(b) permits the company or any security holder to sue on behalf of the company to recover any profit that the person realizes from any purchase and sale or sale and purchase of any equity security of the company within a period of less than six months.
Section 10(b) and Rule 10b-5 are used in most cases of insider trading violations, as well as in other kinds of alleged securities fraud. (Some of the major cases are discussed below.) Although Section 10(b) does not refer to specific types of fraud or specific types of insiders, one of its most frequent applications over the years has been to insider trading. The statute states, in relevant part:
It shall be unlawful for any person, directly or indirectly by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . .
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. . . .
Rule 10b-5, mentioned later along with other SEC regulations that focus more specifically on insider trading, is the general SEC rule used in many securities fraud cases. The rule states:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.

		Insider Trading Sanctions Act of 1984

According to the House report on the bill, the Insider Trading Sanctions Act of 1984 was enacted because:
Insider trading threatens . . . markets by undermining the public's expectations of honest and fair securities markets where all participants play by the same rules. This legislation provides increased sanctions against insider trading in order to increase deterrence of violations.
"Insider trading" is the term used to refer to trading in the securities markets while in possession of "material" information (generally, information that would be important to an investor in making a decision to buy or sell a security) that is not available to the general public.
The 1984 Act provides that, if the Commission believes that any person has bought or sold a security while in possession of material, nonpublic information, the Commission may bring an action in federal district court seeking a civil penalty. The penalty may be up to three times the profit gained or loss avoided.

		Insider Trading and Securities Fraud Enforcement Act of 1988

After a number of hearings and considerable debate in the 100 th Congress, President Reagan signed the Insider Trading and Securities Fraud Enforcement Act of 1988. This act expanded the scope of civil penalties that may be imposed against officers and directors who fail to take adequate steps to prevent insider trading. Among other things, the 1988 Act also established a private right of action against the inside trader for buyers or sellers of securities who traded contemporaneously with the insider.

		Stop Trading on Congressional Knowledge (STOCK) Act of 2012

The STOCK Act, signed into law on April 4, 2012, affirms that insider trading prohibitions apply to Members of Congress, congressional staff, and other federal officials.
The STOCK Act also has provisions concerning financial disclosure reporting requirements for legislative and executive branch officials.

		Examples of Penalties for Insider Trading

There are both civil and criminal penalties for insider trading, and the penalties can vary depending on what statutes a trader is found guilty of violating. The 1934 Act sets out the civil penalties for engaging in securities transactions while in possession of material nonpublic information. As mentioned above, the penalty can be up to three times the profit gained or loss avoided. However, willful violations of other provisions, such as Section 10(b), the general antifraud securities provision, may result in other significant penalties, including fines up to $5 million and/or imprisonment for up to 20 years for individuals and fines up to $25 million for businesses.

	Selected Regulations

As stated above, SEC Rule 10b-5, which implements Section 10(b) of the Securities Exchange Act, is apparently the most frequently used SEC rule in lawsuits that charge violations of insider trading prohibitions. However, other SEC rules, some of which specifically target insider trading, are also important.
Rule 10b5-1 prohibits trading "on the basis of" material nonpublic information. This rule states that one of the proscribed activities under Section 10(b) and Rule 10b-5 is securities trading "on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is owed" to the issuer of the security, shareholders of the issuer, or another who is the source of the inside information. The regulation defines "on the basis of" to have a kind of knowledge requirement:
[A] purchase or sale of a security of an issuer is "on the basis of" material nonpublic information about that security or issuer if the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale.
Various affirmative defenses are allowed under the rule, such as the alleged violator's demonstrating that he had entered into a binding contract to buy or sell the security, had instructed another person to buy or sell the security for his account, or had adopted a written plan for trading securities before becoming aware of the material nonpublic information.
Rule 10b5-2 sets out duties of trust or confidence in insider trading cases based on the misappropriation of inside information. The misappropriation theory of insider trading is a fairly recent development in securities law. Under the classical theory of insider trading, a corporate insider is prohibited from trading that corporation's securities if the trade is based on inside information and the trader has a fiduciary duty to the corporation's shareholders. In contrast to classical insider trading, the misappropriation theory may hold liable a person who is not actually a corporate insider but has instead been provided inside information in confidence and who breaches a fiduciary duty to the source of the information in order to gain profit or avoid loss in the securities market. Rule 10b5-2 sets out examples of what is meant by "duties of trust or confidence." Such duties include a person's agreement to maintain the disclosed information in confidence; a person's history with the discloser of the inside information indicating an expectation that the recipient of the information will keep the information in confidence; and a person's receiving information from a spouse or close relative, unless the recipient can show that he neither knew nor should have reasonably known or agreed that he would keep the information confidential.
Regulation FD is another SEC rule that could prohibit insider trading. Regulation FD addresses selective disclosure. It provides that, when an issuer or any person acting on behalf of an issuer discloses material nonpublic information to certain enumerated persons (typically, securities market professionals and holders of the securities), that issuer or person acting on behalf of the issuer must disclose the information to the public. This disclosure must be made simultaneously with the intentional disclosure to the enumerated persons or as promptly as possible after the disclosure, in the case of a non-intentional disclosure to the enumerated persons.

	Selected Decisions Illustrating the Use of Section 10(b) and Rule 10b-5 to Prosecute Insider Trading Violations

There are numerous cases and administrative proceedings in which Section 10(b) and Rule 10b-5 have been used to prosecute insider trading violations. The following is a brief discussion of some of the most notable of these cases and proceedings.

		Strong v. Repide

Although it was decided 25 years before the enactment of the Securities Exchange Act, Strong v. Repide illustrates that the common law rule of fiduciary duty, which is arguably the idea driving the case law imposing penalties for insider trading, prohibits a company insider from profiting from knowledge that he alone has about the company. According to the Court, a corporate director may not generally have an obligation of a fiduciary nature to disclose to a shareholder the director's knowledge affecting the value of the shares. However, the Court believed that such a duty can exist in special cases and did, in fact, exist in this case because the fraudulent concealment of the identity of a stock purchaser would have affected the value of the stock in question. To wit, the Court stated: "Concealing his identity when procuring the purchase of the stock, by his agent, was in itself strong evidence of fraud on the part of the defendant." The Court went on to state: "The case before us seems a plain one for holding that, under the circumstances detailed, there was a legal obligation on the part of the defendant to make these disclosures."

		In the Matter of Cady Roberts & Co.

In an administrative disciplinary proceeding, In the Matter of Cady Roberts & Co. , the SEC held that Section 10(b) and Rule 10b-5 prohibited insider trading by a person, in this case a broker-dealer, who may not be within the corporation whose stock has been traded, but who has received privileged information about the corporation from someone within the corporation.
The case concerned a partner in a brokerage firm who, after receiving a message from a director of the Curtiss-Wright corporation stating that the board of directors had voted to cut the dividend, placed orders to sell some Curtiss-Wright stock before news of the dividend cut was disseminated to the public. The broker was not a corporate insider (i.e., he was not an officer, director, or significant shareholder). However, the SEC held that the broker's conduct violated at least clause (3) of the above-quoted SEC Rule 10b-5 in that the conduct operated as a fraud or deceit on the purchasers and, thus, there was no need to decide the scope of clauses (1) and (2). In determining that there was a violation of clause (3), the SEC appears to have found fraud committed on both the company and on persons on the other side of the market, noting:
Analytically, the obligation [not to trade on inside information] rests on two principal elements: first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone, and second, the inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing. In considering these elements under the broad language of the anti-fraud provisions we are not to be circumscribed by fine distinctions and rigid classifications. Thus, it is our task here to identify those persons who are in a special relationship with a company and privy to its internal affairs, and thereby suffer correlative duties in trading in its securities. Intimacy demands restraint lest the uninformed be exploited.
The SEC rejected the broker's argument that the obligation to disclose material information exists only in situations involving face-to-face dealings on the grounds that:
[i]t would be anomalous indeed if the protection afforded by the anti-fraud provisions were withdrawn from transactions effected on exchanges, primary markets for securities transactions. If purchasers on an exchange had available material information known by a selling insider, we may assume that their investment judgment would be affected and their decision whether to buy might accordingly be modified. Consequently, any sales by the insider must await disclosure of the information.
Thus, it appears that this case established that Section 10(b) and Rule 10b-5 extend beyond officers, directors, and major stockholders to others (in this case, a broker-dealer) who receive information from a corporate source. Later cases, discussed below, appear to support this view.

		Securities and Exchange Commission v. Texas Gulf Sulphur

Securities and Exchange Commission v. Texas Gulf Sulphur , a 1968 decision by the U.S. Court of Appeals for the Second Circuit (Second Circuit), effectively supported the SEC's ruling in Cady Roberts by suggesting that anyone in possession of inside information must either publicly disclose the information or not trade the particular stock until the information becomes public. According to the Second Circuit:
[A]nyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or if he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed.

		Chiarella v. United States

The U.S. Supreme Court appears, however, in 1980 to have somewhat modified the rule of Texas Gulf Sulphur by indicating that, for a fraud to be actionable under Rule 10b-5, there must be a duty to disclose arising from a relationship of trust and confidence between parties to the transaction. Chiarella v. United States involved an alleged violation of Rule 10b-5 by an employee of a financial printer. The employee, who was involved in printing materials related to corporate takeover bids, deduced the names of the target companies from information contained in documents delivered to the printer by the acquiring companies. Without disclosing his knowledge, the employee purchased stock in the target companies and sold the shares immediately after the information was made public, realizing a profit of $30,000. The Second Circuit held that a violation of Rule 10b-5 had occurred and convicted the employee for willfully failing to inform the sellers of the target company securities that he knew of an imminent takeover bid that would increase the value of their stock.
The Supreme Court reversed. According to the Court, an employee in this situation did not have a duty to disclose the information. He was not a corporate insider, and he received no confidential information. In addition, no duty arose from the relationship between the printing company employee and the sellers of the target companies' securities. The Court held that a duty to disclose under Section 10(b) and Rule 10b-5 does not arise from the mere possession of nonpublic market information.

		Dirks v. Securities and Exchange Commission

Dirks v. Securities and Exchange Commission could be seen to have gone a little further than Chiarella by indicating that persons not within a corporation who possess inside information are not always liable when trading on this information. The case involved an officer of a broker-dealer who specialized in providing investment analysis of insurance company securities to institutional investors. He received information that the assets of an insurance company were greatly overstated because of fraudulent corporate practices and that regulatory agencies had not acted on charges made by company employees. Although the officer of the broker-dealer did not himself trade the stock, some of his customers did, based on information they received from him. The price of the stock fell, and the SEC began investigations, eventually finding that the officer had violated Rule 10b-5 by repeating the allegations of fraud to investors who later sold their stock in the insurance company. However, because of his role in uncovering the fraud, he received only a censure from the SEC.
On appeal, the Supreme Court held that no violation of Section 10(b) had occurred in this case. In order to find a violation of Section 10(b) by a corporate insider, two elements are necessary, according to the Court: (1) the existence of a relationship affording access to inside information intended to be available only for a corporate purpose, and (2) the unfairness of allowing a corporate insider to take advantage of that information by trading without disclosure. However, the duty arises from a fiduciary relationship, in the Court's view. In addition, there must be manipulation or deception to bring about a breach of the fiduciary duty. Here, according to the Court, the insider did not trade on the inside information, nor did he make secret profits. For the officer of the broker-dealer to have a duty to disclose inside information or abstain from trading, the officer must have a fiduciary duty and must have breached that fiduciary duty. The officer in this case had no duty to abstain from using inside information because he had no pre-existing fiduciary duty to the insurance company's shareholders. Therefore, he did not violate Section 10(b) or Rule 10b-5.

		Carpenter v. United States

Seven years after Dirks , the Supreme Court decided another landmark securities case, Carpenter v. United States . In this case, although the Court did not find the defendants guilty under the misappropriation theory of securities fraud, it did discuss the issue. The case arose when R. Foster Winans, a former writer for the Wall Street Journal's "Heard on the Street" column, and others were charged with violations of Section 10(b) and Rule 10b-5. They were also charged with violating the federal mail and wire fraud statutes and conspiracy. In researching information to be used in his column, Winans interviewed corporate executives, but none of the information he obtained was said to have involved corporate inside information. Because of its perceived quality and integrity, the column had the potential for affecting the prices of the stocks that it discussed.
The Wall Street Journal's official policy was that, before publication, the contents of the column were its confidential information. However, despite being familiar with this rule, Winans agreed to give Peter Brant and Kenneth Felis, both employees of Kidder Peabody, advance information about the columns. Brant, Felis, and another person, David Clark, bought and sold stocks based on the probable effects of the information that would later appear in Winans's columns. The profits from these trades over a four-month period amounted to $690,000. Kidder Peabody's compliance department eventually noticed correlations between the Winans columns and the Clark and Felis accounts. The SEC began an investigation; Winans and his roommate, David Carpenter, revealed the scheme, and indictments followed.
The Second Circuit held that Winans had knowingly breached a duty of confidentiality by misappropriating prepublication information. It found that this misappropriation had violated Section 10(b) and Rule 10b-5 because Winans's deliberate breach of his duty of confidentiality was a fraud and deceit on the newspaper. The Second Circuit also held that Winans had fraudulently misappropriated property within the meaning of the mail and wire fraud statutes.
In reviewing the Second Circuit's decision, the Supreme Court was evenly divided concerning these convictions under the securities laws and therefore affirmed, by a vote of four to four, the Second Circuit's opinion. The Court did not elaborate on whether Winans's activities violated the securities laws. It also affirmed the Second Circuit's judgment with respect to the mail and wire fraud convictions without elaboration.

		United States v. O'Hagan

Ten years later, in United States v. O'Hagan , the Supreme Court legitimated the misappropriation theory of securities fraud by finding James O'Hagan guilty of violating Section 10(b) and Rule 10b-5. O'Hagan was a partner in a Minneapolis law firm that represented Grand Metropolitan PLC (Grand Met), a company based in London. Grand Met was interested in acquiring Pillsbury Company (Pillsbury). O'Hagan purchased call options for and stock in Pillsbury after he learned of Grand Met's interest. After the tender offer was publicly announced, Pillsbury stock immediately rose. O'Hagan exercised his options and liquidated his stock, realizing a profit of over $4 million.
The SEC indicted O'Hagan on 57 counts, including securities fraud under Section 10(b) and Rule 10b-5. A jury convicted him on all of the counts, but the U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit) reversed, holding, among other things, that the misappropriation theory is inconsistent with Section 10(b). The Supreme Court subsequently reversed the Eighth Circuit.
In its decision with respect to the misappropriation theory, the Court found that O'Hagan's fiduciary status and his willful intent to violate that status were sufficient to find him guilty of misappropriating confidential information:
[T]he fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities. The securities transaction and the breach of duty thus coincide. This is so even though the person or entity defrauded is not the other party to the trade, but is, instead, the source of the nonpublic information . . . . A misappropriator who trades on the basis of material, nonpublic information, in short, gains his advantageous market position through deception; he deceives the source of the information and simultaneously harms members of the investing public.

		United States v. Newman

A decision late in 2014 by the Second Circuit recently brought increased attention to the issue of insider trading. In this decision, United States v. Newman , the Second Circuit overturned two high-profile convictions for insider trading. The Second Circuit held that the evidence against Todd Newman and Anthony Chiasson, who were analysts for hedge funds and investment funds, could not sustain a guilty verdict. According to the Second Circuit, the government had not adequately shown that the alleged insiders, who were employees of publicly traded technology companies, received personal benefits for providing information to Newman and Chiasson. In addition, according to the court, the government had not presented evidence that the defendants knew that they were trading on inside information obtained from insiders who were violating their fiduciary duties. According to some commenters, this decision "upended the government's campaign" against insider trading because it held that the government must show that the insiders, who in this case allegedly passed on inside information, received personal benefits, presumably of a tangible nature, in order to obtain conviction. Although the federal government sought review of the Second Circuit's decision in Newman from the Supreme Court, the High Court declined to hear the case.

		Salman v. United States

As mentioned above, the Second Circuit's Newman decision required proof of a tangible benefit. However, in its 2015 decision in United States v. Salman , the Ninth Circuit found that it is enough to show that the insider and the tippee (the one who receives inside information) share a close family relationship. The Ninth Circuit took specific note of the Supreme Court's statement in Dirks v. Securities and Exchange Commission , discussed above, that "[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend ." Salman appealed the Ninth Circuit's decision to the Supreme Court, which granted review.
On December 6, 2016, the U.S. Supreme Court in Salman v. United States sided with the Ninth Circuit, unanimously upholding the conviction of Bassam Yacoub Salman for insider trading on tips that he had received from his brother-in-law. The Court agreed with federal prosecutors that a trader can be guilty of violating insider trading prohibitions even if the insider did not receive a tangible benefit, such as money or property, for passing the tip so long as the trader and insider are friends or relatives. In so doing, the Court resolved a difference of opinion between the U.S. Courts of Appeals for the Second and Ninth Circuits concerning what the government must prove in prosecuting insider trading cases.
In its Salman decision, the Supreme Court held that the Ninth Circuit had properly applied Dirks in affirming Salman's conviction. The Court first looked to the trial court evidence that had established there were close family and friendship relationships among Salman and others involved in the case. With these close relationships in mind, the Court found that Dirks easily resolved the issue at hand, reiterating the Dirks Court's statement that "a jury can infer a personal benefit—and thus a breach of the tipper's duty—where the tipper receives something of value in exchange for the tip or 'makes a gift of confidential information to a trading relative or friend.'"
According to the Court in Salman , when an individual disclosed confidential information to his brother with the expectation that his brother would trade on it, that individual breached his fiduciary duty to his employer, Citigroup, and its clients. Then, when Salman, as a tippee, traded on this information, knowing that it had been improperly disclosed, he too breached a duty of trust and confidence to Citigroup and its clients. According to the Court, it is not necessary that the tipper receive something of a tangible nature; rather, the breach of the fiduciary duty to a trading relative or friend suffices to meet the standard laid out in Dirks.

	Congressional Interest in Insider Trading

No bills concerning insider trading appear to have been introduced, to date, in the 115 th Congress. However, before the Supreme Court's Salman decision, at least three bills were introduced in the 114 th Congress in an attempt to prevent the type of securities trading that would appear to have been allowed under the Newman decision.
Two of the bills would have amended Section 10, the general antifraud provision of the Securities Exchange Act, and one of the bills would have added a new provision, Section 16A, to the Securities Exchange Act.
H.R. 1173 , 114 th Congress, referred to the House Committee on Financial Services, would have added a new subsection (d) to Section 10. This new subsection would have held a person liable for violating the insider trading prohibition laid out in Section 2(a) of the bill if the person intentionally disclosed "without a legitimate business purpose" information he knew or should have known is material information and inside information. The bill would have defined "should know" to include various factors, such as the person's financial sophistication, knowledge of and experience in financial matters, position in the company, and assets under management.
H.R. 1625 , 114 th Congress, also referred to the House Committee on Financial Services, would have added a new Section 16A to the Securities Exchange Act. This section would have prohibited the trading of securities if a person had material nonpublic information about the securities or knew or recklessly disregarded that the information was wrongfully obtained or that the securities transaction would involve a wrongful use of the information. The section would also have prohibited a person from communicating material nonpublic information about securities to others if: (1) others engaged in securities transactions based on the communication and (2) the securities transactions were reasonably foreseeable. The standard for the wrongfulness of a communication is based on information that has been obtained by activities such as theft, breach of a fiduciary duty, or violation of a federal law protecting computer data. Specific knowledge of how the information was obtained is not necessary for a violation so long as the person trading was aware or recklessly disregarded that the information was wrongfully obtained or communicated. The bill would also have authorized the SEC to provide exemptions from these prohibitions by rule if the exemptions were not inconsistent with the purposes of the section.
S. 702 , 114 th Congress, referred to the Senate Committee on Banking, Housing, and Urban Affairs, would have added a new subsection (d) to Section 10 of the Securities Exchange Act. This new subsection would have prohibited securities transactions on the basis of material information that a person knew or had reason to know was not publicly available. It also would have prohibited knowingly or recklessly communicating information that was not publicly available if it was reasonably foreseeable that the communication was likely to result in a securities transaction. "Not publicly available" would have been defined in such a way that it would not have included information that a person had independently developed from publicly available sources. The SEC would also have been authorized to provide for exemptions by regulations if it determined that such regulations were necessary or appropriate in the public interest and consistent with the protection of investors.
The Supreme Court's decision in Salman may accomplish at least part of the goals of the legislation proposed in the 114 th Congress. However, the Salman decision does not appear to go as far as the bills in prohibiting the act of trading in securities with inside information and disclosing inside information. Salman addressed the issue of whether it is necessary for a tipper to receive something of a tangible nature when providing inside information to a trading relative or friend. However, the bills are not limited to relatives and friends; instead, they appear to prohibit in a broad way the trading of securities by any person who knows or should know that he possesses inside information.

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Insider trading in securities may occur when a person in possession of material nonpublic information about a company trades in the company's securities and makes a profit or avoids a loss. Certain federal statutes have provisions that have been used to prosecute insider trading violations. For example, Section 16 of the Securities Exchange Act of 1934 requires the disgorgement of short-swing profits by named insiders—directors, officers, and 10% shareholders. The 1934 Act's general antifraud provision, Section 10(b), is frequently used in the prosecution of insider traders. Although the statute does not specifically mention insider trading but, instead, forbids the use of "manipulative or deceptive" means in buying or selling securities, case law has clarified that insider trading is the type of fraud that is prohibited by Section 10(b). Securities and Exchange Commission (SEC) rules issued to implement Section 10(b), particularly Rule 10b-5, have also been frequently invoked in insider trading prosecutions. With the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988, Congress enacted legislation that imposed up to treble damages (and in some cases the greater of $1 million or up to treble damages) on persons found guilty of insider trading. More recently, the Stop Trading on Congressional Knowledge (STOCK) Act of 2012 (P.L. 112-105) explicitly stated that there is no exemption from the insider trading prohibitions for Members of Congress, congressional employees, or any federal officials. As noted above, SEC Rule 10b-5 is the most frequently used SEC rule in lawsuits that charge violations of insider trading prohibitions. However, other SEC rules, some of which specifically target insider trading, are also important.
There are numerous cases in which Section 10(b) and Rule 10b-5 have been used to prosecute insider trading violations. The most recent case of note is the Supreme Court's decision in Salman v. United States. On December 6, 2016, the Court unanimously upheld the conviction of Bassam Yacoub Salman for insider trading on tips that he had received from his brother-in-law. The Court agreed with federal prosecutors that a trader can be guilty of violating insider trading prohibitions even if the insider did not receive a tangible benefit, such as money or property, for passing the tip so long as the trader and insider are friends or relatives.
No bill concerning insider trading appears to have been introduced in the 115th Congress to date. However, several bills, including H.R. 1173, H.R. 1625, and S. 702, were introduced in the 114th Congress before the Supreme Court's Salman decision. The Salman decision appears not to go as far as these bills would have in prohibiting the acts of trading in securities with inside information and disclosing inside information.


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	Background

Medicare covers about 40 million elderly (over 65 years old) and disabled  beneficiaries. Individuals who are eligible for Medicare automatically  receive Hospital Insurance, known as part A, which helps pay for inpatient  hospital, skilled nursing facility, hospice, and certain home health services.  A beneficiary generally pays no premium for this coverage unless the  beneficiary or spouse has worked fewer than 40 quarters in his or her  lifetime, but the beneficiary is liable for required deductibles, coinsurance,  and copayment amounts. Medicare-eligible beneficiaries may elect to  purchase Supplementary Medical Insurance, known as part B, which helps  pay for certain physician, outpatient hospital, laboratory, and other  services. Beneficiaries must pay a premium for part B coverage, which  was $58.70 per month in 2003. Beneficiaries are also responsible for part  B deductibles, coinsurance, and copayments. Table 1 summarizes the  benefits covered and cost-sharing requirements for Medicare part A and  part B.
Many low-income Medicare beneficiaries who cannot afford to pay  Medicare’s cost-sharing requirements receive assistance from Medicaid.  For Medicare beneficiaries qualifying for full Medicaid benefits, state  Medicaid programs pay for Medicare’s part A (if applicable) and part B  cost-sharing requirements up to the Medicaid payment rate as well as for  services that are not generally covered by Medicare, such as prescription  drugs. To qualify for full Medicaid benefits, beneficiaries must meet their  state’s eligibility criteria, which include income and asset requirements  that vary by state. In most states, beneficiaries that qualify for  Supplemental Security Income (SSI) automatically qualify for full  Medicaid benefits. Other beneficiaries may qualify through one of several  optional eligibility categories targeted to low-income beneficiaries,  individuals with high medical costs, or those receiving care at home or in  the community who otherwise would have been institutionalized.
To assist low-income Medicare beneficiaries with their premium and cost- sharing obligations, Congress established several Medicare savings  programs—the QMB, SLMB, QI, and QDWI programs. Under these  programs, state Medicaid programs pay enrolled beneficiaries’ Medicare  premiums. As a result, for QMB, SLMB and QI beneficiaries, Medicare part  B premiums would not be deducted from their monthly SSA checks. The  QMB program also pays Medicare deductibles and other cost-sharing  requirements, thereby saving beneficiaries from having to make such  payments. Beneficiaries eligible for Medicare savings programs can apply  for and be determined to be eligible through their state Medicaid  programs. Thirty-three states have agreements with SSA whereby SSA  makes eligibility determinations for a state if beneficiaries are deemed  eligible by SSA to receive SSI benefits. In the other 18 states, even if an  individual is eligible to receive SSI benefits, an individual must file an  application with the state or local Medicaid agency to be eligible.  Beneficiaries qualifying for Medicare savings programs receive different  levels of assistance depending on their income. See table 2 for eligibility  criteria and benefits for each program.
In 1998, Congress passed legislation specifically providing funding for SSA  to evaluate ways to promote Medicare savings programs. In response,  SSA conducted demonstration projects to explore the effects of using  various approaches to increase participation in Medicare savings  programs. In one of these demonstrations conducted in 1999 and 2000,  SSA tested six models designed to increase awareness and reduce barriers  to enrollment. The models were implemented at 20 sites in 10 states, as  well as the entire state of Massachusetts. The models differed in the extent  to which SSA was involved in outreach efforts beyond mailing the letters.  For example, in the “application model,” SSA staff screened beneficiaries  if they appeared to be eligible, completed applications, collected  supporting documents, and forwarded the completed application form and  supporting evidence to the state Medicaid agency for an eligibility  determination. In the “peer assistance model,” Medicare beneficiaries  contacted an AARP toll-free number and were screened for program  eligibility by an AARP volunteer. Across all six models, SSA sent more  than 700,000 letters informing low-income Medicare beneficiaries that they  may be eligible for benefits under the Medicare savings programs. The  enrollment rate for each model varied—ranging from an additional 7  enrollees per 1,000 letters to 26 enrollees per 1,000 letters—with the  application model recording the highest enrollment rate and peer  assistance recording the lowest.
In 2000, Congress amended the Social Security Act, through BIPA,  requiring the Commissioner of Social Security to notify eligible Medicare  beneficiaries about assistance available from state Medicaid programs to  help pay Medicare premiums and cost sharing. BIPA also required SSA to  furnish each state Medicaid program with the names and addresses of  individuals residing in the state that SSA determines may be eligible for  the Medicare savings programs. SSA is required to update such  information at least annually.
In addition to SSA’s outreach efforts, CMS and individual states have  engaged in efforts to increase enrollment in Medicare savings programs.  Since fiscal year 2002, CMS has included increasing awareness of the  Medicare savings programs as one of its Government Performance and  Results Act (GPRA) goals. Specifically, CMS’s goal in fiscal year 2002 was  to develop a baseline to measure awareness of Medicare savings programs  and to set future targets for increasing awareness. CMS estimated that 11  percent of beneficiaries were aware of Medicare savings programs in 2002  and the goal was to increase this to 13 percent for fiscal year 2003. As part  of its efforts to increase awareness, CMS has coordinated with states, SSA,  and other organizations regarding various outreach efforts; provided  information about Medicare savings programs in various CMS  publications; and developed a variety of educational materials for targeted  populations, including minorities. CMS efforts in increasing enrollment in  earlier years included setting state-specific enrollment targets and  measuring progress toward these enrollment targets; developing and  disseminating training and outreach materials to the states, and  sponsoring national and regional training workshops for a variety of  stakeholders, including other federal and state agencies, health care  providers, and community organizations; designing a model application for  Medicare savings programs that states can consider adopting; and  providing grant funding to state Medicaid agencies, state health insurance  assistance programs, and national advocacy groups to test and promote  innovative approaches to outreach.
In 2001, CMS also contracted for a survey of states to identify activities  undertaken to increase program enrollment and streamline administration  of these programs. Some of the most common state efforts included  allowing application by mail (49 states), eliminating in-person interviews  (46 states), developing a shorter application form (43 states), and  conducting outreach presentations at health fairs (34 states). Other state  efforts identified by the survey included  increasing awareness of the programs through outreach efforts such as  direct mailings and other printed material, and public service  announcements on radio, television, and in newspapers;    providing training for employees and education for beneficiaries;    developing partnerships with other entities, such as State Health Insurance  Assistance programs and local agencies on aging, to enhance outreach  efforts and promote issues and solutions involving the Medicare savings  programs;    eliminating potential barriers to enrollment such as streamlining the  enrollment and renewal process and easing financial eligibility rules;    supplementing program benefits with other benefits, such as prescription  drug discount programs; and    providing information targeting underserved populations, including  minorities.

	SSA Is Conducting an Annual Outreach Effort Targeted to Low-Income Medicare Beneficiaries

In response to BIPA, SSA is conducting an annual outreach effort to help  increase enrollment in Medicare savings programs. This outreach consists  of a nationwide mailing campaign and data sharing with the states. SSA  selected low-income Medicare beneficiaries to be sent an outreach letter if  their incomes were below the income eligibility ceilings for the Medicare  savings programs. From May through November 2002, SSA sent a total of  16.4 million outreach letters to persons potentially eligible for QMB,  SLMB, and QI. Additionally, in late 2002, SSA sent about 53,000 letters to  those potentially eligible for benefits under the QDWI program. Starting in  2003, SSA has targeted annual outreach letters to individuals newly eligible  for Medicare as well as a subset of those who were sent outreach letters in  2002 but are still not enrolled. From June through October 2003, SSA sent  outreach letters to 4.3 million of these beneficiaries. SSA intends to  continue its outreach mailing annually to potentially eligible beneficiaries,  including recipients who did not enroll after receiving earlier letters, as  well as those whose income has declined, making them eligible for the  program. In addition to sending outreach letters, in 2002 and 2003 SSA  provided states with a data file that listed residents who were potentially  eligible for benefits under the Medicare savings programs. SSA plans to  continue sharing these data once a year with states. The data provided by  SSA could be used by the states to coordinate their outreach with SSA’s or  supplement SSA’s outreach efforts.
For the 2002 mailing, SSA sent letters three times each week from May  through November. Each time letters were mailed, SSA sent them to  approximately 207,000 Medicare beneficiaries randomly selected from the  16.4 million beneficiaries who were identified as potentially eligible for  QMB, SLMB, and QI. Letters were targeted to beneficiaries whose  incomes from Social Security and certain other federal sources were less  than 135 percent of the federal poverty level (FPL). Specifically, those  selected to be sent the outreach letters were intended to meet the  following three criteria:  individuals and couples entitled to Medicare, or within 2 months of  Medicare entitlement eligibility;  individuals who were not currently receiving Medicare savings program  benefits under a state Medicaid program or not already entitled to full  Medicaid based on SSI participation; and  individuals and couples whose combined Social Security income and  Department of Veterans Affairs and federal civil service pensions fell  below the program’s income eligibility ceiling.
The letters provided information in English or Spanish about the Medicare  savings programs, including state-specific asset guidelines and a state  contact number. (See app. II for a sample 2002 outreach letter.) At the  end of November 2002, SSA sent a separate mailing to about 53,000  disabled working adults who were potentially eligible for benefits under  the QDWI program.
Medicare beneficiaries who had sources of income other than Social  Security—such as income from employment and public and private  pensions—and whose incomes were above the programs’ eligibility  thresholds were selected nonetheless to be sent the SSA outreach letter  because SSA’s data systems do not collect information on these income  sources. In addition, SSA’s records do not contain information about  beneficiaries’ private assets, making it impossible for SSA to identify  whether letter recipients had assets within their states’ Medicare savings  programs’ eligibility limits—typically $4,000 for an individual and $6,000  for couples.
In 2002, the Medicare Rights Center, a national health advocacy group for  older adults and people with disabilities, sought a federal court order  requiring SSA to resend 1.4 million letters to potentially eligible  beneficiaries in Connecticut and New York to correct erroneous  information on the asset limit for the QI program. The New York and  Connecticut letters had incorrectly informed potential beneficiaries that  only individuals with assets of less than $4,000 were eligible for the QI  program, even though Connecticut and New York abolished the asset  requirement for QI eligibility in 2001 and 2002, respectively. SSA agreed to  resend the letters and the parties settled the case before trial.
In addition to sending letters to potentially eligible low-income Medicare  beneficiaries, in 2002 SSA provided all but six states with an electronic  data file containing the names of all beneficiaries to whom it had sent  letters in that state. The data file contained information that could assist  states with outreach efforts, such as the name, address, Social Security  number, date of birth, spouse’s name, and the basis for Medicare  entitlement of each letter recipient. SSA is required to provide updated  data to the states each year.
For the June through October 2003 mailing, SSA sent a second round of  letters to about 4.3 million potentially eligible low-income Medicare  beneficiaries nationwide whom its records indicated might have met the  QMB, SLMB, and QI income eligibility criteria and were not currently  enrolled in Medicare savings programs. This mailing included beneficiaries  who were newly eligible since the 2002 mailing, current Medicare  beneficiaries who newly met the income criteria, and about one-fifth of  the beneficiaries notified in 2002 who still met the mailing criteria but  were not enrolled in a Medicare savings program. At the time we  conducted our work, enrollment data for beneficiaries who were sent the  letter in 2003 were not available.
In contrast to the 2002 letter that provided state-specific eligibility criteria  and a state-specific telephone number, the 2003 letter did not contain  customized state information, but provided more general national  information. The letter suggested that beneficiaries who may be eligible  check the government list in their local telephone books for their local  Medicaid contact or call the general 1-800-Medicare number that refers  callers to state help lines, such as state or local medical assistance offices,  social services, or welfare offices. SSA gave several reasons for not  including state-specific information in the 2003 letter. One official  indicated that there was additional cost to SSA to develop state-specific  letters and therefore the agency did not tailor the letters for each state.  CMS officials reported that a few states did not want to provide state-level  contact numbers because eligibility and other Medicare savings program  administrative matters were actually conducted at the county levels.  Furthermore, in some cases, the telephone numbers states initially  provided were changed shortly before the 2002 mailings were begun,  creating additional need for SSA to coordinate with states in finalizing the  letters. However, some state officials we interviewed expressed concern  about the lack of state-specific information for the 2003 mailing. Their  concern was that, given that most states had established mechanisms for  responding to these inquiries for the larger 2002 mailing, not including  state-specific criteria or contact information on the letter could make the  letter less effective since it could be more difficult for beneficiaries to  obtain direct assistance or applications for eligibility determinations.

	Medicare Savings Program Enrollment Increased by More than 74,000 Beneficiaries Following the 2002 SSA Mailing

We estimate that SSA’s mailing from May through November 2002 to 16.4  million potentially eligible beneficiaries contributed to more than 74,000  additional beneficiaries enrolling in Medicare savings programs. Further,  in the year following SSA’s mailing, nationwide enrollment in Medicare  savings programs increased 2.4 to 2.9 percentage points over that in the 3  previous years. Certain demographic groups also had larger additional  increases in enrollment following the 2002 SSA mailing. For example,  beneficiaries less than 65 years old, persons with disabilities, racial and  ethnic minorities, and residents in southern states experienced larger  additional increases in enrollment.

		More than 74,000 Additional Beneficiaries Enrolled in Medicare Savings Programs Following SSA’s 2002 Mailing

On the basis of our analysis of SSA’s Master Beneficiary Record (MBR),  we estimate that, of the 16.4 million SSA letter recipients in 2002, an  additional 74,000 beneficiaries (0.5 percent of letter recipients) enrolled in  Medicare savings programs than would have likely enrolled without the  mailing. To estimate this increased enrollment, we examined two cohorts  of letter recipients—a cohort of 1.3 million beneficiaries who were sent  the letters during the first six mailings in May 2002 and a baseline cohort  of 1.3 million beneficiaries who were sent the letters during the last six  mailings through November 2002. Because SSA sent the mailing to  beneficiaries in a random order nationwide from May through November  2002, the only difference between the cohorts is the time at which the  letters were sent to them. As a result, other factors that could influence  enrollment patterns, such as demographic differences or other outreach  efforts by CMS and the states, should affect the May and November  cohorts similarly. We used the November 2002 cohort as a baseline to  examine how the May 2002 cohort’s enrollment in Medicare savings  programs was affected following SSA’s mailing.
As shown in figure 1, by August 2002—3 months after the initial letters  were sent in May 2002—the Medicare savings program enrollment for the  May cohort began to increase faster than that of the November cohort,  which was yet to have the SSA letter sent to them. While the cohorts were  sent the SSA letters in May or November 2002, SSA officials reported that  it typically takes about 3 months before enrollment is reported in the MBR.
As of December 2002, more than 5,800 additional beneficiaries in the  cohort of 1.3 million beneficiaries who were sent the letter in May had  enrolled in Medicare savings programs compared with the November  cohort, whose enrollment was not yet affected by the mailing. (See table  3.) This additional enrollment in the May cohort represents 0.5 percent of  the letter recipients. Projecting the experience of the May cohort to the  universe of the 16.4 million letter recipients results in an estimate of over  74,000 additional beneficiaries enrolling in Medicare savings programs as a  result of the 2002 SSA mailing.
Nationwide, CMS data showed that Medicare savings programs  experienced an overall net increase in enrollment of 5.9 percent (341,069  individuals) from May 2002—the start of SSA’s mailing—to May 2003.  This 5.9 percent increase was nearly double the 3.0 to 3.5 percent  increases in the 3 previous years before SSA’s nationwide mailings. (See  table 4.) These data suggest that SSA’s mailing helped to increase  enrollment at a greater annual rate than in earlier years.

		Certain States and Demographic Groups Had Higher Enrollment Rates Following SSA’s Outreach

Across the United States, letter recipients residing in the southern states  had a 0.6 percent additional increase in enrollment following SSA’s  mailing. This was more than residents in the Northeast, Midwest, and  West, where the additional increase in enrollment was 0.4 percent. Thirty- five states had an additional increase in enrollment following the SSA  mailing compared to the increase that would likely have occurred without  the letter. Of the thirty-five states, the largest additional increase in  enrollment following the SSA mailing occurred in Alabama, (2.9 percent),  followed by Delaware (2.0 percent), and Mississippi (1.3 percent). While  data from 13 other states showed an increase in enrollment following the  SSA mailing, these increases were not statistically significant. Another  three states showed a decrease in enrollment following the SSA mailing,  but these changes also were not statistically significant. Appendix III  provides the additional percentage change in enrollment following the  2002 SSA mailing for each state.
Certain demographic groups also had higher additional increases in  enrollment rates than the additional increase among all letter recipients. In  comparison to the 0.5 percent additional increase in enrollment among all  letter recipients, beneficiaries less than 65 years old and beneficiaries of  any age who qualified for Medicare as a result of a disability each had a 0.8  percent additional increase in enrollment following SSA’s outreach. Also,  minority beneficiaries, which based on SSA’s data categories include  blacks or individuals of African origin, Asians and Pacific Islanders, and  North American Indians or Eskimos, had a 0.7 percent additional increase  in enrollment. Appendix IV provides data for all demographic groups that  we examined.

	Enrollment Increases Varied among Selected States We Reviewed, with Several Reporting Increased Calls and Applications Concurrent with SSA Mailing

The percentage of additional letter recipients newly enrolling in Medicare  savings programs following SSA’s mailings varied significantly among the  six states we reviewed. Among these six states, enrollment increases  ranged from 0.3 to 2.9 percent. Further, several states we reviewed  reported that calls to their telephone hot lines and applications mailed or  received increased sharply during the period of the SSA outreach. In  addition, some states supplemented SSA efforts with outreach efforts of  their own, while other states were aware of or assisted outreach efforts by  private or community groups.

		SSA Outreach Efforts Had Varying Effects on Enrollment in Selected States

Among the states we reviewed, SSA’s outreach had varying effects on the  percentage of letter recipients enrolling. Alabama, with 2.9 percent  additional letter recipients enrolled compared to the percentage that likely  would have enrolled without the SSA letter, had the largest additional  increase in enrollment following the SSA mailing. This contrasts with the  national average of 0.5 percent. For the states we reviewed, SSA’s  outreach had the least impact on Medicare savings program enrollment in  California, Washington, and New York with a 0.3 percent increase in  additional enrollment. (See table 5.)
The varying effects on enrollment by state can be attributed to several  factors, including, the share of eligible beneficiaries already enrolled in  Medicare savings programs prior to the outreach, a state’s ability to handle  increased phone calls and applications, and a state’s income and asset  limits. For example, a smaller share of low-income elderly beneficiaries in  Alabama was enrolled in QMB as of the year prior to the SSA mailing than  the national average. Specifically, the number of QMB enrollees in  Alabama in 2001 was about half the number of Alabama seniors reported  by the Census Bureau to have incomes below the limit for the QMB  program. In contrast, about three-quarters of the seniors nationwide who  reported income below the QMB limit were enrolled. As a result, a larger  number of letter recipients in Alabama may have been able to meet the  QMB and other Medicare savings program eligibility criteria whereas other  states may have already enrolled a larger share of these beneficiaries.  Further, each of the states we reviewed established or used an existing  state-specific telephone number that was listed in the SSA letter to receive  calls. After the SSA mailing started, however, California’s phone number  was discontinued and calls were redirected to CMS’s nationwide 1-800- Medicare number. California’s lower enrollment could also result from its  eligibility requirements for SSI. For example, in a prior demonstration,  SSA’s mailing in 1999 and 2000 resulted in lower enrollment in California  than in other demonstration sites, in part because the state offered a  generous state supplement to SSI. Therefore, there were potentially not as  many people eligible for the Medicare savings programs. In addition,  other state differences, such as different state asset eligibility  requirements and application requirements as well as state efforts to  support the SSA outreach, may have contributed to different effects  among states.

		States Reported Increased Interest in Medicare Savings Programs Concurrent with SSA and States’ Outreach Efforts

States we reviewed often reported that calls to their hot lines and  applications for Medicare savings programs increased significantly during  the period of the 2002 SSA mailing. Four states provided data on the  monthly trends in the number of calls either related to Medicare and  Medicaid in general or the Medicare savings program specifically that  showed increases concurrent with the 2002 SSA mailing. Three states were  also able to provide data on changes in the number of applications sent to  interested beneficiaries or received from beneficiaries. (See table 6.) While  officials in several states indicated that not all of the increases noted could  be attributed directly to the SSA mailing, the data provided by the states  suggest that beneficiaries’ interest in Medicare savings programs increased  during the mailing period. For example, Alabama experienced a 19 percent  increase in monthly calls to its state hot line related to any Medicare and  Medicaid issue after the SSA mailings began; this was followed by a 25  percent decrease after the mailings ended. Alabama also experienced a  158 percent surge in applications received per month during the SSA  mailing and then a decrease of 57 percent afterwards. State officials  reported that Washington tracked calls and applications specific to the  SSA mailing, and these data showed 85 percent decreases in both monthly  call volume and applications mailed out to beneficiaries after the mailings  ended; Washington also reported a 72 percent monthly decrease in  applications received after the 2002 mailings ended.
Concurrent with SSA’s mailing, each of the states we reviewed reported  that the state or other stakeholders conducted additional outreach. For  example, the Louisiana Department of Health and Hospitals and the  Pennsylvania Health Law Project, a coalition advocating for low-income  individuals and the disabled, each received 3-year grants from the Robert  Wood Johnson Foundation in 2002 to conduct outreach to low-income  Medicare beneficiaries in these states. A state official also reported that in  2002 the New York Department of Health developed and distributed  100,000 copies of a brochure called “How To Protect Your Health and  Money,” which included information about the Medicare savings  programs, and conducted a “Senior Day” at 16 sites in New York City and  several other districts as well as presentations at local fairs. Other states  reported coordinating with community or state organizations as well as  private health plans participating in Medicare, such as health maintenance  organizations participating in the Medicare + Choice program. Some  private health plans conducted outreach to increase Medicare savings  program enrollment since CMS pays these plans a higher rate for these  enrollees. Several state officials also said that their states work with other  groups, such as the local departments of aging or senior services and local  businesses and community organizations, to assist with outreach efforts to  potentially eligible beneficiaries. None of the states we reviewed reported  having assessed the effectiveness of their outreach efforts.
Of the six states we reviewed, only Louisiana and Pennsylvania officials  reported that they used the data file listing names and addresses of  potentially eligible beneficiaries provided by SSA in 2002 to assist with  state outreach or enrollment efforts. For example, after receiving the SSA  data file, seven parishes in Louisiana used it to obtain a list of potentially  eligible beneficiaries and sent an application with a letter and return  envelope to these beneficiaries. In 2003, about 20,450 applications were  mailed to potential beneficiaries. Pennsylvania officials used the file to  cross-check against the state’s own data system to assess the number of  applications authorized, rejected, or denied as a result of the SSA mailing.

	Agency and State Comments

We provided a draft of this report to SSA, CMS, and state Medicaid  agencies in Alabama, California, Louisiana, New York, Pennsylvania, and  Washington. In written comments, SSA generally concurred with our  findings and provided technical comments that we incorporated as  appropriate. SSA also noted that improvements in state enrollment  processes could further increase enrollment. SSA’s comments are  reprinted in appendix V. In a written response, CMS stated it did not have  any specific comments on the report. However, CMS provided technical  comments that we incorporated as appropriate.
While we did not examine the effects of SSA’s 2003 mailing, Louisiana  Medicaid officials indicated that, in comparison to the 2002 SSA mailing,  there was little increase in call volume following SSA’s 2003 mailing, and  that they believe that this was because a state-specific telephone number  was not included in the 2003 outreach letter. New York Medicaid officials  stated that they found an increase in Medicare savings program enrollment  of over 6 percent from December 2002 to December 2003. However, in  addition to being a different timeframe from what we examined, we do not  believe that all of this increase can be attributed to the SSA mailing. Based  on our analysis of SSA’s MBR data, we report a 0.3 percent increase in  enrollment in New York specifically attributable to the 2002 SSA outreach  mailing. We found the net increase in enrollment from May 2002 to May  2003 (following SSA’s 2002 mailing) to be 5.9 percent nationwide, similar  to the net increase in enrollment that New York reported from December  2002 to December 2003. Louisiana and Pennsylvania Medicaid officials  also provided technical comments that we incorporated as appropriate.  Alabama, California, and Washington Medicaid officials reviewed the draft  and stated that the report accurately reflected information relevant to their  respective states.
We are sending copies of this report to the Commissioner of SSA, the  Administrator of CMS, and other interested parties. We will also provide  copies to others on request. In addition, this report will be available at no  charge on GAO’s Web site at http://www.gao.gov.
Please call me at (202) 512-7118 or John Dicken at (202) 512-7043 if you  have any additional questions. N. Rotimi Adebonojo and Rashmi Agarwal  were major contributors to this report.

Appendix I: Methodology

To determine what outreach the Social Security Administration (SSA)  conducted in response to the statutory requirement, we obtained and  reviewed copies of SSA documents, including sample 2002 and 2003  outreach letters and data on the number of letters sent to eligible Medicare  beneficiaries in each state, as well as reports prepared by the Centers for  Medicare & Medicaid Services (CMS) related to the Medicare savings  program. In addition, we interviewed officials from the SSA and CMS.
To determine how enrollment changed following SSA’s outreach, we  analyzed records from SSA’s Master Beneficiary Record (MBR)—a  database that contains the administrative records of Social Security  beneficiaries, including payments for Medicare premiums—and CMS’s  national enrollment data for the Medicare savings programs. The MBR  data contain demographic information as well as information on the  monthly deductions made from beneficiaries’ Social Security checks to  cover Medicare part B premiums. We obtained MBR data on beneficiaries  who were sent the outreach letters in the first six mailings in May and the  last six mailings through November 2002, representing 2.6 million of the  16.4 million Social Security beneficiaries who were sent letters from SSA.  To determine which letter recipients enrolled in the Medicare savings  programs following SSA’s 2002 mailing, we identified letter recipients who  met the following criteria:  those whose date of eligibility for Medicare savings programs began  January 2002 or afterwards;  those for whom a third-party payer, specifically a state, made payments on  their behalf to cover Medicare part B premiums;  and  those who no longer had the premium deduction made from their Social  Security checks to cover Medicare part B premiums at any point from June  2002 through December 2002.
In order to estimate the impact of the SSA outreach mailing on additional  enrollment in Medicare savings programs, we analyzed monthly  enrollment from June 2002 to December 2002 for two cohorts of letter  recipients to identify letter recipients who enrolled in Medicare savings  programs following the initiation of the SSA mailing in May 2002. Because  the mailings were sent to beneficiaries in a random order, the only notable  difference between the recipients in the two cohorts would be the timing  of when the SSA letters were sent to them. SSA officials noted that it  typically takes about 3 months until enrollment is reported on the MBR.  Therefore, since the mailings began in May 2002, the first effects of the  mailing would not have been apparent until after June 2002. We analyzed  the MBR data provided by SSA to determine specifically what month and  year a letter recipient enrolled in Medicare savings programs. Using the  enrollment by the November cohort as a baseline because these  individuals met the same selection criteria as those in the May cohort, we  estimated the net effect of the SSA mailing by comparing the difference in  cumulative monthly enrollment between the May and November cohorts  in December 2002—this difference represented the additional enrollment  we attributed to the SSA mailing. We made the comparison in December  2002 because after this date the enrollment of the baseline group began  increasing at a rate faster than the May cohort, indicating that this was the  point when the largest cumulative difference in enrollment between the  two cohorts occurred before the effects of the mailing started becoming  evident for the November cohort. Using the same methodology, we  calculated the effect of the SSA outreach letter for certain demographic  groups and for beneficiaries in each state. We also obtained and analyzed  data contained in CMS’s third party master file for the period May 1999 to  May 2003 that tracks national Medicare savings programs enrollment.  Using these data, we examined how national Medicare savings enrollment  trends compared before and after the 2002 SSA mailing.
To determine how additional enrollment in the programs changed in  selected states following SSA’s outreach and what outreach efforts these  states undertook, we interviewed Medicaid officials in six states— Alabama, California, Louisiana, New York, Pennsylvania, and Washington.  We selected these states based on several factors, including states with  different levels of change in overall Medicare savings programs enrollment  from 2002 to 2003, geographic diversity, relatively large populations of  Medicare savings programs enrollees, and availability of data on program  enrollment. We also reviewed CMS’s third party master file to identify how  many beneficiaries in each state were enrolled in Medicare savings  programs, and analyzed records from SSA’s MBR to estimate the  additional enrollment in each state following the SSA mailing. In addition,  we obtained information from each state to the extent available on its  involvement with the SSA mailing, the state’s specific eligibility criteria for  its Medicare savings program, outreach efforts conducted by the state to  low-income Medicare beneficiaries, and state data on call and application  volume before, during, and after the SSA outreach.
We obtained information from SSA and CMS on their data reliability  checks and any known limitations on the data they provided us. SSA and  CMS perform quality controls, such as data system edits, on the MBR and  the third party beneficiary master file, respectively. We concluded that  their data were sufficiently reliable for our analysis. A few MBR variables  have certain limitations. For example, some Medicare beneficiaries receive  their Social Security payments electronically, and therefore may not keep  the record of their mailing address current. For our analysis we only used  the beneficiary’s state of residence, which is less likely to change as SSA  reported that, even if a beneficiary’s address changes, the beneficiary often   stays within the same state of residence. Finally, since it is optional for  beneficiaries to identify their race, a number of Social Security recipients  do not. However, sufficient numbers of individuals reported their race to  to allow us to analyze these data and also report missing or unknown  values.

Appendix II: SSA 2002 Outreach Letter

SSA mailed 16.4 million letters in 2002 to potentially eligible Medicare  beneficiaries notifying them about state Medicare savings programs. These  letters were customized to include state-specific information, including a  state contact number. These letters were sent in English or Spanish,  depending on the beneficiary’s preference. Figure 2 provides a sample of  the outreach letter sent to a beneficiary in Texas between May and  November 2002.

Appendix III: Medicare Savings Program Enrollment following 2002 SSA Mailing by State

Figure 3 shows enrollment by state of the estimated 74,000 additional  beneficiaries who enrolled in Medicare savings programs following the  2002 SSA mailing. Because these estimates are based on two cohorts of  about 1.3 million beneficiaries each that represent a sample of the entire  population of 16.4 million beneficiaries, we calculated 95 percent  confidence intervals to reflect the potential for statistical error in  projecting these estimates from the sample cohorts to the entire  population. The small sample size in states with smaller populations  results in larger confidence intervals for the estimates for these states. The  highest additional increase in enrollment was in Alabama, in which an  estimated 2.9 percent (with a 95 percent confidence interval of 2.6 percent  to 3.3 percent) of beneficiaries who were sent the SSA letter enrolled than  if the mailing had not occurred. In three states (Montana, Utah, and  Vermont) our analysis showed no additional or slightly negative  enrollment following the SSA mailing, and because the confidence  intervals for these and 13 other states overlap the numeric value zero, the  data do not show a statistically significant change in additional enrollment  in the Medicare savings programs following the 2002 SSA mailing for these  states. The other 35 states showed a statistically significant increase in  additional enrollment in the Medicare savings programs following the 2002  SSA mailing.

Appendix IV: Medicare Savings Program Enrollment following 2002 SSA Mailing by Demographic Group

On the basis of our analysis of SSA’s MBR, we estimate that enrollment in  Medicare savings programs was about 74,000 higher for Medicare  beneficiaries following the 2002 SSA mailing than it would have been  without the mailing. This represents about 0.5 percent of the 16.4 million  letters sent nationwide. However, this additional enrollment following the  SSA mailing varied among demographic groups.
Figure 4 shows the additional enrollment in Medicare savings programs  following the 2002 SSA mailing by geographic region and demographic  groups, including racial categories, sex, disability status, and age  categories. Because these estimates are based on two cohorts of about 1.3  million beneficiaries each that represent a sample of the entire population  of 16.4 million beneficiaries, we calculated 95 percent confidence intervals  to reflect the potential for statistical error in projecting these estimates  from the sample cohorts to the entire population. Additional enrollment  following the 2002 SSA mailing was statistically significantly higher among  beneficiaries in southern states compared to other geographic regions,  minorities compared to white beneficiaries, beneficiaries with disabilities  compared to beneficiaries without disabilities, and beneficiaries who were  younger than 65 years compared to those who were 65 years or older.

Appendix V: Comments from the Social Security Administration

Related GAO Products

Medicare and Medicaid: Implementing State Demonstrations for Dual  Eligibles Has Proven Challenging. GAO/HEHS-00-94. Washington, D.C.:  August 18, 2000.
Low-Income Medicare Beneficiaries: Further Outreach and  Administrative Simplification Could Increase Enrollment. GAO/HEHS- 99-61. Washington, D.C.: April 9, 1999.
Medicare and Medicaid: Meeting Needs of Dual Eligibles Raises Difficult  Cost and Care Issues. GAO/T-HEHS-97-119. Washington, D.C.: April 29,  1997.
Medicare and Medicaid: Many Eligible People Not Enrolled in Qualified  Medicare Beneficiary Program. GAO/HEHS-94-52. Washington, D.C.:  January 20, 1994.

Output:
Why GAO Did This Study

To assist low-income beneficiaries with their share of premiums and other out-of-pocket costs associated with Medicare, Congress has created four Medicare savings programs. Historic low enrollment in these programs has been attributed to several factors, including lack of awareness about the programs, and cumbersome eligibility determination and enrollment processes through state Medicaid programs. Concerned about this low enrollment, Congress passed legislation as part of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) requiring the Social Security Administration (SSA) to notify low-income Medicare beneficiaries of their potential eligibility for Medicare savings programs. The statute also required GAO to study the impact of SSA's outreach effort. GAO examined what outreach SSA undertook to increase enrollment, how enrollment changed following SSA's 2002 outreach, and how enrollment changed in selected states following SSA's outreach and what additional outreach efforts these states undertook. GAO reviewed information obtained from SSA and the Centers for Medicare & Medicaid Services (CMS), analyzed enrollment data provided by SSA and CMS, and interviewed officials in and obtained data from six selected states (Alabama, California, Louisiana, New York, Pennsylvania, and Washington).

What GAO Found

In response to a statutory requirement, SSA is carrying out an annual outreach effort to help increase enrollment in Medicare savings programs. This outreach effort consists of mailing letters to potentially eligible lowincome beneficiaries nationwide as well as sharing data with states to assist with their supplemental outreach efforts. In 2002, SSA sent 16.4 million letters to low-income Medicare beneficiaries whose incomes from Social Security and certain other federal sources met the income eligibility criteria for Medicare savings programs. The 2002 letters provided eligibility criteria for programs in the beneficiary's home state and urged beneficiaries interested in enrolling to call a state telephone number provided. In addition to sending these letters, SSA provided states with a data file containing information on the beneficiaries to whom it sent letters. In 2003, SSA sent another 4.3 million letters to potentially eligible beneficiaries, and indicated that it intends to repeat the outreach mailing annually to newly eligible beneficiaries and a portion of prior letter recipients. Following SSA's outreach efforts in 2002, GAO estimated that more than 74,000 additional eligible beneficiaries enrolled in Medicare savings programs, 0.5 percent of all 2002 letter recipients, than would have likely enrolled without the letter. CMS enrollment data also showed that growth in Medicare savings programs enrollment for the year following SSA's mailing was nearly double that for each of the 3 prior years. Of the 74,000 additional enrollees, certain states and demographic groups had somewhat larger increases in enrollment than other groups. The highest additional enrollment increase was in Alabama, where 2.9 percent of letter recipients enrolled, followed by Delaware at 2.0 percent. Beneficiaries less than 65 years old, persons with disabilities, racial and ethnic minorities, and residents in southern states also had higher enrollment rates than other groups. The percentage of letter recipients newly enrolling in Medicare savings programs following SSA's 2002 mailing ranged from 0.3 to 2.9 percent among the six states GAO reviewed. The varying effects on enrollment by state could be attributable to several factors, including the share of eligible beneficiaries enrolled in Medicare savings programs prior to the outreach, each state's ability to handle increased call and application volume, and a state's income and asset limits. Four states GAO reviewed reported increases in the numbers of calls received or applications mailed or received following the SSA mailing and then decreases after the mailing period ended. Each of the states GAO reviewed reported that the state or other stakeholders conducted additional outreach during SSA's 2002 outreach. SSA generally agreed with GAO's findings. CMS stated that it did not have specific comments on the report.