Tuesday, December 13, 2011

Congressmen Give Themselves a Loophoole Filled Insider Trading Bill

Since it has become widely known that members of Congress are exempt from insider trading laws, an uproar has forced Congress to bring themselves under the scrutiny of the SEC for insider trading laws.

It should probably come as no surprise, but Congress has put together a bill to regulate against insider trading by members of Congress that is so full of loopholes that it will actually make it easier.

Yale law professor Jonathan Lacey writes in WSJ:
Members of Congress already get better health insurance and retirement benefits than other Americans. They are about to get better insider trading laws as well...

Strangely, while insider trading by corporate insiders has long been the white collar crime equivalent of a major felony, the Securities and Exchange Commission has determined that insider trading laws do not apply to members of Congress or their staff. That is because, according to the SEC at least, these public officials do not owe the same legal duty of confidentiality that makes insider trading illegal by nonpoliticians.

The embarrassing inconsistency was ignored for years. All of this changed on Nov. 13, 2011, after insider trading on Capitol Hill was the focus of CBS's "60 Minutes." The previously moribund "Stop Trading on Congressional Knowledge Act" (H.R. 1148), first introduced in 2006, was pulled off the shelf and reintroduced. The bill suddenly had more than 140 sponsors, up from a mere nine before the show.

The "Stock" Act, as it is called, would make it illegal for members of Congress and staff to buy or sell securities based on certain nonpublic information. It would toughen disclosure obligations by requiring congressmen and their staffers to report securities trades of more than $1,000 to the clerk of the House (or the secretary of the Senate) within 90 days...

Publicly, House members echo bill sponsor Rep. Louise Slaughter (D., N.Y) in saying things like: "We want to remove any current ambiguity" about whether insider trading rules apply to Congress. Or as co-sponsor Rep. Timothy Walz (D., Minn.) put it: "We are trying to set the bar higher for members of Congress."

On closer examination, it appears that what Congress really wants is to keep making the big bucks that come from trading on inside information but to trick those outside of the Beltway into believing they are doing something about this corruption. For one thing, the rules proposed for Capitol Hill are not like those that apply to the rest of us. Ours are so broad and vague that prosecutors enjoy almost unfettered discretion in deciding when and whom to prosecute.

Congress's rules would be clear and precise. And not too broad; in fact they are too narrow. For example, the proposed rules in the Stock bill are directed only at information related to pending legislation. It would appear that inside information obtained by a congressman during a regulatory briefing, or in another context unrelated to pending legislation, would not be covered...

If the law passes in its current form, insider trading by Congress will not become illegal. I predict such trading will increase because the rules of the game will be clearer. Most significantly, the rule proposed for Congress would not involve the same murky inquiry into whether a trader owed or breached a "fiduciary duty" to the source of the information that required that he refrain from trading.

If enacted, the law of insider trading will remain one of many where one reality applies to Congress and an uncomfortable and insecure reality applies to everybody else. Just as Congress is protected from the vicissitudes of ObamaCare, Congress will remain safe from the vagaries of insider trading law. The rest of us will still be vulnerable.


  1. But the source of the problem isn't that congress can trade with insider information.

    The problem is that congress exerts influence over business outcomes (picking winners and losers), and there is a payoff that comes from that power.

    Make insider trading illegal, and congress can still benefit their cronies who might agree to return the favor.

    So get rid of the power that congress exerts over the market (or follow the constitution for starters), and you get rid of the insider trading problem along with many others.

  2. The author of the book that shined a bright light on this subject has a website with commentary on the subject.


    P.S. Enjoy your work Mr. Wenzel

  3. In America, nothing gets in the way of power and profit...nothing.