Friday, February 03, 2012

Senate Passes Legislation to Curb Use of Inside Information by Members of Congress and Staff, Shelby Amendment Extends Ban to Executive Branch

The Senate passed legislation barring members of Congress from profiting on inside information they obtain as part of the job and that is not readily available to the public. The vote was 96-3. The dispute over the applicability of insider trading laws to Congress centers largely on the issue of whether Congress owes a legally enforceable fiduciary duty to the source from which they receive material, non-public information. The Stop Trading on Congressional Knowledge (STOCK) Act, S 2038, makes it explicit that Members and staff owe such a duty under the federal securities laws. A floor amendment offered by Senator Richard Shelby (R-Ala) extending the prohibition on insider trading to the executive branch and independent agencies was approved by a 58-41 vote. The House has been considering companion legislation,but House Majority Leader Eric Cantor (R-VA) said that he intends to schedule consideration of the Senate-passed STOCK Act on the House floor next week.

S 2038 would also prohibit senior executives at the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation from receiving bonuses during any period of conservatorship for those entities on or after the date of enactment.

Specifically, the legislation provides that, for purposes of insider trading prohibitions under the Securities Exchange Act, the prohibition against Members of Congress and employees of Congress using inside information for personal benefit states a duty of trust and confidence. HR 2038 authorizes the SEC to issue regulations implementing the legislation and otherwise ensuring that Members and staff are subject to insider trading prohibitions. Nothing in the Act diminishes an existing legal obligation of Members and staff and makes clear that the STOCK Act does not limit or otherwise alter existing securities laws.

The Shelby Amendment provides that if you are an executive branch or independent agency official and you currently file financial disclosure reports, you must comply with the public reporting requirements in the legislation. The amendment also contains an exemption for certain military personnel. Senator Shelby said that the insider reporting requirements should extend to members of the executive branch who arguably have even greater access to confidential information and who are already required to file annual financial reports.

An amendment offered by Senator Chuck Grassley (R-Iowa), and approved by a 60-39 vote, would define political intelligence operative and require such operatives to register and disclose affiliations in the same way that lobbyists are required to do.

A public perception has developed that Congress is not covered by insider trading laws, and worse, has exempted itself from them, said Senator Joseph Lieberman (I-Conn.), the sponsor of the legislation. This is not true, he noted, but the legislation eliminates ambiguities in current insider trading rules that might make it harder to prosecute a member of Congress than a member of the public for using inside information for personal benefit.

HR 2308 also makes conforming changes to the Commodity Exchange Act to ensure that the insider trading prohibitions under that Act apply.

Senator Leiberman noted that the legislation provides that within 30 days of any stock trades disclosure forms must be filed with the Senate and also online. He noted that the SEC has made clear in congressional testimony and in discussions with the Senator’s staff that that kind of periodic requirement for disclosure of trades in securities will help them do the job Congress wants them to do to ensure that insider trading laws are not being violated and, of course, will keep the public informed. Cong. Record, Feb. 2, 2012, S298.

Senator Susan Collins observed that there are disputes among the experts about whether this legislation is necessary, but Congress feels that a very strong message should be sent to the American public that Members of Congress are not exempt from insider trading laws, and that is exactly what the legislation does.

Within12 months of enactment, the STOCK Act directs the GAO to submit a report to Congress assessing the role of political intelligence in the financial markets and the extent to which investors are using access to Congressional insiders and other federal employees to inform their investment decisions. This report is intended to shed light on the practice and better inform any future Congressional action in this area.

The report must discuss what is known about the prevalence of the sale of political intelligence and the extent to which investors rely on such information; as well as what is known about the effect that the sale of political intelligence may have on the financial markets. The report must also examine the extent to which information which is being sold would be considered non-public information and the legal and ethical issues that may be raised by the sale of political intelligence. Importantly, any benefits from imposing disclosure requirements on those who engage in political intelligence activities must be discussed, as well as any legal and practical issues that may be raised by the imposition of disclosure requirements on those who engage in political intelligence activities.