Professor Stephen Bainbridge recently responded to a National Review Online article by my colleagues John Berlau and David Bier in which they argue that the STOCK Act (which recently passed both houses of Congress) would, if enacted, discourage congressional staffers from engaging in “whistleblowing and routine communication with outside groups.” Prof. Bainbridge responds by summarizing the state of insider trading laws vis-à-vis congressional staffers; he concludes that Berlau and Bier’s essay is a “load of codswallop,” a conclusion with which I disagree.
Many of Prof. Bainbridge’s criticisms are well-taken, to be sure, and I’d be remiss to attempt to defend all of Berlau’s arguments. However, Prof. Bainbridge overstates his case in contending that “[t]he STOCK Act doesn’t change the law applicable to Congressional staffers.” Although the STOCK Act would hardly ban whistle blowing, the law would substantially alter — or, at the very least, meaningfully clarify — the degree to which congressional staffers are subject to liability under the insider trading laws.
At issue is Section 4 of the STOCK Act. Here’s the relevant portion:
SEC. 4. PROHIBITION OF INSIDER TRADING.
(a) Affirmation of Nonexemption- Members of Congress and employees of Congress are not exempt from the insider trading prohibitions arising under the securities laws, including section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
(1) PURPOSE- The purpose of the amendment made by this subsection is to affirm a duty arising from a relationship of trust and confidence owed by each Member of Congress and each employee of Congress.
(2) AMENDMENT- Section 21A of the Securities Exchange Act of 1934 (15 U.S.C. 78u-1) is amended by adding at the end the following:
`(g) Duty of Members and Employees of Congress-
`(1) IN GENERAL- Subject to the rule of construction under section 10 of the STOCK Act and solely for purposes of the insider trading prohibitions arising under this Act, including section 10(b) and Rule 10b-5 thereunder, each Member of Congress or employee of Congress owes a duty arising from a relationship of trust and confidence to the Congress, the United States Government, and the citizens of the United States with respect to material, nonpublic information derived from such person’s position as a Member of Congress or employee of Congress or gained from the performance of such person’s official responsibilities.
The last paragraph explicitly imposes on congressional staffers (and on Members) a “duty arising from a relationship of trust and confidence . . . with respect to material, nonpublic information derived from such person’s position . . . [for purposes of the insider trading laws.]”
Prof. Bainbridge argues in his response to Berlau that this language is redundant as far as congressional staffers are concerned:
As I demonstrated . . . in my article Insider Trading Inside the Beltway, insider trading and tipping by Congressional staffers and executive branch employees is already illegal under current law. It was only Members of Congress who fell through the cracks of current law.
This oversimplifies the profound grey areas surrounding insider trading laws and obfuscates how the STOCK Act might substantially impact staffers’ willingness to disclose material nonpublic information. Although Prof. Bainbridge is correct in stating that insider trading laws already apply to congressional staffers, today, the outer reach of these laws is entirely unclear.
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