Lawmakers find insider trading ban popular in theory, problematic in practice

Lawmakers agree that members of Congress should not
personally profit on private insider information. But deciding on how to block
such a practice is proving to be much more divisive.

Lawmakers convened at the House Financial Services Committee
Tuesday to discuss how they could assure the public that members are not lining
their pockets by trading on private information gleaned in the halls of Congress.
But while bipartisan agreement was easy to come by when criticizing the
practice, that unity fractured as lawmakers criticized various proposals, touting alternative approaches or wondering if existing laws were sufficient.

The bill under discussion was the STOCK Act, introduced by
Reps. Louise Slaughter (D-N.Y.) and Tim Walz (D-Minn.). The measure, which would prohibit members and
their staff from making trades based on private information, has languished for
years with minimal sponsors and attention. But it skyrocketed in popularity
following a November “60 Minutes” piece that suggested several high-profile members were using their status for personal gain. The bill has
garnered 153 co-sponsors from members of both parties — the vast majority coming
after the report aired.

The piece has led to wide condemnation of privileged trading
by top officials from both parties. But at the hearing, lawmakers were quick to
point out problems with the proposal at hand, identifying loopholes or
questioning how one could discern what trades were explicitly guided by private
information.

Rep. Francisco “Quico” Canseco (R-Texas) called the bill a “completely
unworkable solution to these allegations” that could incite “political witch
hunts.” He also raised concerns that the bill, if made law, could raise sticky
constitutional issues, in that it would require federal regulators under the executive
branch to investigate the legislative branch.

Others suggested that regulators were not enforcing laws
already on the books, making additional laws redundant.

“Let’s make sure we’ve identified the right problem. The
problem may be lax enforcement,” said Rep. Jeb Hensarling (R-Texas).

Some lawmakers acknowledged that portions of such a law might
not be needed or work all that well, but maintained that passing a bill that
expressly prohibits such activity can have its own value, particularly in explicitly
assuring the public that the Congress does not condone the practice.

“There’s an area of ambiguity no matter what we do,” said
Rep. Barney Frank (D-Mass.), the ranking member on the panel. “Redundancy is
clearly preferable to ambiguity when it comes to passing laws.”

Further muddying the waters on the popular topic is the wide
number of legislative fixes being proposed. In addition to the STOCK Act, Sens.
Scott Brown (R-Mass.) and Kirsten Gillibrand (D-N.Y.) have both offered their
own slightly differing takes on the same idea.

Meanwhile, House Financial Services Committee Chairman
Spencer Bachus (R-Ala.) — who was singled out in the “60 Minutes” piece — has offered
a bill requiring lawmakers to place their funds into a blind trust. And Rep.
Sean Duffy (R-Wis.) has offered a similar bill, but his would give lawmakers
the option of a blind trust or disclosing any trades within three days of their
completion.

Canseco is taking yet another approach, introducing a
House resolution that is similar to Duffy’s bill but would put the onus of
enforcement on the House Ethics Committee, not federal regulators.

Duffy pressed Slaughter and Walz on their bill, and argued
that his tougher bill was the proper prescription.

“My fear is that if we only take half a step … members could still
skirt around the new bill. I think my bill goes the distance and makes sure
there will be no doubt,” he said.

To highlight his concern, he pointed out that trades would
only need to be publicly disclosed if they exceeded $1,000. He argued that such
disclosure could be easily avoided.

“I could trade $50,000 in a stock if I keep every trade
under $950,” he said.

Walz said he would be open to adding more teeth to his bill,
and argued that it was not beefed up at the outset to make the one-time overlooked
bill more “palatable.”

“It took six years to get seven people,” he said.

From a regulator’s perspective, Robert Khuzami, the
Securities and Exchange Commission’s (SEC) enforcement director, told the panel
that existing insider trading laws do, in fact, apply to Congress.

“You are subject to the same laws as everyone else,” he said.

However, he added, using those laws to pursue charges
against a federal lawmaker has never happened before, and any attempt could
raise “some unique issues.”

Passing a law like the STOCK Act could help ensure that if
the SEC were to charge a member, a judge would determine that insider trading
laws were violated by making it explicitly a violation. He also warned
that lawmakers need to be careful to ensure that any law passed does not narrow
the SEC’s reach in enforcing those laws, given the broad deference they
currently have in identifying violations on a case-by-case basis.