WASHINGTON, D.C.—The United States Senate today began consideration of the Stop Trading on Congressional Knowledge or (STOCK) Act. This legislation is intended to affirm that Members of Congress are not exempt from laws that prohibit insider trading.
As Ranking Member of the Senate Homeland Security Committee, Senator Susan Collins is managing this bill on the Senate floor. Following is the text of a statement she delivered today before the Senate voted to begin consideration of the bill.
“Mr. President, I am pleased to join Chairman Lieberman today in urging our colleagues to begin consideration of the “STOCK Act.” This legislation is based on a bill first introduced in the Senate by Senator Scott Brown, and a similar bill introduced by Senator Gillibrand. Put simply, the STOCK Act is intended to ensure that Members of Congress do not profit from trading on insider information.
“As a cosponsor of Senator Brown’s bill, I want to commend him for his leadership in this area. I also want to recognize Chairman Lieberman for moving this legislation forward.
“Press reports on “60 Minutes” and elsewhere have raised questions about whether lawmakers have been exempt – legally or practically – from the reach of our laws prohibiting insider trading. At a time when polls show low public confidence in Congress, there is a strong desire to address the concerns that underpin the public’s skepticism and assure the American people that we put their interests above our own.
“The STOCK Act is intended to affirm that Members of Congress are not exempt from our laws prohibiting insider trading. While several of the witnesses who appeared at our Committee’s hearing on the STOCK Act testified that there is no legal exemption for Members of Congress, confusion and uncertainty nevertheless persist. For example, on the eve of our markup, the Wall Street Journal published an op-ed by a Yale law professor who wrote that, “the Securities and Exchange Commission has determined that insider trading laws do not apply to Members of Congress or their staff.” This, however, is directly contradicted by the statement for the record submitted to the Committee by the SEC’s Enforcement Director, who said: “There is no reason why trading by Members of Congress or their staff members should be considered exempt from the federal securities laws, including trading prohibitions.”
“Mr. President, I ask unanimous consent that the SEC’s statement and the Wall Street Journal op-ed be entered into the Record at this point.
“To me, this illustrates the confusion over this issue. So, I am pleased that the Committee unanimously adopted an amendment I offered with the Chairman that states clearly that Members and their staff are not exempt from insider trading laws.
“The need for this unambiguous statement can likely be traced back to the nature of the insider trading laws. As the Committee has learned, our nation’s insider trading laws are not – generally speaking – based on statutes passed by Congress, but on court precedents. As one of our witnesses – Professor Donna Nagy of Indiana University – pointed out during our hearing:
““Congress has never enacted a federal securities statute that explicitly prohibits anyone from insider trading . . . The explicit statutory ban on insider trading . . . is entirely absent in U.S. securities law.”
“Rather, the SEC pursues insider trading cases under the general antifraud provisions of the Federal securities laws, most commonly Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, a broad anti-fraud rule promulgated by the Commission. Therefore, what constitutes insider trading has largely been determined by the courts, including the Supreme Court, on a case-by-case basis.
“Under the case law, two different types or “theories” of insider trading violations have developed: One where the defendant is a “classic” corporate “insider” using nonpublic information to trade on the company’s stock, and another where the defendant has “misappropriated” inside information in violation of a duty owed to the source of the information – such as a lawyer who trades on advanced notice of a business deal.
“Both types of cases, however, share common elements:
• There must be some breach of a “duty” –such as a traditional “fiduciary duty” or a duty of “trust and confidence;”
• The breach must involve “material” information – which is the type of information a reasonable investor would consider important in making a decision to buy or sell stock;
• The information must be “nonpublic;” and
• The defendant must receive a “personal benefit” – which the U.S Supreme Court has said may include not only financial gain, but also “reputational benefits.”
“As the Supreme Court has held, under Section 10(b), the chargeable conduct must “involve a ‘deceptive device or contrivance’ used ‘in connection with’ the purchase or sale of securities.” And, in criminal prosecutions for insider trading under Rule 10b-5, the “Government must prove that a person ‘willfully’ violated the provision” with “culpable intent.”
“Though the witnesses who came before the Committee generally agreed that Congress enjoys no exemption from insider trading laws, they also stressed the need to clarify the relevant “duty” that applies to Members.
“The bill reported by the Committee – in language refined by Senator Levin – addressed this issue by affirming a duty arising from a relationship of trust and confidence owed by Members and their staff to the Congress, the United States Government, and the citizens we serve. At our markup, we clarified that this does not create a new fiduciary duty, in the traditional sense, but rather recognizes or affirms our existing duty.
“As reported, the bill would also have amended the Congressional Accountability Act to prohibit Members and staff from using “nonpublic information” gained through the performance of their official duties for “personal benefit.” This proposed prohibition, however, was not limited to the trading context or otherwise tethered to financial transactions. Because it was not anchored in financial transactions, I expressed some concerns about the potential breadth of the term and the potential for unintended consequences.
“These concerns were echoed by several Members of the Committee during our consideration of the bill. Following the markup, we continued to refine the bill while adhering to the principle that Members of Congress should be subject to the same insider trading laws as other Americans. I believe we have come up with a solution that addresses the potential problem that really troubles all of us – namely, people using public office for personal gain – without inhibiting our ability to serve our constituents effectively.
“Specifically, the substitute that I have cosponsored with the Chairman would require the Senate Ethics Committee and the House Committee on Standards of Official Conduct to issue guidance on the relevant rules of each chamber, clarifying that Members and staff may not use nonpublic information derived from their positions in Congress to make a private profit. This would cover insider trading matters, as well as land deals and other transactions where nonpublic information could be wrongly converted into a private profit.
“Like the reported bill, the substitute includes a straightforward statement making clear that Members of Congress and their staffs are not exempt from the insider trading prohibitions arising under the securities laws.
“In keeping with an amendment that Senator Paul successfully offered at the Committee’s markup, the substitute applies this same framework – clarification of the prohibition against using nonpublic information for private profit and affirmation of the existing duty – to employees of the executive and judicial branches. And, like the reported bill, the substitute includes earlier deadlines for financial reporting requirements and greater transparency for financial disclosure statements, by requiring that they be available online, in a searchable format.
“Let me make clear that I understand that we may still have some work to do to refine this bill before final passage, and therefore, I welcome the debate ahead. Nevertheless, I agree that we need to reassure a skeptical public that we understand that elective office is a place for public service, not private gain. Underscoring that important message is clearly the intent of this legislation, and that is why I support it.
“Mr. President, I urge my colleagues to vote yes to invoke cloture on the motion to proceed, and I yield the floor.”
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