Congressional Securities Trading

Indiana Law Journal Volume 96 Issue 1 Article 7 Winter 2021 Congressional Securities Trading Gregory Shill University of Iowa College of Law, Follow this and additional works at: https://www.repository.law.indiana.edu/ilj Part of the Law and Economics Commons, Law and Politics Commons, Legal Ethics and Professional Responsibility Commons, and the Securities Law Commons Recommended Citation Shill, Gregory (2021) "Congressional Securities Trading," Indiana Law Journal: Vol. 96 : Iss. 1 , Article 7. Available at: https://www.repository.law.indiana.edu/ilj/vol96/iss1/7 This Essay is brought to you for free and open access by the Law School Journals at Digital Repository @ Maurer Law. It has been accepted for inclusion in Indiana Law Journal by an authorized editor of Digital Repository @ Maurer Law. For more information, please contact . Congressional Securities Trading GREGORY H. SHILL* The tradingofstocks and bonds by Members of Congresspresents several risks that warrant public concern. One is the potentialfor policy distortion: lawmakers' personalinvestments may influence their official acts. Another is a special case of a general problem: that of insiders exploiting access to confidential informationfor personal gain. In each case, the current framework which is based on common law fiduciary principles is a poor fit. Surprisingly, rulesfrom a related context have been overlooked. Like lawmakers, public company insiders such as CEOsfrequently trade securities while in possession of confidential information. Those insiders' trades are governed by federal securitiesregulations. Borrowingfrom these regulations, this Essayproposes 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 illicitprofits ex post) should be adapted to the congressional context. To further minimize conflicts of interest, lawmakers should also be restrictedfrom owning any securities other than Treasuriesand 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 alternativereform 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 thirdpartiesby lawmakers is often conflated with policy distortion and lawmaker self-enrichment, but its regulationpresents distincttradeoffs and should be taken up separately. SEC rulesprovide guideposts here as well. * Associate Professor of Law, University of Iowa College of Law; J.D., Harvard Law School; B.A., Columbia University. The author thanks Stephen Bainbridge, Patrick Barry, Mihailis Diamantis, Benjamin Edwards, Jared Elias, Arpit Gupta, Andrew Jennings, Ann Lipton, Gillian Moldowan, Anya Prince, Sean Sullivan, Cristina Tilley, J.W. Verret, participants of the UC Hastings Workshop in Law, Business & Economics and the University of Iowa Junior Faculty Workshop for comments, and Samuel Gray and Jordan Romero-Villanueva for invaluable research assistance. Any errors are the author's alone. 314 INDIANA LAW JOURNAL [Vol. 96:313 INTRODUCTION....................................................................................................... 314 I. THE REGULATION OF CONGRESSIONAL SECURITIES TRADING ........................... 319 A. CASE STUDY: TRADING ON THE PANDEMIC ............................................. 321 B. TRADING DURING "NORMAL" TIMES....................................................... 325 C. THE CURRENT CONGRESSIONAL SECURITIES TRADING DISCLOSURE REGIME......................................................................................................... 325 II. DESIGN DEFECTS IN THE CURRENT SYSTEM...................................................... 326 A. INSTITUTIONAL SHORTCOMINGS.............................................................. 327 B. DOCTRINAL SHORTCOMINGS.................................................................... 328 III. A BELT-AND-SUSPENDERS MANAGEMENT SYSTEM FOR CONGRESSIONAL SECURITIES TRADING............................................................................................. 329 A. Ex ANTE: DISCLOSURE VIA A CONGRESSIONAL 10B5-1 PLAN................. 330 B. Ex POST: DISGORGEMENT VIA A CONGRESSIONAL § 16(B) SHORT-SWING PROFITS RULE............................................................................................... 332 C. CONTINUOUS MANAGEMENT: ONGOING RESTRICTIONS ON CONGRESSIONAL SECURITIES INVESTMENTS................................................ 333 D. ONE MODEL FOR REGULATING CONGRESSIONAL "TIPPING": REGULATION FAIR DISCLOSURE......................................................................................... 335 CONCLUSION.......................................................................................................... 336 INTRODUCTION In March 2020, as millions of Americans-a record number of them newly jobless'-locked themselves indoors to help fight an accelerating pandemic, they learned that two U.S. Senators had received a secret briefing about the coronavirus and had cashed in their investments in the nick of time. After receiving this briefing from high-level public health officials in January 2020, Republican Sens. Kelly Loeffler of Georgia and Richard Burr of North Carolina sold their shares, preserving their fortunes before COVID-19 crashed the market in March. 2 The first trade of 1. Economists characterized these months as the worst from an employment perspective since the Great Depression. See, e.g., Heather Long, Over 10 Million Americans Appliedfor Unemployment Benefits in March as Economy Collapsed, WASH. POST (Apr. 2, 2020), https://www.washingtonpost.com/business/2020/04/02/jobless-march-coronavims/ [https://perma.cc/WG23-K5MQ]. During the months of March and April 2020, 22.2 million Americans lost their jobs. News Release, Bureau of Labor Statistics, U.S. Dep't of Labor, The Employment Situation-June 2020, at 3 (July 2, 2020), https://www.bls.gov/news.release /archives/empsit_07022020.pdf [https://perma.cc/BK8J-ZTMQ]. 2. See Eric Lipton & Nicholas Fandos, Senator Richard Burr Sold a Fortune in Stocks as G.O.P. Played Down Coronavirus Threat, N.Y. TIMES (Mar. 19, 2020), https://www.nytimes.com/2020/03/19/us/politics/richard-burr-stocks-sold-coronavirus.html [https://perma.cc/XA4K-X55F]. Senator Burr has requested an investigation by the Senate Ethics Committee. John Wagner, Michelle Ye Hee Lee, Jon Swaine & Karoun Demirjian, Sen. Burr Asks Senate Ethics Committeefor Review (...truncated)