Should insider trading by Congress be allowed?

"Like millions of American’s all across the country, I was surprised to learn that insider trading by members of Congress, their families, or their staff, using non-public information gained through their Congressional work is not clearly and expressly prohibited by law and the rules of Congress.

The American people need to know that their elected leaders play by the exact same rules that they play by. They also deserve the right to know their lawmakers' only interest is what's best for the country, not their own financial interests.

Members of Congress, their families and staff shouldn’t be able to gain personal profits from information they have access to that everyday middle class families don’t. It's simply not right -- and we need to change it by ensuring the proper oversight and accountability is in place. Nobody should be above the rules.”

"Simply put, members of Congress should be held to the same standard as the general public and should not be able to profit based on nonpublic information…

As members of Congress, we have access to information that the public does not; classified briefings, closed conference reports and personal conversations with government officials. All of these sources can give us nonpublic information that may have a significant value if traded upon. But not only do we access information, we create information and policy. When we act on legislation or negotiate legislative language, frequently that legislation has real financial consequences to an industry or company. Because we have access to and we create information, we must not betray the public’s trust by using it for our own personal gain.”

"This is a venture opportunity. This is an opportunity to leverage your position in public service and use that position to enrich yourself, your friends, and your family... There are all sorts of forms of honest grafts that congressmen engage in that allow them to become very, very wealthy. So it's not illegal, but I think it's highly unethical, I think it's highly offensive, and wrong...

For example insider trading on the stock market. If you are a member of Congress, those laws are deemed not to apply... [I]f you sit on a healthcare committee and you know that Medicare, for example, is considering not reimbursing for a certain drug that's market moving information. And if you can trade stock off of that information and do so legally, that's a great profit making opportunity. And that sort of behavior goes on...

It's really the way the rules have been defined. And the people who make the rules are the political class in Washington. And they've conveniently written them in such a way that they don't apply to themselves.”

"In my 1966 book [Insider Trading and the Stock Market] I said unequivocally that insider trading by any government officials on information received in the course of their work should be outlawed. The economic consequences of this trading on stock prices will be the same as any other informed trading, but there are many other aspects to the economic argument for legalizing insider trading generally that just will not pass the 'smell test' for government officials.

The compensation argument for corporate insider trading cuts in exactly the opposite direction for government officials. We do not want them to receive extra compensation or outside compensation for doing their jobs. And, of course, all too frequently their access to this information is merely another form of a bribe, and that sure as hell is not legal.

But proof will always be difficult (there are many ways government officials can hide the use of inside information, including using the information as a currency with which to pay off other contacts, thus avoiding buying or selling the securities themselves), and enforcement of any law against insider trading will be minimal at best. You can be sure that the SEC [US Securities and Exchange Commission] will not actively monitor Congressional trading, and the usual disclosure techniques will rarely elicit sufficient legal proof of a violation of the law.

Ultimately the only thing that will reduce the value of the use of inside information by government officials is for the government to be involved in far, far fewer matters than it is at present, thus curtailing the amount of valuable information the government can force out of citizens."

"With respect to H.R. 682 [Stop Trading on Congressional Knowledge Act], I confess I am neither an attorney nor am I an expert on insider trading. That having been said, I am generally supportive of making insider trading illegal for members of Congress and their staffs. It is likely to have some positive effect. However, historically speaking, convicting an individual of insider trading has always been a difficult task... In my view, the vast majority of insider trading goes undetected as evidenced by the fact that corporate insiders continue to earn significant abnormal returns despite the best efforts of the SEC to monitor their trading activities. Thus I am doubtful that making insider trading by members of Congress illegal will eliminate the problem."

"[W]hether or not there is clear and conclusive evidence that members of Congress or our staffs have benefitted financially from insider information and whether or not the SEC believes it can act against members of Congress under its existing authority, there ought to be a law that explicitly deters such unethical, illegal behavior by members of Congress and punishes it when it happens…

Adopting a new law that explicitly makes insider trading by members of Congress illegal would strengthen the ‘foundations of our national policy’ and I hope, in a small way, help repair the breach that exists today between our government and our people.”

"The idea that Members of Congress or their staffs can freely step ahead of ordinary investors to profit from information acquired as a result of their legislative roles is disturbing, to say the least. While current insider trading law is more potent with regard to such activity than some of the public commentary on this issue suggests, Congress should act to eliminate any doubt and state clearly that both the trading and tipping prohibitions apply to Members and staff. It would be extremely unfortunate were the SEC or prosecutors to bring an action and have the Member or staff person raise the defense, which they surely would, that service in Congress carries with it no fiduciary-like duty to respect governmental confidences. That would be the last headline Congress should want to see.

The SEC deserves resolution of this as well. An insider trading case against a Member (or even a powerful staff person) will always be a matter of great political sensitivity, likely to be brought only to the extent that the case—legally and factually—is very strong. The external pressures to bring such cases, or not bring them, will inevitably be great when any suspicions arise. Leaving any ambiguity as to the question of whether, and to what extent, the insider trading on Capitol Hill is unlawful is hardly an encouragement to those matters that deserve to be courageously investigated and pursued. Conversely, an explicit statement by Congress that its Members and staff are subject to a duty of trust and confidence would make plain, to the SEC and the American public, that Congress expects no special privilege or treatment with respect to the rules of fair play in the U.S. capital markets.”

"Clearly, the buying and selling of stock based on non-public information has the potential to profit some private parties at the expense of others who may not have access to this same information... I am very concerned that privileging a handful of investors with confidential information about congressional activity is not only a misuse of congressional office, but also undermines investor confidence in the fairness and integrity of the securities market...

As I have noted, buying or selling stock based on nonpublic information from Congress does not clearly run afoul of current insider trading laws. For this reason, I joined forces with Ranking Member Slaughter to introduce the Stop Trading on Congressional Knowledge, or STOCK Act, earlier this week to put an end to this troubling practice."

"...Common Cause, Democracy 21, League of Women Voters, Public Citizen and U.S. PIRG – strongly support passage of the 'Stop Trading on Congressional Knowledge Act' (H.R. 682)... The legislation would prohibit members of Congress, congressional staff and other federal employees from using non-public information obtained through their official duties for personal gain in the stocks and commodities markets. It would also prohibit private individuals and firms who attempt to mine such information from public officials to use it for insider trading. This legislation is critically important as the federal government increases its regulation and oversight – and invariably insider knowledge – of prospective business opportunities of banks and financial services companies...

With the federal government assuming a far greater role over the financial services industry, the opportunity and temptation for federal employees to cash in on their insider knowledge of legislation, rules and even business trends that can have a dramatic and immediate effect on the stock market will become all the more dangerous. Members of Congress and federal employees should be required to live by effective restrictions on insider trading."

"A few thoughts:

1. Stock trading by Congressmen and their staffs presents a double-edged conflict of interest. They may vote on the basis of their trading plans or trade on the basis of their voting plans...

2. Congress has lots of access to confidential information, but one key source is its power to investigate. Do we want Congress 'investigating' companies so that members or staffers can get stock tips?

3. Congressional insider trading is a real problem... A study of trading by US Senators found that they were earning rates of returns from stock trading that would make Warren Buffet proud. The study's authors found that 'the senators also appeared to know exactly when to buy or sell their holdings. Senators would buy stocks just before the shares suddenly would outperform the market by more than 25%.' As every investor knows, you can't do that sort of thing routinely without having access to nonpublic information...

Congress often exempts itself from the laws that apply to everybody else. In most cases, we might infer that it is the laws in question that are a bad idea. In this case, however, it is the Congressional exemption that is the bad idea. This gaping conflict of interest needs to be staunched."

"It is difficult to imagine a more obvious betrayal of the public trust. It is even more difficult to imagine that such behavior could be completely legal. But that is exactly the conventional wisdom today. Trading on congressional knowledge seems intuitively unfair, but it is almost universally believed to be legal by securities attorneys, legal academics, and even members of Congress...

[I believe, however] that under the 'misappropriation theory' of insider trading, trading on material nonpublic congressional information is already decidedly illegal."

"We suggest that Congressional insider trading should be regulated... There is credible evidence that Congressional insider trading has occurred in the past, and that the current patchwork of laws and norms is inadequate to stop its future practice. There is also a presumption, based on the feelings of Americans and the obvious analogy to corporate insider trading, that Congressional insider trading is inequitable and should be illegal. The best arguments for corporate insider trading are not applicable enough to Congressional insider trading to overcome this presumption. Thus, the legality of Congressional insider trading constitutes an unfortunate gap in securities law—one that should be filled by an amended version of the STOCK [Stop Trading on Congressional Knowledge] Act, or some other similar regulation."

"...I think that there is a major flaw in the current securities laws which do not provide a statutory definition of insider trading. I have long believed that such a definition should be adopted and would certainly favor a definition that would make it clear that governmental officials would be covered as well."

"Members of Congress and their staff should be prohibited from trading on information related to the status of pending legislation and other policy initiatives by Congress. This type of information is just as important to the markets as internal corporate information, such as earnings or possible acquisitions. It is appalling that Congress does not explicitly prohibit such trading."

"Politicians have used their positions and knowledge to line their pockets since the Stone Age. Some like Vice President Cheney have taken it to new heights. The question also begs an answer for 'Should Congress be allowed to receive bribes, or contributions to insert already written sections from Lobbyists into legislation?' This is the ultimate form of insider trading, where the group that benefits drafts the legislation, and of course quietly let's themselves and friends position their investments to maximize financial gain long before the information is even before the legislature... Insider trading by any means should be illegal for any members of Government."

"Insider trading is unethical whether it draws on information obtained from Congress or from companies themselves. Members of Congress and federal employees often know what is happening before everyone else. They have access to incredibly sensitive information that can have a dramatic effect on the stock market. The potential for the improper use of that information is very real."

"When discussing decisions that fall into moral and legal gray areas, I often ask my students: How would this look on the front page of the New York Times? If the answer is 'terrible,' then my advice is simple: don't do it. I think it's clear that insider trading by members of Congress does not pass this test. The fundamental principle underlying laws on insider trading is the notion that financial markets should be a fair and even playing field, not one where certain huge titans have unreasonable advantages over the widows and orphans. While we all know that the reality of financial markets is far less benign, this is not a good reason to abandon the principle altogether. We don't give up on speed limits because many people routinely ignore them...

Similarly, the argument that we shouldn't bother legislating against insider trading by Congress because it would be impossible to enforce is worrisome. If we applied that principle to all laws, we would be veering toward anarchy. Moreover, as the Historical Timeline suggests, insider trading is difficult but not impossible to enforce. Indeed, the SEC [US Securities and Exchange Commission] and NYSE [New York Stock Exchange] have developed sophisticated technology to spot insider traders...

Finally, it is worth noting that public scorn of Congress has never been lower. The public trusts its congressional representatives less than it does used car salesmen; less than 20 percent of the American people approved of the job Congress was doing in September 2008. This distrust is firmly rooted in both the perception and the reality of congressional antics over the past decade or so. Surely congressional representatives have ample opportunity to enrich themselves after they leave office; they should not require the benefit of insider trading to do so while they are serving at the will of their people.

The principle of a fair playing field is and should remain sacred (tarnished though it may be). There's no excuse for abandoning it."

"I can't begin to imagine how anyone could justify members of Congress buying or dumping stock on the basis of non-public information they've learned by virtue of their positions as lawmakers. These folks are sent to Washington for the public good, not for private gain."

"Congress enacted the Securities Act of 1933, which required registration of publicly traded companies -- making more information open and available to the public. A year later, Congress added more protections for investors. One of those provisions made it illegal to trade stock by corporate insiders who were privy to special information that could help or hurt a stock.

After this generation's corporate scandals, Congress passed Sarbanes-Oxley in 2002 to improve corporate governance and audit independence. But one of the measures added reporting requirements and tougher standards for insider trading.

Unfortunately, Congress forgot itself. It remains perfectly legal for a member of Congress to buy and sell stocks based on information that's not available to the public...

'This is simply wrong that members of Congress can exchange information...and get rich on it,' says Rep. Brian Baird, D-Wash., who is co-sponsor of a bill [the STOCK Act] to prohibit insider trading by members of Congress and their staffs...

We think Baird's right. Even if a congressional insider trading ban comes seven decades too late."