Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, March 28, 2021

Shill on Congressional Securities Trading

Gregory H. Shill has posted Congressional Securities Trading on SSRN with the following abstract:

The trading of stocks and bonds by Members of Congress presents several risks that warrant public concern. One is the potential for policy distortion: lawmakers’ personal investments may influence their official acts. Another is a special case of a general problem: that of insiders exploiting access to confidential information for personal gain. In each case, the current framework—which is based on common law fiduciary principles—is a poor fit. Surprisingly, rules from a related context have been overlooked.

Like lawmakers, public company insiders such as CEOs frequently trade securities while in possession of confidential information. Those insiders’ trades are governed by federal securities regulations. Borrowing from these regulations, this Essay proposes a taxonomy of congressional securities trading (CST) and develops a comprehensive prescription to manage it. Specifically, Rule 10b5–1 plans (which disclose trades ex ante) and the section 16(b) short-swing profits rule of the Exchange Act (which disgorges illicit profits ex post) should be adapted to the congressional context. To further minimize conflicts of interest, lawmakers should also be restricted from owning any securities other than Treasuries and passive U.S. index funds. The Essay uses recent high-profile trading scandals to illustrate why the new bright-line rules proposed here are better suited to this problem than both the current system of regulating CST, which relies on common law standards, and prominent alternative reform proposals.

This Essay’s proposed reforms are purposefully pragmatic. They draw on proven successes and do not require new legislation or regulation; all can be adopted by chamber rule. The changes, which would be very consequential if adopted, are also narrow. A risk they do not address—the enrichment of third parties by lawmakers—is often conflated with policy distortion and lawmaker self-enrichment, but its regulation presents distinct tradeoffs and should be taken up separately. SEC rules provide guideposts here as well.

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