I got to know Iowa law professor Greg Shill digitally back when I was on Twitter and met him at AALS20. He's a rising star. I really like his new article on Congressional insider trading, a topic longtime readers will recall I have dabbled in myself.
Shill, Gregory H., Congressional Securities Trading (April 7, 2020). U Iowa Legal Studies Research Paper No. 2020-11. Available at SSRN: https://ssrn.com/abstract=3570314 or http://dx.doi.org/10.2139/ssrn.3570314
In March 2020, it was revealed that several U.S. Senators had cashed in their stocks after receiving intelligence on COVID-19, sparking both outrage and renewed interest in congressional insider trading. The pandemic trades exposed gaps not only in current law, but in scholarship and leading reform proposals. Congressional securities trading (CST) generates unique challenges, such as the risk of policy distortion, as well as more prosaic ones, like the management of benign trading by insiders. The current framework—which centers fiduciary regulation of theft—is poorly matched to both types. Surprisingly, rules from a related context have been overlooked.
Drawing on SEC regulations that govern public company insiders, this Essay proposes a taxonomy of CST, situates the Senators’ conduct within it, and develops a novel, comprehensive prescription to manage it. Like Members of Congress, corporate insiders such as CEOs engage in securities trading despite possessing valuable inside information. The system designed to manage these trades provides a model. Specifically, Rule 10b5-1 plans (which disclose trades ex ante) and the short-swing profits rule of Section 16(b) (which disgorges illicit profits ex post) should be adapted to the congressional context. Both devices emphasize the management of legitimate trades rather than the punishment of criminal ones (which is already accomplished by other rules).
Rules like these would address policy distortion and unjust self-enrichment by Members of Congress. To reduce those risks further, lawmakers should also be restricted from owning any securities other than U.S. index funds and Treasuries. None of these rules would require new legislation or regulation; all can be adopted by chamber rule. A third risk—the unjust enrichment of third parties—is often conflated with the others, but presents distinct tradeoffs and should be taken up separately. SEC rules provide useful precedent here as well.
I'm on board with the idea of adopting both a Rule 10b5-1 plan system for Congress (tweaked so as to prevent the abuses we've seen in the current version of 10b5-1) and the 16(b) analogy.
I'm not convinced by the proposal to restrict lawmakers from owning any securities other than U.S. index funds and Treasuries. I would hate for Congress to be populated only by career politicians. I'd like to see businessmen and women have a fair shot at it. Should a member of Congress who spent twenty years building a business have to sell it to serve? Should the answer to that question turn on whether the business's legal structure involves securities?
And how about Congressional spouses? Should they be banned from owning a corporation? What if their business is running a huge fund?
With those caveats, however, this is a recommended read. it's short, clear, and thoughtful.
