This is not the first time Members of Congress were accused of misusing information they had learned in the workplace for their personal gain. In November 2011, “60 minutesReleased an investigation report that found that several companies did extensive equity business in 2008/09 after learning secret details about the latest financial crisis. The problem was that although it looked and smelled like corruption, not everyone agreed that it violated federal securities laws. (This is a different question than whether trade violates Congress-imposed ethics, censors for violating it, or even thrown it out of the Senate even if they haven’t broken a law.)
The trade in material, non-public information – commonly referred to as insider trading – is illegal. However, insider trading is defined by case law and not by law. These cases require that a duty of trust or loyalty be violated or that information be otherwise misused. For example, if a manager learns of an upcoming deal for his company and trades his shares before the deal is published, he has likely violated the Insider Trading Act, also because he violated the “trust” the company had in him it does not take advantage of this information for its personal benefit. However, if no obligation is violated, there is no insider trading. For example, suppose our manager was just a very disgusting cell phone user. Suppose someone else just heard the name of the company and the upcoming unpublished deal. This lucky listener can trade this information without breaking the law as he has no direct or indirect obligation to the source of the information.
Regulators have recently made it clear to “Corporate Insider” that the insider trading rules also cover essential, non-public information about the effects of the coronavirus outbreak. Of course, this should also apply to government insiders.
Members of Congress and their staff learn a great deal of information that the general public does not know: they receive information from other government officials; You receive selective information from large companies and professional associations. Members of Congress have access to information precisely because they have the ability to influence the results and are tasked with using their knowledge to make the best decisions for our country. Shouldn’t they have a “duty” not to use the information they learn in their work for their personal financial gain?
A handful of senators and staff, including myself, have drafted the LAGER Act to answer this question with a resounding yes. The law clearly and directly obliges government officials not to act if they have material, non-public information that “comes” from their positions or is “obtained in the course of their work.” In addition, the new law stipulates that transactions must be reported retrospectively so that we can be more easily informed about possible abuses. The law is not limited to information about a particular company or companies. It includes all “essential, non-public information”.
In fact, when negotiating the bill, I used an example to explain the bill to other Congress assistants and their superiors. Suppose a member of the Senate learns of a credible threat from an upcoming major terrorist attack in New York City. The STOCK Act would make it illegal for the Senator to sell a lot of hotel stocks. That would be a betrayal of the senator’s duty. No one I spoke to – on either side of the political process – disagreed. Ultimately, the STOCK Act passed both congress chambers with an overwhelming majority and was incorporated into the law on April 4, 2012.
That brings us to now.
I am unable to assess whether the recent transactions of some senators have violated the AKTIENGESETZ or other federal laws or ethics rules. These issues should be thoroughly investigated by the Securities and Exchange Commission, the Department of Justice and the Senate Ethics Committee.
But given that Congress’s first commitment to the American people is and that fulfilling that commitment so often requires more knowledge than ordinary American investors, why should Congress members be allowed to trade individual stocks at all? Why should we expect them to be able to separate business decisions from what they know because of their government role and what else they could know as private individuals?
As recent events have made clear, any trade with members of Congress can undermine confidence in the government and our democracy. If we want Congress members to focus on their work rather than their personal wealth, we should consider whether permission to be an active public company trader or even an active participant in significant non-business activities is a priority of the American people rightly reflects demand from officials.
Members of Congress often have information that can mean millions or even billions of dollars to market participants. Should they knowingly misuse this information for themselves, their families, or their friends? Of course not. But it is also unreasonable to expect Congress members to pretend they don’t know anything.
The STOCK Act is a useful tool to fight corruption, but it is not enough. Stock trading is not the only way that members of Congress misuse the material, non-public information they learn. For example, information can also be valuable in real estate transactions. Congress should consider banning significant external business for all members and restricting securities trading to diversified funds, with all business initially approved by an appropriate ethics bureau. This type of process is common for investment banks and other companies where employees often have essential, non-public information. Many compliance officers in companies like these sometimes even conclude that insiders should be prohibited from trading in entire industries. We should expect at least as many members of Congress.
The Oath of office A US senator includes the promise: “I will perform the duties of the office I will serve well and faithfully.” These obligations do not affect your personal financial interests, but us.