Lawless insider trader, House Speaker Nancy Pelosi, tears up President Donald Trump’s ‘State of the Union 2020’ speech. (Credit: BBC)
Members of Congress come across a lot of information in the course of their official duties. Can they use “insider information” to make a quick buck by buying and selling stock at opportune times?
The answer to this question is a resounding and unequivocal no. Statutory law forbids it, and even if it did, Congress has always had the constitutional power to discipline its Members.
In mid-November 2011, CBS’ 60 Minutes ran a story alleging that Members of Congress were using insider information to benefit on stock trades. The story provoked a furor among the public, leading to the enactment of the STOCK Act, which President Obama signed into law on April 4, 2012. The act had several effects, but the most notable was that it explicitly stated that Members and congressional employees “are not exempt from the insider trading prohibitions arising under the securities laws…” (§4(a)). Additionally, it amended the Securities Exchange Act of 1934, to specify each Member or employee “owes a duty” when in receipt of “material, nonpublic information” obtained as a result of their public office (§4(b)(2)).
Although the STOCK Act amended the Securities Exchange Act of 1934, in the lead up to its enactment, there was some debate over whether Members and staffers were exempt from anti-insider trading law. For instance, in February 2012, when the House passed the STOCK Act, Representative Rob Woodall of Georgia said, “The STOCK Act has been characterized … as to prevent insider trading by members of Congress, as if members of Congress are allowed to participate in insider trading today, and they are not.” Similarly, when the Senate passed the STOCK Act, The Wall Street Journal reported:
Robert Khuzami, head enforcement official at the Securities and Exchange Commission, said in testimony late last year that it is possible that insider-trading laws do, in fact, apply to members of Congress.
But he said it is possible that a federal judge could disagree with him and strike down an insider-trading case. As a result, he said it would be easier to prosecute an insider-trading case against a lawmaker if Congress approved legislation to make it clear that lawmakers have a duty to keep private the nonpublic information they hear in Congress about legislation and policy changes that could affect markets.
The dispute over whether congressional insider trading could be prosecuted before the passage of the STOCK Act aside, adopting it was a way for Congress to attempt to restore public trust amidst public indignation. You could dismiss that as a mere show, but maintaining the confidence of the public is critical for a healthy democracy. Even if it was possible to prosecute congressional insider trading before the STOCK Act, with both it and other laws in force today, it is unambiguous that Members of Congress may not engage in insider trading, whether the information they obtain is from their public office or their private life.
(Members are required to publicly report on their annual financial disclosure forms all stocks that are owned, purchased or sold. Such transactions should be reported within 30 days and “in no case later than 45 days” afterwards (§6(a)). The Act also required that the reports be posted on the House and Senate websites (§8(a)) This allows the public and the media to check whether a Member has been engaged in any suspicious activity in the securities markets.)
In addition to statutory law against insider trading, each Chamber has a constitutional right to discipline its own Members, officers, and staff. Both the House and Senate ethics rules provide ample room to punish insider trading—and, arguably, did so even before the passage of the STOCK Act. Both the 2008 edition of the House Ethics Manual and the 2003 edition of the Senate Ethics Manual note that individuals under their respective Chambers’ jurisdictions may be disciplined for violations of the Code of Ethics for Government Service. This code admonishes public servants, “Never use any information gained confidentially in the performance of governmental duties as a means of making private profit.” Aside from specific references to the Code of Ethics for Government Service, each Chamber has broad rules requiring Members and staff to act at all times in ways that do not dishonor their Chamber, and each of the ethics manuals contain a discussion on the various ways the House and Senate can discipline for behavior that is not otherwise explicitly forbidden. The House and Senate could impose different kinds of penalties, including fines and, for Members, expulsion from office if 2/3 of the Chamber votes to do so. Any discipline imposed by one of the houses of Congress would be separate from prosecution by the Justice Department. Sanction by a Member’s chamber is an additional form of punishment that a private citizen would not face.
Aside from the discipline that Congress or the criminal justice system might pursue, there is always the court of public opinion. Members of Congress are always responsible to their constituents, who always have the right to turn an incumbent out of office at the next election, for whatever reason. Beyond having a right to defeat an unworthy incumbent, it is not even too much of a stretch to say that the people must do so. As James Garfield, then a U.S. Representative, wrote in April 1877:
[N]ow, more than ever before, the people are responsible for the character of their Congress. If that body be ignorant, reckless, and corrupt, it is because the people tolerate ignorance, recklessness, and corruption. If it be intelligent, brave, and pure, it is because the people demand those high qualities to represent them in the national legislature.
Garfield’s admonition reminds of the power that citizens have to hold their elected officials accountable—remember it any time a scandal in Congress bubbles up. (Congressional Institute, 8/16/2018) (Archive)
(…) The law does not provide for a criminal penalty, but violators can face substantial fines.
Some supporters of the Stock Act thought it clearly banned the buying or selling of stocks based solely on information members of Congress learn about on the job, because it brought them under that “relationship of trust or confidence” rule — namely, their duty to the public. But that concept has never been tested in court, and some former SEC officials have said they doubt that members of Congress have a duty of confidentiality.
But even if that approach of the insider trading law clearly did apply to Congress, bringing a criminal case would be difficult for prosecutors because of the immunity provided by the Constitution’s speech or debate clause.
“They’ll never be [able to] prosecute anybody for this, if they have to penetrate a committee to find out if that’s where the information came from. That’s speech-or-debate protected territory,” said Stan Brand, a Washington lawyer and former U.S. House general counsel.
Members of Congress can nonetheless be prosecuted for insider trading when the information they act on comes from a company, not through the legislative process. Former Rep. Chris Collins, a New York Republican, was sentenced to 26 months in prison in January after he admitted revealing inside knowledge to his son about a drug company’s stock that was likely to fall. Collins learned of the information because he served on the company’s board. (Read more: NBC News, 3/20/2020)