Insider trading is a key enforcement priority for the SEC
and the DOJ. Now however it has become a populist issue centered on members of Congress. There have been repeated reports of Congressional members raking in
huge profits by using information they obtain through their office to trade in
the securities markets. Those stories of course have sparked cries for
legislation to prohibit members of Congress from insider trading. Legislation
has been drafted and hearings are being held.
While there has not been a case brought against a member
of Congress for using information learned during the legislative process, that
does not mean members are somehow exempt from the insider trading laws. There
is nothing in Exchange Act Section 10(b), the predicate for most insider
trading cases, or the case law which developed alternate theories known as the
"classic theory" or the "misappropriation theory," which suggests that members
of congress are not subject to prosecution on these theories. Stated
differently, there is no reason to believe members of Congress are exempt.
SEC Enforcement Director Robert Khuzami made it clear in
testimony before the House Committee on Financial Services on December 6, 2011
that Congressional members are not exempt: "[T]rading by Congressional Members
or their staffs is not exempt from the federal securities laws, including the
insider trading prohibitions." Testimony by Robert Khuzami, Director, Division
of Enforcement, SEC, on H.R. 1148, the Stop Trading on Congressional Knowledge
The principles which govern a possible insider trading
case against a member of Congress or their staff member are the same as in any
other case, according to the Director. At the same time, such a prosecution
would have unique challenges. First there is the question of duty which is
typically at the core of any insider trading case. For members of Congress
there is no case law which discusses the duty of a member with respect to
trading on the basis of information learned in an official capacity. There is
however case law which notes in other contexts that members have a fiduciary
relation with the United States. Commentators differ on whether trading while
in possession of information learned in an official capacity breaches that
duty. For staff members in, contrast, the question is more straight forward,
the Director noted. They have a duty to their employer.
Second, the question of materiality would have to be
considered. The analysis here is the same mixed question of fact and law which
must be analyzed in any other case. In some instances this question may be
clear. In others the materiality of the information may be more questionable.
Finally, the information must be nonpublic. Here the
question "would likely depend on the circumstances under which the Member or
staff learned the information and the extent to which the information had been
disseminated to the public," Mr. Khuzami told the Committee. Again the issue
does not significantly differ from what is considered in other cases.
The Director cautioned however, that insider trading
investigations involving members or their staff could pose unique issues. Those
might in part arise from the Constitutional privilege afforded to members under
the speech and debate clause. That clause is intended to ensure wide freedom of
speech, debate and deliberation. In this regard there may be instances in which
the privilege covers communications of nonpublic information regarding
legislative activity. Overall however, the principles which govern the
investigation of congressional members and their staff are the same as those
which apply in other contexts.
Mr. Khuzami concluded his testimony with a note of
caution: "Any statutory changes in this area should be carefully calibrated to
ensure that they do not narrow current law and thereby make it more difficult
to bring future insider trading actions against individuals outside of
The principles which govern insider trading
investigations of members and their staff may be the same as for anyone else.
Draft legislation on this subject is being considered. It remains to be seen if
the first case will be brought or the legislation will be passed.
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Not having real time disclosures of securities trades is the loophole which makes members of congress and legislative staffers are immune from enforcement of insider-trading laws. The delayed reporting of securities transactions by congress, defeats, obstructs, and impairs its use as timely evidence. Insider-trading cases are hard to prove, because the trades must be tightly linked to the events or information on which they are allegedly based.
Trades need to be disclosed in "real time or near real time," so that the memories of potential witnesses are fresh and suspects do not have time to cover up their actions. The SEC, which conducts most insider-trading investigations, urged faster disclosure of stock trades by members of Congress on electronic, searchable forms. This is why no Congress people were investigated under the current laws.
The SEC, which conducts most insider-trading investigations, urged faster disclosure of stock trades by members of Congress on electronic, searchable forms. This is why no Congress people were investigated under the current laws.