Stop Trading on Congressional Knowledge Act

Floor Speech

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Ms. COLLINS. Mr. President, I am pleased to join today the chairman of our committee, Senator Lieberman, and the sponsor of this bill, Senator Scott Brown, in urging our colleagues to begin consideration of what is known as the STOCK Act.

This legislation is based on a bill that was first introduced in the Senate by Senator Scott Brown and a similar one 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 wish to commend him for his leadership in this area. I also wish to recognize Chairman Lieberman for moving this important bill forward in such an expeditious manner.

Press reports on ``60 Minutes'' and elsewhere have raised questions about whether lawmakers have been exempt, either legally or practically, from the reach of our laws prohibiting insider trading. At a time when polls show record low public confidence in Congress, there is a strong desire on our part to address the concerns that underpin the public's skepticism and assure the American people that we are putting their interests ahead of 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 before our committee's hearing on this bill testified that there is no legal exemption for Members of Congress, confusion and uncertainty nevertheless persists. 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.''

I ask unanimous consent to have printed in the Record the SEC statement at the conclusion of my comments.

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Ms. COLLINS. Mr. President, to me, this illustrates the confusion over this issue. So I am pleased the committee not only reported Senator Brown's bill but unanimously adopted an amendment I offered with Chairman Lieberman 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 our committee has learned, our Nation's insider trading laws are not, generally speaking, based on statutes passed by Congress but rather on court precedents. As one of our witnesses, law professor Donna Nagy from 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 10B of the Securities Exchange Act of 1934 and rule 10b5, a broad antifraud 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 a second 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 transaction. Both types of cases, however, share common elements:

There must be a 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 Supreme Court has said may include not only financial gain but also reputational benefits.
As the Supreme Court has held, under section 10B, the chargeable conduct must involve a deceptive device or contrivance used in connection with the purchase or sale of securities. In criminal prosecutions for insider trading, under rule 10b5, the government must prove that a person willfully violated the provision with culpable intent.

Although 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 the relationship of trust and confidence already owed by Members and their staff to the Congress, the U.S. 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 this term and the potential for unintended consequences.

These concerns were echoed by several members of the committee during our consideration of the bill. Therefore, following the markup, we continued to refine the bill while adhering to the fundamental 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 troubles all of us; that is, public officials using public office for private gain. We need, however, to make sure that in doing so, we do not inhibit our ability to gather information so we can serve our constituents to the best of our ability.

The proposed substitute offered by Senator Reid, Senator Brown, and Senator Lieberman reflects the work of our committee members as well as other bill sponsors. It 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 personal profit. This would cover insider trading matters, as well as land deals and other financial transactions where nonpublic information could be wrongly converted into a private gain.

Similar to the reported bill, the substitute includes a straightforward statement making clear that Members and their staff are not exempt from insider trading prohibitions arising from the securities laws.

In keeping with an amendment that Senator Paul successfully offered at our markup, the substitute applies the same framework--clarification of the prohibition against using nonpublic information for private profit and the affirmation of existing duty that we have--to the employees of the executive and judicial branches, as well as the legislative branch. Similar to the reported bill, the substitute includes earlier deadlines for financial reporting requirements and greater transparency for financial disclosure statements, as the chairman mentioned, by requiring that they be available online and in a searchable format.

I believe we need to reassure a skeptical public that we understand that elective office is a place for public service, not private gain; that it is an honor and a trust we have been given by the people we represent. Underscoring that important message is clearly the intent of this bill, and that is why I support it.

I urge my colleagues to vote yes to vote to invoke cloture on the motion to proceed.

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