Knocking Out One Form Of Corruption

by hilzoy

From the WSJ (sorry; subscription wall):

"Amid broad congressional concern about ethics scandals, some lawmakers are poised to expand the battle for reform: They want to enact legislation that would prohibit members of Congress and their aides from trading stocks based on nonpublic information gathered on Capitol Hill.

Two Democrat lawmakers plan to introduce today a bill that would block trading on such inside information. Current securities law and congressional ethics rules don't prohibit lawmakers or their staff members from buying and selling securities based on information learned in the halls of Congress.

It isn't clear yet what kind of support the bill will garner from Republicans. But its prospects are enhanced by the current charged environment in Congress; lawmakers from both parties in both houses have placed a high priority on passing ethics and lobbying-reform legislation. Such legislation would provide a vehicle to which proponents could attach a measure on stock trades.

In addition to banning trading on inside information, the proposal would require that lawmakers and their top aides disclose within 30 days any stock trades. Congressional rules now require lawmakers to disclose their trades once a year. The bill also would require that companies register with Congress if they sell information about congressional activity to Wall Street investors.

Unlike members of Congress, executive-branch employees already are banned from trading on inside information. Employees of several federal agencies are prohibited from investing in companies that have business before them. In 1934, for example, Congress banned Federal Communications Commission employees from owning stocks or bonds in telecommunications or broadcast companies.

The two Democrats who wrote the bill say they were motivated by the trading activity of a former top aide to Rep. Tom DeLay, the onetime Republican majority leader in the House. The aide, Tony Rudy, bought and sold hundreds of stocks from his computer in the U.S. Capitol in 1999 and 2000, according to financial-disclosure forms and other DeLay aides.

Neither Mr. Rudy nor his lawyer returned calls seeking comment. It is impossible to tell from the disclosure forms whether Mr. Rudy traded stocks based on information he gathered while working as deputy chief of staff and general counsel to Mr. DeLay, then the No. 3 Republican in the House.

Rep. Louise Slaughter, the New York Democrat who wrote the bill, said: "Top leadership aides know what is happening before anyone else. The potential for abuse there is incredible." (...)

Congressional Republicans declined to discuss the proposal until they see its exact language. Republican lawmakers could view it as a partisan ploy to hurt Mr. DeLay and another top Republican caught up in an insider-trading controversy: Senate Majority Leader Bill Frist of Tennessee, who has been trying to explain his sales of stock in a hospital firm long associated with his family."

Let's hope Republicans don't fight this one on the grounds that it's a "partisan ploy." Letting Congresspeople and their staff trade on non-public information creates obvious possibilities for corruption, and it should be prohibited. The best way to defuse any partisan angle would be for Republicans to get behind the bill and pass it. I hope they do.

Comments

[Pooh]

They want to enact legislation that would prohibit members of Congress and their aides from trading stocks based on nonpublic information gathered on Capitol Hill.

How is this not already a law?

[hilzoy]

Pooh: that was sort of my reaction. Which is why the Republicans should get behind it: it's obviously the right thing to do.

[Sebastian Holsclaw]

This is confusing. Isn't there a general prohibition against trading on inside information? Isn't that the whole basis of the Martha Stuart issue? She wasn't an insider, but she traded on non-public information. Is this one of the many things that Congress exempted itself when the rules were initially passed?

I've heard there are arguments that insider trading shouldn't be outlawed so long as we require transparency from large holders. But whatever the general rule is, Congress should stick to it for themselves.

[Brian Palmer]

As I understand it, the "insider trading" that is being talked about is not stuff that the company itself necessarily knows; it's that people on the Hill hear what regulations are being planned and have an idea of when it's coming to the floor, which can be advantageous for stock trading.

They're not making money off of what company insiders know; they're making money off of what they themselves know.

[Bernard Yomtov]

Isn't there a general prohibition against trading on inside information? Isn't that the whole basis of the Martha Stuart issue? She wasn't an insider, but she traded on non-public information.

You're the lawyer.

As I understand it the laws restrict only certain types of insider trades - more or less those based on information - "material nonpublic information" - available to a corporate insider or transmitted by an insider to another. The status of third and fourth hand tippees is not clear to me.

I do not think the general prohibitions apply where the inside information is about developments outside the business, and the trader has no connection to the corporation (hence the need for specific legislation covering executive branch employees). Thus, knowing, because one is a Congressional staffer, that a certain tax privilege is going to be enacted, for example, and trading on that information would not, I think, be illegal under current law.

[Pooh]

Bernard's post answers my original question to an extent. If the net of "insider information" was cast that wide, then it is hard to see how any congressional staffer could ever safely invest, and that doesn't seem right as an outcome.

[Slartibartfast]

Sounds like a gimme to me. And, also, I agree that it's something that already ought to be the law.

[hilzoy]

Pooh: two words: blind trusts. And really blind, not Frist's "blind" trusts.

[Slartibartfast]

I think anyone who was really concerned over Cheney's Halliburton holdings ought to be (really concerned)^2 over this lack of restriction on the body that, you know, makes multi-billion-dollar contract decisions.

But, hey, I defy you to live on their salary. Don't they deserve a bone now and then?

[Anarch]

But, hey, I defy you to live on their salary.

It's a deal.

[Slartibartfast]

Sorry, Anarch. I guess what I meant to say was "I challenge anyone to live on their salaries".

[liberal japonicus]

then it is hard to see how any congressional staffer could ever safely invest, and that doesn't seem right as an outcome.

I seem to remember one of the first episodes of West Wing (which just got to Japanese TV last year some time) where Toby made a windfall profit and, because of the possibility of being harassed by an investigative committee and the press, reluctantly agreed to reduce his salary to a symbolic $1. I guess that's fiction...

[Jackmormon]

The ban on trading stocks and the requirement to disclose stock trades are both good steps, but what about, say, sector-based funds or indices? If a lot of Congressional insiders were, say, dumping their small-capital US funds in favor of Eurozone indices, I would like to know about it. It wouldn't be illegal, necessarily, but it might be the sort of thing that deserved a little sunshine.

[Pooh]

Hilzoy, I thought of that, but it still seems pretty restrictive. Can you not invest in real estate? There are all kinds of things that come down the pike which could affect that market. What about buying a home?

[Pooh]

To clarify, "insider trading" insider trading by congresspersons and staffs is (with apologies) Double-Plus Ungood. The process of drawing the appropriate line strikes me as more complex then I first realised.

[Bernard Yomtov]

I don't think you'd need to restrict investing entirely. While sector funds could be a problem, broader mutual funds should present little difficulty.

You could sensibly prohibit trading in individual stocks. That is really much less of a restriction than it seems. It would probably even save the staffers, at least the honest ones, money on balance.

Blind trusts would work, but might be impractical from a cost point of view. If the staffers' portfolios are small, as seems likely, the fees would be an unreasonable burden.

[votermom]

You could sensibly prohibit trading in individual stocks. That is really much less of a restriction than it seems. It would probably even save the staffers, at least the honest ones, money on balance.

I agree. If you work in a financial company you usually are given a huge list of stocks that you are not allowed to own (buy or sell) but you are allowed to invest in mutual funds. Should be a good enough rule for congress and staffers. And yeah, it does mean missing out on shiny IPOs. Well, tough.

[Brian Palmer]

Incidentally, this is one of those unforeseen side-effects of the "ownership society" that Bush was touting to replace social security: if everybody is an investor, then attempts to regulate insider trading need to fall on everybody. We would need to have a lot more speech regulation to deal with widespread (universal) investing, I think.

[Slartibartfast]

then attempts to regulate insider trading need to fall on everybody

I have no idea what this means. Insider trading restrictions are just there to keep people from having undue trading advantage because of what they know. The average Joe influencing policy by doing advocacy on blogs or other media while betting on his own success in the market, that sort of thing falls well outside of any sane definition of insider trading.

[Gary Farber]

What I find depressing here is that the fact that giving Congressional reps and staff inside info on stock is one of the most common and well-known forms of corruption in Congress, and yet people here are expressing surprise at it, as if it's news.

I don't like the cranky tone of this comment; please chalk it up to my crankiness with the system, rather than any crankiness with people here, which would correctly reflect where my crankiness is, if you would be so kind.

Contemplating the corruption of our Congressional system makes me want to throw things. People here, I mostly like.

[Gary Farber]

Incidentally, Jill Carroll has been released! Yay!

[Amos Newcombe]

Well, maybe there is something to be done here, but my question is, why this? And why now?

What about the whole steering-public-funds-to-industry-in-return-for-campaign-contributions thing? Will Congress actually empower Medicaid to negotiate drug prices, for example? No. They prefer to bring up something new and different to distract us. Democrats as much as Republicans benefit from the current system of laws for sale, or will when they come back into power.

They make a big fuss about something relatively minor, pass some sort of watered-down compromise law about it, everybody calms down, and the main corruption goes on just like always. We've seen this movie before.

[Gary Farber]

"Incidentally, Jill Carroll has been released!"

Yeah, okay, mentioned on the more appropriate unlabeled open thread. Sorry. Makes me happy happy, anyway.

[Sebastian Holsclaw]

"What I find depressing here is that the fact that giving Congressional reps and staff inside info on stock is one of the most common and well-known forms of corruption in Congress, and yet people here are expressing surprise at it, as if it's news."

I'm not at all surprised that it happens. I'm surprised that it is completely legal.

[Bernard Yomtov]

I'm not at all surprised that it happens. I'm surprised that it is completely legal.

I do not think it is legal.