New York – As a bill regulating insider trading by congressional members gains momentum after five years of lingering in Congress, SEC director Robert Khuzami warned about the need to make “carefully calibrated” statutory changes to avoid obstructing the commission’s current work on insider trading outside Congress.
The proposed legislation targets information related to pending legislation (although this might exempt information obtained from regulatory briefings), requires reporting by political intelligence firms, and this legislation could require members of Congress to put their assets in blind trusts, among other measures.
A recent report by 60 Minutes divulged how some members of Congress from both sides of the aisle have profited using privileged information without directly breaking any congressional rule. The 60 Minutes’ report elaborated on the research by Peter Schweizer, a fellow at the Hoover Institution, who was intrigued by the fact that some Congress members manage to accumulate significant wealth beyond their salaries. Schweizer found that stock trading using privileged information is a common practice among legislators.
The 60 Minutes’ report generated reactions across the board. CBS announced: “Democratic Congresswoman Nancy Pelosi’s office called the report a ‘right-wing smear.’ While Republican Speaker John Boehner’s office called his inclusion in the story ‘idiotic’.”
As of today, the support for the Stock Act has increased from 9 to 171 co-sponsors since the airing of the 60 Minutes report.
SEC director Khuzami warned in a statement last week that the Stock Act could narrow existing rules against insider trading outside Congress. He believes that the solution is for Congress to clarify existing laws on representatives’ and their staff’s duty not to use inside knowledge for private gain instead of introducing new legislation.
House and Senate ethics rules already prohibit conduct such as fraud, misappropriation, breach of trust and confidence to shareholders in the private sector, and unethical behavior, among others. Furthermore, general antifraud provisions (e.g. Rule 10b-5 of the Securities Exchange Act) could potentially be applied to representatives according to Professor Donna Nagy of Indiana University. Yet insider trading practices that would put a layman behind bars are common among Congressional members.
According to an SEC statement issued on December 1st it prosecutes insider trading under general anti-fraud provisions. Yet the agency has never used these general provisions to investigate members of Congress. The intentions of the bill’s co-sponsors is to end the ambiguity of the existing regulation and set a clear boundary on the use Congress members and staff can give to the information they receive as part of their job. Khuzami believes that having one law applicable to Congress and another to everyone else could create confusion and make his agency’s job more difficult.
In the research industry, political intelligence research could also be affected by the passing of the Stock Act. The bill requires political intelligence firms to register with the House and Senate, much like lobbyists. Furthermore, the bill prohibits members and employees of Congress to disclose non-public information from pending or prospective legislative action, which is currently a relevant aspect of political intelligence research. For more analysis on the effect of the Stock Act on political intelligence research, visit our article Do As I Say Not As I Do.
Given the momentum the Stock Act has received inside and outside Congress, Khuzami’s concern of a potential narrowing of existing inside trading provisions will have to find common ground with the bill’s co-sponsors. And close attention should be paid to how the existing insider trading regulatory framework will be affected.