Industry groups studying insider trading issue

Industry groups are looking at getting behind proposals that would prohibit members of Congress and others involved in the legislative process from trading stocks or commodities based on nonpublic information related to their work in government.

The issue, which has come up in previous years but never gathered much support, is gaining traction since a “60 Minutes” segment Nov. 13 pointed out that Congress seems to be allowing its members to subvert insider trading rules.

“I am appalled that our own politicians can place stock trades and inform hedge fund managers on nonpublic information, while I cannot,” said Chad Karl, a financial adviser and a principal of an eponymous firm who reached out to advisory groups the day after the segment was broadcast, asking them to support legislation to stop such trading.

The Financial Planning Association and the Financial Services Institute Inc. are looking at whether to lend support to any of several proposals aimed at tightening rules that could allow someone with access to Capitol Hill proceedings to benefit unfairly by trading securities for themselves or selling information to professional investors.

According to the “60 Minutes” story, members of Congress use nonpublic information to make money in the markets, but the trades aren’t illegal, as they would be in the corporate world. CBS estimates that about 14 million people tune in to the Sunday night news program.

On Nov. 17, the chairman of the House Financial Services Committee, Rep. Spencer Baucus, R-Ala., whose trading was mentioned in the story along with that of House Minority Leader Rep. Nancy Pelosi, D-Calif., set a hearing for Dec. 6.

“Existing law clearly prohibits insider trading by members of Congress,” Mr. Bachus said in a statement. “However, the American public deserves for there to be no question or equivocation concerning members of Congress or any citizen being exempted from laws prohibiting insider trading.”

A bill that Rep. Tim Walz, a Democrat from Minnesota, introduced in March addressing this issue went from having nine co-sponsors before the “60 Minutes” story aired, to more than 90 now. The Stop Trading on Congressional Knowledge, or STOCK, Act would ban trading by members or employees of Congress based on nonpublic information and require them to report all securities transactions of $1,000 or more.

Two measures with similar goals also have been introduced in the Senate since the segment aired.

The reaction to the segment was one of disappointment, said Chris Paulitz, a spokes-man for the FSI, which has 124 broker-dealer member firms and represents more than 30,000 individual financial advisers.

“We share the concerns of all Americans when it comes to fairness and transparency in investing, no matter who the investor is,” he said. “We are currently studying a number of proposals and will decide which one or ones will best serve our members and hardworking American investors.”

Dan Barry, the FPA’s government relations managing director, said in a statement that his group is reviewing Mr. Walz’s bill.

“Investors need to have faith in the integrity of our markets,” Mr. Barry said. “If there are loopholes that allow those with access to nonpublic information to unfairly benefit, it makes sense to find these loopholes and close them.”

Critics of such a measure, however, say that existing insider trading laws apply to members of Congress. Some doubt that the practices reported by “60 Minutes” are widespread.

“This is not happening on the rampant basis some feel it is occurring,” said Robert Walker, a lawyer with Wiley Rein LLP and former chief counsel for the House and Senate ethics committees.

SEC CAN PURSUE CASES

The Securities and Exchange Commission already can pursue cases against members when trades are based on material nonpublic information, he said.

There is no “blanket duty of confidentiality” that applies to Congress as it does to corporate insiders, but tightening the law could have unintended consequences, Mr. Walker said.

Lawmaking requires a flow of information, and a blanket confidentiality rule could have a chilling effect, he said.

Perhaps confidentiality could be worked out by each committee, Mr. Walker said.

During the “60 Minutes” segment, Hoover Institution research fellow Peter Schweizer said that Mr. Bachus bought stock options in September 2008 after being briefed by then-Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben S. Bernanke.

The TV show also reported that Ms. Pelosi bought into a Visa Inc. stock offering in 2008 while she was helping to block a bill from getting to a vote that would have toughened credit card regulations.

Rep. Barney Frank of Massachusetts, ranking Democrat on the Financial Services Committee, acknowledged in a letter to Mr. Bachus three days after the segment aired that he “should have” addressed this issue when he was head of the committee.

“I did not pay sufficient attention to this when it was first discussed with me, in part because I did not see this as a problem that was of any great substance,” Mr. Frank wrote. “I am still not sure that this is widespread, but given the attention that we have seen on this matter now, and given the importance of those whom we represent being fully assured that we are behaving appropriately, I think that we should now take up this legislation and, after suitable study, enact some version of it.”

Financial adviser Tom Hoffman of KAF Financial Advisors LLC said that he hadn’t heard about the situation but would support a measure to prevent insider trading by members of Congress.

“Every member of Congress should have all of their assets placed in a “blind trust,’ even if it is in a retirement account,” he wrote in an e-mail. “That way, they are prevented from knowing specifically which funds, stocks or bonds they actually hold and can influence.”

Email Liz Skinner at [email protected]

Related Topics: Financial Planning Association (FPA), Financial Services Institute Inc. (FSI)