House and Senate committees plan to hold hearings soon on bills that would prohibit lawmakers from trading on information they have learned on Capitol Hill.
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Lawmakers have come under fire recently after a “60 Minutes” report criticized members of Congress who made profitable securities trades based on information relating to pending or prospective legislative action.
In a recently published book, Throw Them All Out, Peter Schweizer contended that members of Congress may be exempt from some insider trading laws. Because there is no statute defining the prohibition of insider trading, there is no provision that allows or disallows members of Congress or their staff to trade on non-public information learned on Capitol Hill.
Insider trading has come to be recognized as securities fraud over the past 40 years through rules developed by the Supreme Court and the Securities and Exchange Commission. To prove that someone has participated in insider trading, the government must show that person breached a “duty of trust and confidence” by trading on material non-public information.
However, the contours of the prohibition become less defined outside the realm of corporate insiders using confidential information for their own benefit. While a member of Congress trading on information about a pending corporate transaction before that information became public would clearly be in violation of the law, that clarity is lost if the “inside information” is instead a legislative development that could affect a company or industry. Determining whether the information is “material” becomes more difficult because it is not always clear how one step in the legislative process may affect the stock market.
Now as Congress holds hearings on bills that would prohibit trading on information relating specifically to legislative action, the difficulty lies in how to effectively enforce any new laws that might result.
The proposed legislation is called the Stop Trading on Congressional Knowledge Act, and has been around for many years, though there was no movement on the legislation until “60 Minutes” brought broad public attention to the issue earlier this month. However, if passed, the legislation is unlikely to result in new insider trading cases involving Capitol Hill because of two significant hurdles to pursuing investigations into members of Congress and their staff.
The first problem is political: the S.E.C., which takes the lead in most investigations, must obtain its appropriations from Congress each year. Republicans critical of the scope of the Dodd-Frank Act have been threatening to cut the S.E.C.’s budget, and the S.E.C. is not immune to feeling political pressure over its decisions. Any inquiry into trading by powerful members is unlikely to be well-received, meaning the S.E.C. risks that Congress might use its power to punish the S.E.C. for pursuing a case.
The second hurdle comes in the form of the Constitution’s Speech or Debate Clause, which traces its roots to conflicts between the English monarch and Parliament, providing that “for any Speech or Debate in either House [members] shall not be questioned in any other Place.”
The law is meant to protect Congress from interference by the executive and judicial branches of government, and provides a type of immunity to members, making them unaccountable in court for actions relating to their duties as lawmakers. The clause says lawmakers cannot be required to answer questions in court, and cannot be subpoenaed or prosecuted with evidence of actions involving the legislative process.
While different Supreme Court rulings have determined that the clause has its exceptions, an insider trading investigation typically requires the S.E.C. to subpoena records to determine what information a person accused of insider trading had access to at a particular point in time, as well as any communications that person may have had.
Even if able to surmount hurdles to prosecution, the S.E.C. will likely encounter difficulties in gathering the relevant documents to make its case. Furthermore, questioning representatives and senators to determine whether the legislative action was “material information” could also prove challenging, given that the Speech or Debate Clause prevents any questioning of members of Congress or their staff about the legislative process.
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Even if Congress passes the legislation, the S.E.C. and the Justice Department would encounter too many roadblocks in conducting their investigations to ascertain the necessary information to pursue a conviction. Of course, Congress could try to waive the constitutional protection in advance as part of any law it passes, but it is not clear whether that would prevent an individual member from asserting that clause in a particular case in the future.