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Tuesday, March 28, 2006

How is this Legal? 

Via Rep. Slaughter writing on Kos, we find out she's introducing a bill to prevent Capitol Hill aides from day-trading based on inside information:
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.[Emphasis G&G]
Now, I am not am a securities lawyer, and I cannot believe that this is legal under current law. Is there some exemption to the insider trading law that exempts congressional aides? Now, time to sue my awesomely powerful lawyer skills (warning: Do Not Attempt Without J.D.): Rule 10b-5 (specifically, 10b5-1) under the Exchange Act covers insider trading. It reads in part:
a. General. The "manipulative and deceptive devices" prohibited by Section 10(b) of the Act and Rule 10b-5 thereunder include, among other things, the purchase or sale of a security of any issuer, on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is owed directly, indirectly, or derivatively, to the issuer of that security or the shareholders of that issuer, or to any other person who is the source of the material nonpublic information.

b. Definition of "on the basis of." Subject to the affirmative defenses in paragraph (c) of this section, a purchase or sale of a security of an issuer is "on the basis of" material nonpublic information about that security or issuer if the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale.
Now, I am not up on the caselaw, but I can't imagine Congressional aides are not found to owe a duty of trust to the issuer, at least indirectly. But maybe caselaw states otherwise. Rep. Slaughter say:
The bottom line is, at the very least, individuals with access to non-public government information should be held to the same standards as any other American. There is a gaping hole in the law and it needs to be closed. People should come work in Congress to serve their country, not to enrich themselves.
So, I guess we have to just assume that insider trading is, in fact, legal for these people? So my question is: What is this loophole and how does it work? Anyone?
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