Last updated on: 12/22/2011 9:37:51 AM PST
Is it legal for Congressional representatives to trade securities based on insider information?
General Reference (not clearly pro or con)
Peter J. Henning, MA, JD, Professor of Law at Wayne State University Law School, in his May 3, 2008 email to ProCon.org, wrote:
"The issue is what type of information the representative or staff member has. If the information came from a corporate insider, then the person's status on Capitol Hill makes no difference. If the information relates to pending legislation, then it is in much more of a gray area of the law of insider trading. It is not corporate information, nor is it strictly market information (such as who is buying or selling shares). It is not clear that it is legal or illegal..."
May 3, 2008 - Peter J. Henning, JD
Sheila Kaplan, MA, Lecturer in the Political Reporting Program at the University of California at Berkeley Graduate School of Journalism, in the July 6, 1998 The Nation article "Congress's Insider Traders," wrote:
"Members of Congress are privy to information that affects the market. Few investors are better positioned to know when a new regulation is about to derail a booming business; when a young firm is set to win its first lucrative government contract; or whether a much-debated tax bill will actually become law. House and Senate ethics rules say that lawmakers should not use their offices for improper advantage. But the interpretation of those rules is left to each individual. And there have been almost as many interpretations as there are mutual funds.
An analysis by The Nation of Congressional disclosure reports for 1997, released in mid-June, shows that while some lawmakers avoid buying stock in industries that coincide with their key areas of legislative responsibility--or put their assets into blind trusts--many do not.
In any other government job, they wouldn't have a choice. Food and Drug Administration employees are barred from buying drug company stocks. Energy Department staffers are prohibited from trading in oil companies. But historians say the Congressional ethics rules were designed to permit those with expertise in a certain area to participate in decisions that affect that area..."
July 6, 1998 - Sheila Kaplan, MA
Stephen M. Bainbridge, MS, JD, William D. Warren Professor of Law at the University of California, Los Angeles (UCLA) School of Law, in the online article "Insiders on the Hill" published Mar. 30, 2006 on TCSDaily.com, wrote:
"Much Congressional trading based on nonpublic information may not violate the securities laws...[T]here are two basic ways in which persons can be held liable for insider trading.
First, an insider of the company -- i.e., a person who is an agent or fiduciary of the company or otherwise a person in whom the company has placed its trust and confidence -- may not trade in the company's stock on the basis of material nonpublic information about the company. Obviously, this basis of liability will rarely apply to Congressmen or the staffers, who will rarely have an employee or other inside relationship with the company.
Second, under the so-called misappropriation theory of insider trading, the defendant need not owe a fiduciary duty to the investor with whom he trades. Nor does he have to owe a fiduciary duty to the issuer of the securities that were traded. Instead, the misappropriation theory applies when the inside trader violates a fiduciary duty owed to the source of the information. But how often will the Congressman or his staffer owe such a duty? Typically, one suspects, the Congressman or staffer will be in an arm's-length relationship with the source of the information, as where it is learned in the course of an investigation. (The misappropriation theory might apply to staffers, if the Congressman for whom they work is deemed the source of the information. In that case, the staffer would have breached a duty to his boss by using the information and thus be liable.)"
Mar. 30, 2006 - Stephen M. Bainbridge, MS, JD
Peter Schweizer, MPhil, William J. Casey Research Fellow at the Hoover Institution, wrote in his Oct. 2011 book Throw Them All Out:
"Members of Congress and their staffs are effectively considered exempt from many of the laws they define for the rest of us, and from executive-branch regulation. We ask our legislators to share power with the executive branch, and that means we do not let the latter rule over the former. Thus the Securities and Exchange Commission has a Division of Enforcement to go after private-sector insider trading (among other crimes), but the SEC cannot touch members of congress. A former senior counsel with the SEC's Enforcement Division says of congressional insider trading, 'It may be unethical, and it may be unseemly, but it's not illegal.' The four- and five-hundred-page House and Senate ethics manuals are silent on the matter of insider trading. The idea of using market-moving, inside-government information and trading stocks based on that information is simply not mentioned...
In other words, when a member of Congress trades stock based on information not yet shared with the public but revealed to him as part of congressional business, it is legal."
Oct. 2011 - Peter Schweizer, MPhil
Thomas C. Newkirk, LLB, former Associate Director of the Division of Enforcement in the US Securities Exchange Commission (SEC), was quoted in the Mar. 28, 2006 Wall Street Journal article "Bill Seeks to Ban Insider Trading By Lawmakers and Their Aides" as having said:
"If a congressman learns that his committee is about to do something that would affect a company, he can go trade on that because he is not obligated to keep that information confidential...He is not breaching a duty of confidentiality to anybody and therefore he would not be liable for insider trading."
Mar. 28, 2006 - Thomas C. Newkirk, LLB
Robert Walker, JD, Of Counsel at Wiley Rein LLP, wrote in his Dec. 1, 2011 testimony for the US Senate Committee on Homeland Security and Public Affairs hearing on "Insider Trading and Congressional Accountability":
"I do want to state my view that the current prohibitions on insider trading under federal securities laws and rules, as worked out and applied by the courts through the ‘misappropriation theory’ of insider trading, do apply to members and staff of Congress. In other words, in my view, Members and staff of the House and Senate do not enjoy any blanket immunity from enforcement actions, whether civil or criminal, for violations of the prohibitions on insider trading; an enforcement action may be brought where a Member or employee of Congress uses – in connection with a securities trade – material, nonpublic information, to the source of which the Member or employee owes a duty of trust or confidence.”
Dec. 1, 2011 - Robert Walker, JD
Donna Nagy, JD, C. Ben Dutton Professor of Law at Indiana University Maurer School of Law, wrote in her Dec. 1, 2011 testimony for the US Senate Committee on Homeland Security and Public Affairs hearing on "Insider Trading and Congressional Accountability":
"[It is] an urban myth that Congress has somehow exempted itself from a federal statute that outlaws insider trading by all those outside of the Capitol. Indeed, while the current catalyst is 60 Minutes’ recent claim that congressional insider trading is ‘perfectly legal,’ a similar hullabaloo occurred more than a year ago after the Wall Street Journal asserted that legislative staffers could legally profit from the use of congressional knowledge because Congress was purportedly ‘immune from insider-trading laws.’
Congress in no way has sought to immunize or exempt itself. Beyond that, my article concluded then, and I continue to say with confidence now, that congressional insider trading is already illegal under existing law. Based on my research, I would expect a federal district court to hold Members of Congress and legislative staffers liable for any securities trading that is based on material nonpublic information obtained through congressional service, if the Securities and Exchange Commission (SEC) in a civil case, or the Department of Justice (DOJ) in a criminal case, successfully proved the facts alleged. I acknowledge, however, that many distinguished securities law scholars and at least one such scholar has concluded that ‘the quirks of the relevant laws almost certainly would prevent Members of Congress from being successfully prosecuted.’”
Dec. 1, 2011 - Donna Nagy, JD
Robert Khuzami, Director of the Division of Enforcement at the Securities and Exchange Commission (SEC), wrote in his Dec. 1, 2011 testimony for the US House Committee on Financial Services hearing on "H.R. 1148, the Stop Trading on Congressional Knowledge Act”:
"While trading by Members of Congress or their staff is not exempt from the federal securities laws, including the insider trading prohibitions, there are distinct legal and factual issues that may arise in any investigations or prosecutions of such cases. Any statutory changes in this area should be carefully calibrated to ensure that they do not narrow current law and thereby make it more difficult to bring future insider trading actions against individuals outside of Congress.”
Dec. 6, 2011 - Robert Khuzami, JD