Insider trading by Members of Congress has recently been moved to the front burner, or at least the stove, for many policymakers. The President called for an explicit ban on such trading in his recent State of the Union address. On Thursday the Senate passed a bill prohibiting Members of Congress from trading securities on the basis of material, nonpublic information. The vote was 96-3.
This has not always been an easy call for lawmakers. As CBS’s 60 Minutes showed in November, trading by Senators and Representatives on nonpublic information learned in their official capacities sometimes runs rampant. And members have been resistant to change what is widely viewed as a “loophole” legalizing that behavior.
Well, it’s not exactly a loophole, an exemption, or an exception. Congress has never explicitly carved itself out of liability for insider trading. The problem with finding Senators liable for trading on secret information they learn as Senators is that it’s not clear that they have a duty not to do so. And to be liable for insider trading under Section 10(b) of the Exchange Act, one typically has to be trading in breach of a fiduciary duty either to the company’s shareholders (in a classical theory case) or to the source of the information (in a misappropriation case). For Senators, to whom would the duty run? To the United States? To the voters who elect them? These are plausible theories, but they are untested by the courts, as SEC Enforcement Director Rob Khuzami acknowledged in testimony before the House Committee on Financial Services last December.
The STOCK Act, which the Senate passed, would set forth a clear duty for Members of Congress not to trade on material, nonpublic information learned in their official capacities. Others are unimpressed by the bill, and think it is not strong enough. I tend to disagree. I think closing the “duty” gap for Members of Congress will go a long way toward making insider trading cases possible in appropriate cases. We’ll see if the House can get it together to pass the same bill.