By Jim Toes
President and CEO, STA
Paul Atkins will soon testify before the Senate Banking Committee for his potential SEC Chair nomination, with no set date. If approved, a full Senate vote could confirm him within three weeks.
In addition to facing questions on his regulatory philosophy, enforcement priorities, and the SEC’s mandate to protect investors, ensure fair markets, and support capital formation, Atkins will face more specific inquiries. In this second of a multi-part series about the topics he will most likely face, we highlight the limitations that the SEC has in policing stock trading by government officials.
Stock Trading in Washington
In November 2011, 60 Minutes ran a segment that featured Peter Schweizer highlighting profitable stock trades made by members of Congress and federal employees with access to material, non-public information through their jobs. Public outrage led to the Stop Trading on Congressional Knowledge Act (STOCK Act) of 2012.
The STOCK Act mandates federal government officials to disclose their financial transactions within 45 days and prohibits them from using material non-public information for personal profit. The STOCK Act has successfully increased transparency in an area where none previously existed. Every day, we learn about the trades Congress members make through a steady drip of financial disclosures mandated by the STOCK Act shared via platforms like X, news outlets, and watchdog organizations that scrutinize trading reports for suspicious patterns.
Disclosure and Enforcement
There is, however, widespread skepticism about the efficacy of the STOCK Act in restoring public trust. While the STOCK Act applies to all federal officials, it is not equally administered. Many three-letter agencies like the FDA, FCC, IRS, and others have discretion on what is demanded among their staff, which leads to inconsistent levels of disclosure and transparency. Reporting standards by congressional members is more strictly enforced with information on trades more easily found in the public domain. This is why almost all the attention is on them.
Enforcement has been nonexistent due to significant challenges within the legal and constitutional framework. Investigating and proving intent, as well as a breached duty of trust, is nearly impossible and often leads to a political minefield. One major obstacle is the Speech and Debate Clause — a constitutional provision that grants members of Congress immunity from prosecution for actions or statements made in the course of their legislative duties — which hinders regulatory agencies’ investigations. Another barrier is the lack of direct authority over Congress; while the SEC can investigate individual members, it lacks explicit power to regulate or discipline them, leaving enforcement to the Department of Justice or congressional ethics committees.
The Model to Follow? The Financial Industry
These realities are especially infuriating to those of us in the financial industry. Our employers require us to forfeit most of our financial privacy. In our jobs, we face strict regulations on trading stocks in our personal accounts. We’re subject to pre-clearance requirements before executing trades, as well as holding period rules, which prevent quick buy-and-sell transactions to avoid short-term speculation. Additionally, we are restricted from trading stocks of companies where we have material non-public information, which for anyone on a trading desk includes every company under the sun. These policies are monitored with great proficiency and when violated individuals face severe consequences in the form of fines and lifetime bans from our industry. These regulations and industry standards greatly reduce the occurrence and perception of widespread insider trading.
Until the STOCK Act more closely resembles the insider trading rules of the financial industry, the questions about congressional and federal employee stock trading will continue to captivate and confound the American public and continue to raise questions about fairness and accountability in government. Increased transparency is great, but many still wonder why such behavior is allowed to persist, especially when the same actions land private citizens in legal jeopardy.
Restoring Faith in Government
SEC Chairs face significant limitations in policing insider trading by members of Congress, making it difficult to find meaningful courses of action within those constraints without additional authority from Congress. Until such reforms are enacted, public frustration is likely to persist, underscoring the urgent need for legislative action to close these loopholes and restore faith in governmental integrity.
Edition I: Private and Public Equity Markets: A Divergence in Growth