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H.R. 1148, THE STOP TRADING ON 

CONGRESSIONAL KNOWLEDGE ACT 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

DECEMBER 6, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–90 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

December 6, 2011 ............................................................................................. 1 

Appendix: 

December 6, 2011 ............................................................................................. 67 

WITNESSES 

TUESDAY, DECEMBER 6, 2011 

Jones, Hon. Walter B., a Representative in Congress from the State of North 

Carolina ................................................................................................................ 7 

Khuzami, Robert, Director, Division of Enforcement, U.S. Securities and Exchange Commission (SEC) ................................................................................... 23 

Maskell, Jack, Legislative Attorney, American Law Division, Congressional 

Research Service (CRS) ....................................................................................... 50 

Nagy, Donna M., C. Ben Dutton Professor of Law, Indiana University Maurer 

School of Law ........................................................................................................ 52 

Slaughter, Hon. Louise M., a Representative in Congress from the State 

of New York .......................................................................................................... 8 

Walker, Robert L., Of Counsel, Wiley Rein LLP ................................................... 53 

Walz, Hon. Timothy J., a Representative in Congress from the State of 

Minnesota ............................................................................................................. 10 

APPENDIX 

Prepared statements: 

Donnelly, Hon. Joe ........................................................................................... 68 

Fitzpatrick, Hon. Michael ................................................................................ 69 

Slaughter, Hon. Louise M. ............................................................................... 70 

Walz, Hon. Timothy J. ..................................................................................... 73 

Khuzami, Robert ............................................................................................... 75 

Maskell, Jack .................................................................................................... 83 

Nagy, Donna M. ................................................................................................ 86 

Walker, Robert L. ............................................................................................. 99 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Khuzami, Robert:: 

Additional information provided for the record in response to questions 

posed during the hearing by Representatives Canseco and Pearce .......... 106 

(1) 

H.R. 1148, THE STOP TRADING ON 

CONGRESSIONAL KNOWLEDGE ACT 

Tuesday, December 6, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the committee] presiding. 

Members present: Representatives Bachus, Hensarling, Royce, 

Manzullo, Jones, Biggert, Capito, Garrett, Neugebauer, Pearce, 

Posey, Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Hayworth, 

Renacci, Hurt, Dold, Schweikert, Grimm, Canseco, Stivers; Frank, 

Waters, Maloney, Ackerman, Sherman, McCarthy of New York, 

Baca, Lynch, Miller of North Carolina, Scott, Green, Cleaver, 

Moore, Ellison, Perlmutter, Donnelly, and Carney. 

Chairman BACHUS. The hearing will come to order. The Committee on Financial Services has been convened. 

Today, we will examine an issue that has received a significant 

amount of attention in recent weeks. The American people deserve 

an answer to questions that have been raised about whether insider trading laws apply to Members of Congress and their staffs. 

They also have an absolute right to demand that the people they 

elect to represent them in Congress conduct themselves according 

to the highest ethical standards and do not seek to profit from their 

positions. 

During this hearing, we will address this concern. We will seek 

to learn whether a Member of Congress or any citizen is exempt 

from the law, and we will discuss H.R. 1148, the Stop Trading on 

Congressional Knowledge Act (the STOCK Act). Accordingly, we 

will hear from several witnesses today, including: the sponsors of 

H.R. 1148, our colleagues; the Director of Enforcement at the Securities and Exchange Commission; and other experts on the subject. 

I thank all the witnesses for appearing today and I look forward 

to hearing their testimony. I especially want to thank Representatives Slaughter, Walz, and Jones for joining us to talk about the 

bill they sponsored. 

I will now recognize Mrs. Maloney for 1 minute for an opening 

statement. 

Mrs. MALONEY. Thank you. 

I am very pleased to welcome our witnesses today: Mr. Jones; 

Ms. Slaughter; and Mr. Walz. And I look forward to your testimony. 

2 

I am particularly proud of my New York colleague, Louise 

Slaughter, who was the first person to introduce this bill, when she 

discovered a staffer was making trades from his office based on inside information. And I am proud to be a sponsor of H.R. 1148, as 

I was in the last Congress. I am pleased to see that we are moving 

with great speed to address this issue and hopefully pass it into 

law. 

Elected officials really should be like Caesar’s wife in avoiding 

the appearance of impropriety. The potential for trading on inside 

information within these halls is undeniable, and we need to move 

to address it. 

While the SEC has said recently that existing insider trading 

laws apply to Members, I can’t remember the last prosecution 

under any existing laws. In addition, the House Ethics Committee 

guidance has been that House rules prohibit Members and their 

staff from entering into personal transactions that trade on confidential information, and we need to ban this. It remains clear to 

me that the need to expressly prohibit this activity in statute cannot be overstated. This bill is needed, and action on it is long overdue. 

I have a series of editorials from across the country that I would 

like to place in the record, all of which support this bill and say 

we should have passed it yesterday. 

I thank my colleagues, and I look forward to your testimony. 

I yield back. Thank you. 

Chairman BACHUS. Thank you. 

Mr. Hensarling for 11⁄2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman, for calling this 

hearing. And I thank my colleagues on the panel for their leadership in this area. 

Before we debate any given policy, I think it is critical that we 

first get right the principle, and I would suggest that two principles 

apply here: first, with the exception of statutory compensation, the 

American people have to have confidence that Members of Congress will not profit from their office; and second, with the exception of the Speech or Debate Clause enshrined within our Constitution, our constituents deserve to know that Members of Congress 

are going to be living under the same laws that apply to them, and 

people need to know that these principles are inviolate. 

Now, it is clear that ‘‘60 Minutes’’ still enjoys pretty good ratings, 

since I heard about this issue over the weekend on several occasions, but our constituents also deserve the facts. Let me quote 

from one of our witnesses from the Congressional Research Service: 

‘‘I think it is now fairly clear to everyone following this issue that 

Congress did not exempt itself from insider trading laws.’’ I also 

note that under our House ethics rules, Members are expressly prohibited from ‘‘using their official positions for personal gain.’’ 

The subject matter of today’s hearing is very, very important, but 

before we prescribe a remedy, let’s ensure we have identified the 

right problem. The challenge may be lax enforcement. The problem 

may be inadequate disclosure. It may lie in vague statutory definitions. It does not appear to lie with a Congressional exemption. But 

wherever it lies, the American people rightfully demand accountability, and we owe it to them to provide it. 

3 

I yield back the balance of my time. 

Chairman BACHUS. I thank the gentleman. 

Mr. Scott for 3 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

I want to just commend our fellow Members of Congress who 

have taken the bold leadership on this legislation: Mr. Jones; Ms. 

Slaughter; and Mr. Walz. You are certainly to be commended. 

And I want to thank you, Mr. Chairman, for holding this hearing 

today on the Stop Trading on Congressional Knowledge Act. 

It is very important that we honor the trust that the American 

people placed in Members of Congress, and the STOCK Act would 

bar Members of Congress and Federal employees from profiting 

from information that is not publicly available that they obtain by 

means of their elected positions. The STOCK Act would also direct 

the Commodity Futures Trading Commission to prohibit someone 

from buying or selling a commodity for future delivery or swap 

while in possession of material information that is not public—very 

important and should be the case. 

Currently, as a matter of fact, insider trading is not forbidden by 

law. However, there have been reports that Members of Congress 

and their staffs have been engaging in day trading of securities, 

and I find this very, very troubling. I believe that my House colleagues and I, as well as staff, should be subject to the very same 

rules as those that are not directly associated with Congress. 

Although there seems to be a consensus on this fact, some have 

questioned the legislation’s narrow scope. I think that this deserves 

a particular mention, and that is, namely, its application to only 

material that is nonpublic information relating to pending legislation and the omission of tipping by Congress or employees of the 

Executive Branch. 

So I will be very interested in finding out today from our witnesses how our witnesses view the legislation under discussion, 

and then what should be done to increase this narrow focus, the 

focus of it, the effectiveness of it, if we feel it is necessary. 

So I look forward to this hearing. Thank you very much, Mr. 

Chairman. And, again, the American people are depending upon us 

to do the right thing and play by the same rules that all the other 

American people are playing by when it comes to trading on the 

exchanges. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mr. Royce? 

Mr. ROYCE. Thank you, Mr. Chairman. 

I want to see us strengthen the law as it applies to insider trading as it can be practiced by Members of Congress. 

I think that many people look at the government today and see 

that it has entered into every facet of the economy. We have massive Federal spending now. We have taxation policy that is not uniform. We have the government intervening in the economy on behalf of some firms and not others. And with that increased size and 

increased influence, there is a heightened sense that political pull 

and insider knowledge are enriching a select few. It is that perception of crony capitalism which threatens our free enterprise system 

and our republic. 

4 

And it is that perception that we have to address here in Congress. Washington must be held to a higher standard. And whether 

this is achieved through the STOCK Act or Mr. Duffy’s legislation, 

of which I am a cosponsor, I believe that, at the end of the day, 

now is the time to act. After this hearing, we should mark up legislation. 

And I look forward to hearing the witnesses, their testimony here 

this morning. 

Thank you. I yield back, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mr. Frank? 

Mr. FRANK. Thank you, Mr. Chairman. 

And I want to express my admiration for the efforts of my colleagues. 

I will now acknowledge that during the 4 years I chaired the 

committee, it was during that period that I think this first surfaced, and I did not see it, apparently incorrectly, as an issue. It, 

frankly, seemed to me inconceivable that Members of Congress 

would be doing that. But I now accept the fact that it has been 

happening, and it is both a matter of right and a matter of what 

we owe the country to correct it. So I thank my colleagues for persevering. 

I still think the best thing for Members of Congress to do is to 

be very cautious. To some extent, there are going to be elements 

of knowledge we have that are going to be hard to capture under 

the law. Our prediction about how a vote may go, if you don’t have 

all the commitments signed in your pocket, probably wouldn’t be 

inside information, but it is something that ought not to be there. 

I will say, this had occurred to me some time ago as a potential 

issue, and I think I have resolved it the best way I can. Almost all 

of my investments are Massachusetts municipal bonds, which also 

have done pretty well lately because the rating agencies underestimate the commitment of the States. And, in fact, if anything, I 

have acted against interest because I have been urging the rating 

agencies to reduce the risk component that they impute to municipal bonds, which would make the interest rate go down. 

I acknowledge the fact that I am getting an unduly high return 

because of the nonexistent possibility that they are going to default. But I also thought that owning the bonds of the State I am 

enjoined to represent would minimize any argument of conflict of 

interest. To the extent that I oppose anything that would undermine the fiscal soundness of the State I represent, I would assume 

that would be considered to be okay. 

But to go back, there is an area of ambiguity. And no matter 

what we do, I think it is important that we pass this legislation, 

and I thank my colleagues for doing it. I must say, I am skeptical 

of the blind trust. I gather we got a last-minute entry into this 

derby to talk about mandatory blind trusts. I think there are problems with trusts being more or less blind and supervising who the 

trustee is. I believe that the approach my colleagues are taking is 

a very thoughtful one, and I will be working to sharpen the legislation. I understand there are obviously some ambiguities. 

Let me just say, for those who might argue it is not necessary, 

I will rely on my most important legislative principle: Redundancy 

5 

is clearly preferable to ambiguity when you are passing laws, especially since we know that some of those who are telling us that this 

is unnecessary, if hired to represent one of us, would immediately 

argue that it was too ambiguous. So let’s clear this up. 

Thank you. 

Chairman BACHUS. Thank you. 

Mr. Duffy for 2 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. 

I think there is a cloud over Members of Congress and the trades 

that they make. Whether that is just perception or whether there 

is really wrongdoing I don’t know. But I would commend Ms. 

Slaughter and Mr. Walz for introducing this bill, the STOCK Act. 

I think it is a first step in the right direction. 

But I think we have to go a step further. We can’t take a half 

step here. I think we should take the full step and leave no gray 

area with what Members of the House, Members of the Senate, the 

President, or the Judicial Branch do in regard to their trades. And 

that is why I have introduced H.R. 3550, the RESTRICT Act. 

What we do there is we mandate that each Member have a blind 

trust, and if they opt out of the blind trust, they can opt for disclosure of trades within 3 business days of that trade. And I think if 

we do that, it will shed light on any trades that go on with Members or senior staff. And if there was a meeting with a high-ranking business official and 3 days later or 2 days later a Member is 

trading, we will be able to see that. I think that kind of transparency, the immediate transparency, is imperative. 

If we are going to introduce legislation, this can actually get the 

job done. My fear is that if we only take half a step, there will still 

be too much gray out there for members of the public to see that 

Members could skirt around the new rule. I think my bill goes the 

distance and makes sure that there will be no doubt within the 

minds of the American people that Members of Congress, the Executive Branch, or the Judiciary are not going to use insider information to trade. 

And, with that, I would yield back. 

Chairman BACHUS. All right. Thank you, Mr. Duffy. 

Mr. Lynch for 1 minute. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I want to thank our distinguished panel and sponsors of this legislation for coming forward. 

I certainly think that recent revelations have created doubt in 

the integrity of the whole process here, whether or not Members 

are capitalizing on inside information that they get through the 

legislative process. So I certainly—I am a cosponsor of Mr. Walz’s 

bill. I think it needs to be addressed, and I think we need to do 

it quickly and in a fashion that I think restores America’s confidence that we are operating aboveboard here and not taking 

undue advantage of our positions. 

So, with that, I want to congratulate the sponsors of this bill and 

Mr. Jones, Ms. Slaughter as well. Thank you very much. 

I yield back the balance of my time. 

Chairman BACHUS. Thank you, Mr. Lynch. 

If there are no further Members—Mr. Canseco? 

Mr. CANSECO. Thank you, Mr. Chairman. 

6 

While today’s hearing focuses on a specific piece of legislation, I 

feel the greater discussion revolves around the public’s perception 

of Washington and the current lack of trust that voters across the 

country have in their elected leaders. I think it is pretty clear that 

if a Member of Congress trades off of material, nonpublic information, as it is defined for private citizens who trade off of such information, there should be penalties and there should be accountability. 

But we also must keep in mind that innuendo and bad research 

do not make for justifiable allegations against Members of Congress. To this end, I feel that the STOCK Act offers a completely 

unworkable solution to these allegations. The bill would likely lead 

to political witch hunts and, judging by language in Section 3, 

could disallow a Member of Congress from ever getting in front of 

a camera again to discuss pending legislation. This would have the 

perverse effect of decreasing transparency and further eroding the 

public’s trust in Washington. 

I feel there are better ways to address this issue, and that is why 

I have introduced House Resolution 480, which would amend 

House rules and require that every Member of Congress either 

place their assets in a blind trust or disclose all of their trading activity on a monthly basis for the public to see. The resolution bars 

insider trading by Members of Congress and grants enforcement 

power to the House Committee on Ethics, thereby avoiding the 

Constitutional problem of having an Executive Branch agency investigating the Legislative Branch. I feel this would be an important step toward Washington regaining some of the trust of the 

American people. 

With this in mind, I look forward to discussing these very important issues at today’s hearing, and I yield back the balance of my 

time. 

Chairman BACHUS. Mr. Miller? 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

In the 1960s, when Americans were asked in polls if they believed that government officials, their government officials, could 

be counted on to do the right thing or at least try to do the right 

thing, they overwhelmingly said ‘‘yes.’’ They might not agree with 

their decisions, but they didn’t question the motives. They thought 

that the people who held responsible positions in their democracy 

came from the people and wanted to do the right thing by their 

country. They were patriotic Americans, just like other Americans. 

That trust is now gone. In polling now, overwhelmingly, Americans do not think that of people who hold positions of government. 

That is toxic for our democracy. We cannot survive this democracy 

unless there is more confidence in our elected officials than there 

is now. 

Part of that has been the result of the conscious effort to discredit government, to discredit everything that government does. 

Part of that is the result of the financial crisis and what happened. 

Most Americans think that everything done in the financial crisis 

was done to help specific institutions and specific people, not to 

help the economy. And there is too much truth to that. 

Part of that is the result of another story on ‘‘60 Minutes,’’ although it has been widely reported, on the failure to prosecute in 

7 

the face of what appears to be clear evidence of criminal misconduct. Certainly, in a democracy, no one can be too big to prosecute. And then, finally, this: There has to be an understanding 

that people have to believe, and it has to be true that people in responsible positions are not using their positions to enrich themselves. 

We have to restore the trust of the American people in their democracy, and the first step to restore their trust is to be trustworthy. 

I yield back the time I don’t have. 

Chairman BACHUS. Thank you, Mr. Miller. 

We have completed opening statements. 

We have three of our colleagues here to testify: Representative 

Walter Jones; Representative Louise Slaughter; and Representative 

Tim Walz. And you are free to make an opening statement at this 

time. 

Walter, we will start with you. 

STATEMENT OF THE HONORABLE WALTER B. JONES, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH 

CAROLINA 

Mr. JONES. Thank you, Mr. Chairman. 

We are living in a time when the American people do not trust 

Congress. Since the bailout of Wall Street, the Bernie Madoff scandal, and other indiscretions, the American people have been frustrated and disappointed in their elected officials concerning financial issues. 

‘‘60 Minutes’’ recently escalated speculation and raised more 

questions about those in power not playing by the same rules as 

the American people. According to many experts, those at the top 

of the financial world manipulated information to the detriment of 

the American taxpayer and investors, big and small. 

As Members of Congress, it is our job to follow a strong honor 

code and to hold those accountable who are profiting from positions 

of power. The American people should never, ever have the slightest perception that we are using our office to pad our own pockets. 

That is why I believe in and I support the STOCK Act. It is a proper first step in maintaining the integrity of Congress. 

The introduction of H.R. 1148 states its purpose: ‘‘To prohibit 

commodities and securities trading based on nonpublic information 

relating to Congress, to require additional reporting by Members 

and employees of Congress of securities transactions, and for other 

purposes.’’ While there may be some technicalities to this legislation that need to be addressed, I believe that H.R. 1148 is a great 

starting point for this Congress. 

Mr. Chairman, too many people today think that financial markets are a rigged casino in which regular investors cannot win and 

where insiders virtually cannot lose. And why shouldn’t they think 

that, Mr. Chairman? Here are three headlines from the last 2 

weeks. Bloomberg: ‘‘Secret Fed Loans Gave Banks $13 Billion.’’ The 

second Bloomberg report: ‘‘How Henry Paulson Gave Hedge Funds 

Advance Word of 2008 Fannie Mae Rescue.’’ Mr. Chairman, this is 

why the American people are so disenchanted with Congress. And 

8 

the third, the Economic Times: ‘‘MF Global Proves Enron-Era Accounting Lives On.’’ 

Three years after the financial crisis, the too-big-to-fail banks are 

even bigger, phony accounting still is being used, and back-door 

bailouts of favorite financial institutions still continue. Just yesterday, I was asked by a constituent why the banks that received a 

bailout continue to give millions of dollars in bonuses to their employees. It simply makes no sense. 

That is why H.R. 1148, the STOCK Act, is so important. This 

legislation proves to the American people that if there is a problem, 

those of us in Congress will fix it. It is of the utmost importance 

that Members of Congress maintain the integrity of this institution. We in Congress are given a privilege and an opportunity to 

serve the American people. They deserve to trust those whom they 

elect to represent them in Washington. 

And, Mr. Chairman, I hope this committee will use this bill, the 

STOCK Act, as the vehicle to expand and build the American people’s confidence in this institution, confidence which they have totally lost. 

With that, Mr. Chairman, I am pleased and honored to be with 

my colleagues Tim Walz and Louise Slaughter. Ms. Slaughter has 

been fighting for this for the last 3 or 4 years. Mr. Walz has picked 

up the ball and is running. Let’s join him and let’s score a touchdown for the American people. 

Thank you, Mr. Chairman. I yield back. 

Chairman BACHUS. Thank you, Mr. Jones. 

Representative Slaughter? 

STATEMENT OF THE HONORABLE LOUISE M. SLAUGHTER, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW 

YORK 

Ms. SLAUGHTER. Good morning, everybody. Thank you, Chairman Bachus, and Ranking Member Frank, for holding this hearing 

this morning. 

To Ranking Member Frank, I want to thank you for acknowledging the need for this legislation. Your leadership will certainly 

be missed when you retire at the end of this term, but I look forward to working with you and Chairman Bachus to get this bill 

passed, and another historic financial reform will be added to this 

committee’s legacy. 

I thank the committee, as I said, for taking this up. 

The STOCK Act has been around, as you know, for 5 years. It 

never gained more than 14 cosponsors, never had a Senate sponsor 

or anybody to notice. Brian Baird and I introduced it after increasing reports that Members of Congress and staff were abusing their 

official status for private gain, and the rise of national political intelligence firms—which, to me, is one of the most important parts 

of this bill that never gets mentioned, but I want to talk about that 

a little more later—using Congressional nonpublic information to 

gain an advantage in the stock market. In addition, the academic 

field had developed a study on whether Members of Congress performed better than average in the stock market in the 1980s and 

the 1990s. 

9 

The bill was reintroduced in the 110th and again in the 111th 

Congresses. I testified in 2009 before this committee’s Oversight 

and Investigations Subcommittee at a hearing on this topic, but the 

bill never advanced at all. 

The bill is supported by a broad base of groups: Public Citizen; 

Citizens for Responsibility and Ethics in Washington; Common 

Cause; Democracy 21; the League of Women Voters; the Project on 

Government Oversight; the Sunlight Foundation; and U.S. PIRG. 

Leading up to the ‘‘60 Minutes’’ report, we only had, as I said, 

nine cosponsors—a typical amount, although we did have Walter 

Jones, for which I am extremely grateful, and I thank him for the 

support that he has given us in this legislation. We now have 171 

cosponsors and counting. Every day brings four or five more. It is 

truly a bipartisan bill. There are not one but two Senate counterparts, as you know, and the Senate has already held their hearing. 

Now, to make up for lost time—the Senate held the hearing and 

committed to the markup of this bill before the end of the year— 

I encourage the members of this committee to work in concert with 

the other five House committees of jurisdiction. 

Congressional approval, as we all know, is at 6 percent. And it 

is hinted at that those are only 6 percent of the people who know 

and love us personally. Thousands of people across the country 

have been peacefully protesting to break the intimate relationship 

between Wall Street and Washington. 

Enacting the STOCK Act will prove that Congress is capable of 

reforming its internal operations and will help to ensure that Members are held to at least the same standards as everyone else when 

it comes to insider trading. Failing to pass it, I am afraid, will send 

a clear signal to the American people that we have no interest in 

gaining their approval or in reforming a broken system. 

Members of Congress, Congressional staff, and Federal employees have the unique opportunity and means to make profound 

changes in our economy and the country and the world, but that 

comes with a great obligation that we do not betray our principles 

for private gain. 

I sincerely do believe that a vast number of Members of Congress 

and their staffs serve the best interests only of their constituents 

and the public, and they do not come here, obviously, to line their 

pockets. This bill is not about individuals; it is about reforming the 

institution as a whole. By explicitly prohibiting the improper use 

of sensitive information, we will be taking an enormous step in providing transparency, while preserving and strengthening the public 

faith in our government and the democratic process. 

I understand some people don’t believe this is necessary. They 

might argue that, in theory, the current ethics rules and the SEC 

rules could be applied to cases of trading using Congressional material and nonpublic information. However, in practice, we have 

never seen these rules applied to Congress. This has made the public rightly question the adequacy of the rules that we have today. 

And that is why the STOCK Act has a multi-pronged effort to address Congressional insider trading and remove any current ambiguity about the issue. 

The STOCK Act requires the SEC, the Commodity Futures Trading Commission, and House Ethics to explicitly ban such trading 

10 

and provides two new enforcement rules. The bill requires timely 

financial disclosures, similar to what is required of Wall Street insiders. And I cannot emphasize this piece enough: It requires the 

registration of political intelligence firms, similar to what is required by lobbyists. 

And as the author of this bill, I have sincerely regretted that this 

part of this legislation has been totally ignored. Let me tell you 

something about the importance of this bill. This is a whole group 

of people who survive on political intelligence. 

Now, throughout this current economic crisis and, indeed, since 

their creation in the 1970s, the so-called political intelligence firms 

have operated quietly in the background without any regulation or 

oversight. Recently, the size of this industry has grown considerably, bringing in an estimated $100 million a year. These firms are 

not influencing Congress but, rather, using Congressional information to influence their clients’ stock portfolios. 

For example, let me read to you the Web page for one such 

group—this is terribly important to me, so if you will give us a second on this one, and open up your ears: ‘‘Providing this service for 

clients who do not want their interest in an issue publicly known 

is an activity that does not need to be reported under the Lobbying 

Disclosure Act, thus providing an additional layer of confidentiality 

for our clients.’’ 

How can we possibly allow that to continue? When we pass the 

STOCK Act, we will be requiring all such lobbying firms to sign up 

with both the House and the Senate, and for the first time since 

the 1970s, we will have some idea of what it is that they are up 

to. Now, the STOCK Act does not ban political intelligence firms 

but just requires that they be as transparent as the rest of the lobbying industry. 

As I said, I deeply regret that part of the bill has gotten so little 

attention because, to me, it is one of the major, if not the major, 

part of it that we need to pass. 

So, again, Chairman Bachus and Ranking Member Frank, I 

thank you for holding this hearing. It is a very important step forward. I look forward to working with you and all the people of this 

wonderful committee and any other interested parties to enact this 

critical legislation in a timely fashion. 

Thank you for your time. 

[The prepared statement of Representative Slaughter can be 

found on page 70 of the appendix.] 

Chairman BACHUS. Thank you. 

Representative Walz? 

STATEMENT OF THE HONORABLE TIMOTHY J. WALZ, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA 

Mr. WALZ. Thank you, Chairman Bachus, Ranking Member 

Frank, and members of the committee for having us here on this 

important issue. A special thank you to Congresswoman Slaughter 

and Congressman Jones for being so engaged in this. 

Prior to coming to Congress, I was a high school social studies 

teacher and an enlisted soldier in the Army National Guard. And 

I came to Congress for the same reason all of you did: to make a 

11 

difference, to try and serve our country, and to try and make 

things better, coming and talking about the issues that the American public was frustrated about—not just policy, but how the system worked. And the rampant cynicism that all of us recognize, the 

idea of a 9 percent approval rating, that is a disgrace to not only 

all of us, it is a disgrace to those who have worked so hard to build 

the democracy. And it is our responsibility to restore faith. 

So as I got here and started talking about things like disclosing 

earmarks online, and that became a common practice, those types 

of things, I was approached by Louise Slaughter and Brian Baird, 

and they said, ‘‘We have something you might be interested in.’’ 

And they started explaining to me about the idea of trading on 

knowledge. 

I think, like most Americans, I could not believe it. It seemed 

like it would be impossible there would be a loophole there. It 

seemed impossible that anyone would do it. But the facts and the 

studies that were done seem to show that, lo and behold, Members 

of Congress outperformed the stock market by about 6 to 10 percent on a regular basis. Now, that may be due to the infinite wisdom that resides in these halls or it could be something different: 

luck; smart, savvy trading; or the possibility that there was insider 

knowledge. I don’t know. 

My point on this was, the idea of serving in Congress is the single greatest honor that your neighbors can bestow upon you. And 

our responsibility back to them is not to have them agree with 

every political decision we make, but to have them believe we are 

doing it in their best interest, everything we do. We could be 100 

percent wrong in their opinion, but if they believe we are doing it 

for the right reasons and the system is not gamed, the faith in the 

democracy is solid. 

So I got on to this bill and spent countless hours with the SEC, 

with professors of law, with Louise, and with our esteemed retired 

colleague, Brian Baird, talking about ways to make this work. 

I do it with no pleasure, because this is about restoring faith. It 

is not about individuals, it is not about singling out. I don’t know 

if it has ever been done before, but the perception that it was being 

done is strong. Go home to the grocery store, all of you who were 

at Thanksgiving, tell me how that conversation went at the dinner 

table, and I will tell you that they are talking about this because 

their faith in the system is not there. 

So I think trying to restore this and trying to get it right, any 

suggestions are welcome, but I agree with my colleague, Ms. 

Slaughter, that we need to move something. And I can tell you, if 

you think a 9 percent approval rating is bad, don’t pass anything 

on this. Drag it out and don’t do anything, and watch what happens. And that is not about political reelections, it is not about ideology; it is about the American people becoming so cynical in the 

greatest system of governance in the world that it is putting things 

at risk. 

So, with that, I encourage you to take a look at this STOCK Act. 

I will be the first to tell you that this is the bare minimum. But 

for those of who you say, take another step, I am with you, I agree 

on this. The problem was, the first step took 6 years to take that 

12 

half-step, with seven cosponsors. We need to get something done 

now. We need a mechanism that does it. 

And I agree with Louise, the problem of the tippers and the 

tippees has to be addressed in this also. For those who say this is 

already there, that may hold true in a theoretical argument, but 

in the American public’s perception, it is not there. Something 

must be done. If it is transparency, I believe the STOCK Act is the 

most thoughtful, and the unintended consequences have been 

looked at in a greater nature. 

And I will give you just a quote here. This is from former SEC 

Chairman Levitt: ‘‘Our markets are a success precisely because 

they enjoy the world’s highest level of confidence. Investors put 

their capital at work and their fortunes at risk because they trust 

that the marketplace is honest. They know that our securities laws 

require free, fair, and open transactions.’’ I would substitute this 

for the American public’s. Our market is a success, our democracy 

is a success because people believe they are open, fair, and transparent. And that is what we are asking to do. 

I can tell you that newspapers in my district—the Mankato Free 

Press said, this is a no-brainer. The Minneapolis Star Tribune: 

‘‘This bill is smart politics and policy and is a dose of what is needed to start reversing voters’ rapid cynicism.’’ 

That is what this is about. It is not a witch hunt. It is not about 

trying to get involved too deeply in the SEC’s responsibility. It is 

trying to clarify for the American public that their public servants 

are held not just to the same law; I would argue we need to hold 

ourselves to a higher standard. We need to make it perfectly clear 

so that when they hear our debates, they may differ with us on the 

substance of the debate, but not on our motives. 

So I am thankful, Mr. Chairman and Mr. Ranking Member, that 

you are taking this up. I look forward to working with each and 

every Member on improving and perfecting this bill. But I can’t 

stress enough that we have a Senate counterpart, and I would like 

to thank Senators Gillibrand, Tester, and Brown. They have already moved forward; they have promised us a markup. I think it 

is one of those rare occurrences where, as Congresswoman Slaughter said, we now are nearly approaching that magic number of 

218—we should get there hopefully soon—that we have the momentum to move this. 

With that, I thank you, and I look forward to any questions you 

may have. 

[The prepared statement of Representative Walz can be found on 

page 73 of the appendix.] 

Chairman BACHUS. Thank you. That was a very articulate and 

effective statement. Thank you. 

And I think it expresses a lot of our own views. It is absolutely 

essential that we do restore the public’s trust. There have been 

some very serious allegations; I think we all are aware of that. I 

am personally aware of them. And if this is the answer, so be it. 

And we will—I can’t speak for the committee, but after this hearing, I am perfectly willing to schedule a markup. 

Mr. FRANK. Mr. Chairman, if you would yield briefly? 

Chairman BACHUS. Yes. 

13 

Mr. FRANK. In my experience, when it comes to scheduling a 

markup, yes, you can speak for the committee. 

Chairman BACHUS. Well, then I will schedule a markup. I usually have to consult the ranking member. So you are with me? 

Mr. FRANK. Yes. 

Chairman BACHUS. Then we will have a markup. 

Ms. SLAUGHTER. Excellent. We are happy to hear that. 

Chairman BACHUS. I have no questions. I am going to yield to 

Mr.—do you have questions, Mr. Hensarling? No? 

Mr. Frank? 

Mr. FRANK. I just have a couple. 

First, I want to say, Ms. Slaughter, I was one of those guilty of 

not looking sufficiently at the political intelligence. And that is a 

very important thing. Now— 

Ms. SLAUGHTER. Frankly, to me, in writing this bill, that was of 

critical importance. 

Mr. FRANK. —one of the questions, I notice this bill will be multiply referred. Because, for example, it changes the House Ethics 

rules, and we have no jurisdiction, and that is not legislative. The 

Senate has no jurisdiction over our rules and vice versa. And it 

goes to the Judiciary, which is important because there are obviously First Amendment considerations here. 

Although I will say for people who are going to automatically say 

there is a First Amendment problem with the political intelligence, 

you don’t get any stronger than the First Amendment protection 

for lobbying. It is called in the Constitution in the First Amendment the right to petition for the redress of grievances. And regulation of that has clearly been upheld—not prohibition, but regulation, information has been upheld. So I would think that Constitutional doctrine is already there to allow appropriate publicity regulation of these activities. Because, if anything, it is less than the 

lobbying, although it is an important thing for us to look at. 

I also wanted to note and to comment to my colleague Mr. Jones, 

we obviously differ with some of what was done in the past, but 

I would point out that, as a result of this committee’s actions, going 

forward, first of all, the power under which the Federal Reserve 

made some of those loans has been abolished. Section 13(3) of the 

Federal Reserve Act no longer exists. I will say that I believe that 

the Fed acted appropriately and that, in fact, the Federal Government will make money on those things and I think they were helpful. But, going forward, they will have to be done under more constraint and reported. 

And, secondly, as a result of the legislation that was signed, no 

transaction, no transaction whatsoever, between the Federal Reserve and any private entity will go ultimately unreported. Now, 

there will be a time delay, in some cases, so you don’t have a market impact. But that is—I think that what happened was, on the 

whole, constructive. But we have severely changed it. 

As a matter of fact, you mentioned ‘‘too-big-to-fail.’’ Current expert opinion is that we went too far in the legislation, not total, but 

there are complaints that it has now become too hard in case of a 

crisis, and indicative of the fact that, from the standpoint of many 

analysts, we are never able to do anything right. We are either too 

much or too little. We have gone from being accused of tolerating 

14 

‘‘too-big-to-fail’’ to now being ‘‘too-stingy-to-bail.’’ That is the current—The Economist ran a simulation and was very upset to find 

out that we can’t bail people out anymore. We believe that, in fact, 

yes, we knew that, and that is appropriate, and that will affect 

their behavior. 

But let me just ask—the one, I guess—one last point I wanted 

to make, and I appreciate the chance just to make these. Because 

I heard reference as I was coming in, the gentleman from Texas 

talking about the Full Faith and Credit Clause. And I want to 

make a bipartisan criticism of the Congressional leaderships going 

back as far as I can remember. They are inclined to overuse the 

Full Faith and Credit Clause to shelter us, including, there have 

been arguments made by House counsel, supported by the leadership of both parties, that even taking bribes can, in fact, be sheltered from criminal prosecution if the act for which the bribe was 

taken could be put under the Full Faith and Credit Clause. 

So I am telling the Members now—and I have had some arguments about this. I will be asking—and I would put our leadership 

on notice. From now on, I think we ought to have a full discussion 

of how much to use the Full Faith and Credit Clause. 

Look, the Full Faith and Credit Clause had a very important 

purpose in the late 1500s and early 1600s, and it was to prevent 

Queen Elizabeth and King James from prosecuting members of the 

House of Commons who said things that they didn’t want them to 

say. That is also, by the way, why we can’t be arrested on the way 

to work, because the rule was that, once you were in parliament, 

they couldn’t get you. So they could stop you from getting there, 

and they could prosecute you afterwards. 

Those two provisions of the U.S. Constitution were reactions to 

Tudor excesses. And I think it is time now to say, you know what, 

we are probably pretty safe from Queen Elizabeth. The second one 

may be a problem, but I don’t think so, but the first one is long 

gone. 

And I believe there has been an overusage of the Full Faith and 

Credit Clause. And I say that because that is directly relevant 

here, and we will find people trying to hide behind Full Faith and 

Credit. 

So, in addition to what we are doing, I believe it is important for 

the Members to be ready, and I think we probably ought to have 

some kind of session with our leadership. The narrower the Full 

Faith and Credit Clause is used, the better it will be. People should 

not be prosecuted for things they say on the Floor, for libel or for 

other reasons, but the Full Faith and Credit Clause should not be 

a shield here. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mrs. Biggert? 

Mr. FRANK. I kept saying ‘‘Full Faith and Credit.’’ I meant 

‘‘Speech and Debate.’’ But I also want to say— 

Chairman BACHUS. We will give you full credit for saying 

‘‘Speech and Debate.’’ 

Mr. FRANK. I appreciate that. And I ask for immunity from having made that misstatement. 

15 

Ms. SLAUGHTER. But speaking of the Full Faith and Credit, Mr. 

Frank, I must tell you how much I appreciated your comments that 

we have troops all over the world and that we don’t any longer 

have the necessity of protecting Germany from Stalin. And, again, 

like we are doing here, we really need to look at things pretty 

closely to see how much it makes sense. 

Mr. FRANK. It is the Speech and Debate Clause, and I don’t know 

what got into me. But that has been, unfortunately, by both leaderships, they have protected us, and that is part of this problem. And 

I have literally seen invocations of that from both parties’ leaderships. People have argued that it immunized people who took 

bribes from prosecution, and we cannot allow that. 

Ms. SLAUGHTER. No. 

Chairman BACHUS. Mrs. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

I don’t have too many questions, but just—I think this is an important hearing. I am concerned about the fact that—I hope that 

we don’t overreact. We have a tendency to do that every time there 

is a crisis, and we overreact. I think we did that in Sarbanes-Oxley, 

and we did it in a lot of things. 

My concerns are some of the things in the bill that I think will 

come up, and one of them is the reporting requirement of within 

90 days of the numbers of—for people who would have to file, and 

even with a mutual fund. Within 90 days, people wouldn’t even 

have—I don’t think they would have the knowledge of that within 

that 90 days. 

So I think there is a lot—we seem to have an awful lot of myths 

about Congress, and I don’t want this to be one of them. For example, I go back to the district and people say, ‘‘Well, you don’t have 

to pay Social Security,’’ or ‘‘You get a pension after 1 day of service 

and a full salary.’’ They don’t understand the formulas and how 

many years it takes. Or with health care, we don’t have to pay for 

health care. We do have—I have Blue Cross Blue Shield. 

So I think that some of these things can be driven by the fact 

that there isn’t an understanding of how Congress works, how our 

Ethics Committee works, so that I think we have to be careful that 

we don’t overreact. 

I think bringing this to our attention is really good, but we have 

to be very careful that we spell out specifically and not just make 

it that this is Congress and a usual thing, because it is not. I think 

most people come here with very high standards, and it just seems 

like all this takes us down, and it really worries me. 

With that, if anybody would like to respond, I would— 

Mr. WALZ. I would. Thank you, Ms. Biggert. And I couldn’t agree 

more with you. As I say, I certainly take no joy in this. 

My largest, biggest frustration with the ‘‘60 Minutes’’ story is 

that I think, if we had passed this thing, we wouldn’t have had it. 

I think it would have been clearer. And my goal was to make sure 

we didn’t have that, because I take no pleasure in seeing colleagues 

who I know have integrity being drawn into something that is very 

ambiguous, as you are saying. 

And then I think when we overreact, we give the impression that 

everyone here is acting in an improper manner, and that is not 

16 

true. So I very much appreciate your words of, I would argue, wisdom. 

I think Mr. Hensarling brought up some very good points in understanding wanting to fix this but do this in a measured manner 

that makes sense. Because there is going to be a cynicism amongst 

the public that, ‘‘Oh, look, now they are concerned, because it was 

on TV. Now they are going to do something. But is it ever really 

going to be enforced?’’ They have to believe that there is a strong 

desire to make this right, to put those things into place that make 

the transparency there. 

We thought long and hard about these things. And, as I said, I 

certainly can’t speak for my colleagues; I will let them say it. But 

I am more than willing, if this is the vehicle, to make the changes 

to improve it. That is how the best legislation is done, together in 

a bipartisan manner, to make it there, and we are certainly open 

to those suggestions. 

But I agree with your sentiments wholeheartedly. And I want to 

be very clear about this: It is certainly not about bringing a hot 

light of shame to the Congress; it is bringing a hot light of transparency and openness. And I think if you do this right, the flip side 

of that is, look at the vast number of Members who are doing it 

correctly and doing it right, and that restores faith. 

So thank you for those comments. 

Mrs. BIGGERT. I thank you. 

And I yield back. 

Chairman BACHUS. Thank you. 

Our three colleagues have graciously agreed to answer questions 

from the committee. In deference to the demands on their time and 

the fact we have two other panels to get to today, I am hoping we 

can exercise some restraint and not keep them all morning. 

Ms. Slaughter? 

Ms. SLAUGHTER. I want to thank you for that. I am supposed to 

testify before Transportation in 10 minutes. 

Chairman BACHUS. Okay. So, in that spirit, is there anyone else 

who would like to ask questions of this panel? 

Mr. Manzullo? 

Mr. MANZULLO. Yes. 

Chairman BACHUS. Sure. Go ahead. 

Is there anybody on the—Ms. Waters first, and then we will go. 

Ms. WATERS. Thank you very much. 

First of all, let me thank Louise Slaughter for initiating this legislation a long time ago and absolutely understanding that there 

may be a serious problem here. 

I just picked up a book called, ‘‘Throw Them All Out,’’ and I am 

reading the so-called accounts of insider trading by Members of 

Congress. 

Is there something to being able to separate out inadvertent actions from a pattern and practice that can be identified by a Member? 

That is what concerns me a little bit. I think it is important that 

we know the difference between information that may have been 

picked up that one may not even know the meaning of and someone who appears to have access to information who consistently 

trades and earns money. 

17 

Is there a difference? And how does this legislation deal with 

that? 

Ms. Slaughter? 

Ms. SLAUGHTER. Actually, it just says we will not do insider trading, both for Members and staff. 

As I pointed out a while ago, Ms. Waters, before you came, the 

most important part of this bill, to me, is what we have done to 

this whole industry called ‘‘political intelligence’’ that does not have 

to—they lobby and they give confidentiality to their clients because 

they don’t have to report it at all. It is worth $100 million a year, 

and the STOCK Act says simply we don’t try to do away with them 

but just that they will be forced to sign these lobbyists, register 

with both the House and the Senate. 

But we don’t go into deep separation of who does what. I think 

for a lot of people, it may come as a great surprise that we are not 

supposed to do this. I would imagine that a staff person on one of 

the major committees would be a delightful dinner companion, if 

we allowed people to go to dinner anymore—thank goodness we 

don’t do that—to tell everything that is going on in that committee. 

No matter how innocently they may do it, the fact that other people can make money off that information is something that should 

give us pause. 

Ms. WATERS. Thank you very much. 

Mr. WALZ. I think, Ms. Waters, if I could add, I think—and this 

is a question I asked the SEC folks and some of these witnesses 

following us that are experts in this, the 34 Securities and Exchange Acts, 10b-5. There is ambiguity in how the law is written 

in the first place. And some of it is to make sure that folks weren’t, 

by—it could be pure chance, it could be that you are not putting 

someone under jeopardy of prosecution for something that was not 

insider trading even though it may have looked like it from the 

outside—and we are always very careful of that. 

I think it goes back to Ms. Biggert’s point on this. To overreact 

and create a criminal action where there isn’t one is certainly not 

the intent of this law. And I think maybe asking those questions, 

it is the ones we have asked of them and they have been helpful 

with us to—and they have assured us the STOCK Act has that 

ability, to separate out those inadvertent acts. 

Ms. WATERS. Thanks very much, Mr. Chairman. I yield back the 

balance of my time. 

Chairman BACHUS. Mr. Manzullo? 

Mr. MANZULLO. Thank you. 

Certainly, no one is questioning the intent or motives of the legislation, because it is fine with me. The issue is the disclosure. 

What we are essentially doing is, the disclosure act that we fill out 

the compliance with every year lists all the stocks and transactions. But who is missing from this panel are people who handle 

things like mutual funds. 

Mr. Chairman, I would hope we would have at least another 

hearing on this. My mutual funds are held at a house. I don’t 

choose which funds they put the money into. And then, every 90 

days, I get a report as to what the transactions were that took 

place. 

18 

Ms. SLAUGHTER. But this is not what—this is through personal 

trading, what the Congressperson does or what the staff does. All 

of us have some accounts, I suppose, and mutual funds. We are not 

expected to account for every trade that they make. 

Mr. MANZULLO. No, I understand that. 

Ms. SLAUGHTER. Unless you have told them that asbestos, for example, is not going to be punished; therefore, the price of asbestos 

should go up. And I am assuming you are not doing that to— 

Mr. MANZULLO. I don’t know if there is an asbestos mutual fund. 

I am just saying that— 

Ms. SLAUGHTER. That was one of the cases that really prompted— 

Mr. MANZULLO. But what most Members of Congress do is they 

put their money into a mutual fund—and I have a house back in 

Rockford— 

Ms. SLAUGHTER. Some do, not all. 

Mr. MANZULLO. I don’t actively trade. I own one stock that is 

worth about $2,000. The rest is all mutual funds. 

And the issue here is on compliance, because, as you know, when 

we fill out the annual form, we get from our investment house the 

transactions that took place during the course of the year. So now, 

this moves it up to 90 days. I don’t have a problem with it, but, 

functionally, you will get the 90-day statement after 90 days have 

run on the beginning of those transactions. Are you with me? 

Ms. SLAUGHTER. I am with you. 

Mr. MANZULLO. And so that is why, Mr. Chairman, I would—we 

don’t have anybody here who runs an investment house. We ought 

to have the mutual fund people here and be able to take an ordinary portfolio and say, these are the functional problems that can 

happen with regard to the disclosure. And that is why, if you look 

at— 

Chairman BACHUS. Reclaiming the time— 

Mr. MANZULLO. Yes? 

Chairman BACHUS. —I am going to—Ms. Slaughter has to testify 

before another committee. 

So, at this point, you can be excused, Ms. Slaughter. 

Ms. SLAUGHTER. Thank you so much. 

Chairman BACHUS. And would the other two gentlemen be willing to stay? 

Mr. Jones, you are on the committee. 

Ms. SLAUGHTER. And I am always hanging around the hall, so 

anybody can reach me anytime. I thank you very much for allowing 

me— 

Chairman BACHUS. You will be available to Members? 

Ms. SLAUGHTER. Absolutely. 

Thank all very, very much. 

Chairman BACHUS. All right. Mr. Manzullo, go ahead. 

Mr. MANZULLO. I guess my question is the people who actually 

handle the transactions, the ones who kick out the data have not 

been on the witness list. It is because you can’t think of everything 

in looking at legislation. 

My question to you is, would you be willing to have another hearing as to the people who would handle the portfolios just to make 

sure that they would be able to follow this legislation? I don’t have 

19 

a problem with the intent or the nature of it. It is just the mechanics of it. 

Chairman BACHUS. We can have as many hearings as we want 

to. 

Mr. MANZULLO. Okay. Thank you. 

Chairman BACHUS. We can explore all sorts of different things. 

Mr. Scott? 

Mr. SCOTT. Yes. I think it might be helpful if you could comment 

and get some clarity on the question of the narrowness of the application of this legislation. For example, it is limited to nonpublic information relating to any pending legislation. And there is an omission of tipping by Members of Congress or their staffs. If you could 

kind of give us some indication as to how this works, and why 

there is an omission of the concerns of tipping by Members of Congress or their staffs, and why it is limited only to nonpublic information material on pending legislation. Do we need to strengthen 

that any? 

Mr. WALZ. Thank you, Mr. Scott. And again, and back to Mr. 

Manzullo, I think the questions you are bringing up are exactly 

right. That is why we look to the wisdom of this committee, who 

deals with these issues, to craft this and bring something to the 

Floor that works. 

On the issue that Mr. Scott brought up, this narrowness issue is 

one we really struggled with. There are two schools of thought. And 

I think you will hear a very compelling argument, one we listened 

to greatly from Professor Nagy, who will be on the second panel. 

Some of this is the ambiguity of the law as it was written in the 

1934 law that went into effect in 1942. Our take on this was to go 

back also where Ms. Biggert was, instead of having an overarching 

blanket on this, to be very narrow as to the types of behaviors that 

were deemed to be inappropriate. And the belief was, as the ranking member said, might be being protected by the Speech or Debate 

Clause wrongfully. So we narrowed in on the very key aspect of 

what does a Member of Congress benefit on here that could be 

translated into trade? And it was that knowledge that the public 

wouldn’t get. That becomes a very difficult question. My standard 

for myself is I assume every piece of information I get here that 

I wouldn’t have gotten in that classroom in Mankato, Minnesota, 

teaching geography to be knowledge I gained from the job. 

Now, it goes back to where Mr. Manzullo is. That is easy for me 

to say, as someone pointed out, you are poor and don’t trade stocks. 

But my point on this is not to jam someone up, not to make it so 

that they can’t do what they need to do. The American public 

trades stocks. If we are a representation of that public, it would 

make sense that there would be people here. The question was, are 

they doing it in a fair, unbiased manner? So there is a great debate 

that as you narrow it, and I don’t want to speak for Professor 

Nagy, that you may cause more problems by being overly narrow. 

And that is something that we addressed. I didn’t come to that conclusion, but there is certainly a school of thought out there on that. 

On the issue of tipping and tippees, this is where the political intelligence firms and the information going down, this issue of tipping and tippee as is addressed by the SEC in many instances, this 

is where the real problem might lie of inadvertently saying someVerDate Nov 24 2008 18:12 Jul 06, 2012 Jkt 072631 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\72631.TXT TERRIE
20 

thing at Thanksgiving dinner that your brother-in-law was able to 

use. And how would that come back to it when there was no intention by the Member of Congress to profit by it, but the information 

was passed forward and how the SEC views that. 

Mr. SCOTT. So you are saying, going back to tipping, that the 

omission of the tipping in your view does not limit the effectiveness 

of this bill? 

Mr. WALZ. No. And I think it is addressed, Mr. Scott, in the political intelligence firms. That is dealing directly with the idea of tipping. Now, those are under the impression that they are purposely 

coming to gather that information to go and use that information 

they were paid to gather for someone else. That is the tipping that 

is being gathered by that, and it is addressed under that portion 

of it. But what you are talking about is a broader issue, maybe this 

family member issue, of they are not a political intelligence firm, 

but information was passed on. The way we interpret it, and this 

is where it gets, again, whether the law is needed or not discussion, 

that issue of tipping amongst fiduciary responsibility, the idea if I 

have that responsibility, that is already in the law. And the SEC 

will go after you if you tip your brother-in-law off to something, 

whether inadvertently or on purpose. We think that this just clarifies and uses the enforcement of existing SEC to apply here. If that 

makes sense. 

Mr. SCOTT. I think then the tipping, from my understanding, is 

that what you are saying is that cannot be effectively enforced with 

legislation. That is a behavioral—how do you police that? 

Mr. WALZ. You may be right. The SEC again may be best on 

that. It is something I think they struggle with. And I was struck 

by this whole debate on the ambiguity of the original law and how 

it is still used. Some of the cases, we went back and looked at court 

cases, O’Hagan v. U.S., a clear-cut case of a law firm using insider 

information on stock trade, to some of them are far more ambiguous. So it is a difficult one. 

What we are trying to do, and what we think this does is set the 

bar higher for Members of Congress, let the public know that it is 

going to be very difficult to do this. And if it is done, there are repercussions for it. It doesn’t get into the sticky point of how deep 

down that rabbit hole of insider trading can you go. 

Mr. SCOTT. Thank you very much. I appreciate it. 

Chairman BACHUS. Let me read the list on the Republican side, 

because I made a mistake and called on Mr. Manzullo, but it is 

supposed to be in the order that they arrived. And that would put 

Mr. Posey next, followed by Mr. Luetkemeyer, Mr. Huizenga, Mr. 

Duffy, Mr. Dold, Mr. Canseco, Mr. Schweikert, Mrs. Capito, Mr. 

Grimm, Dr. Hayworth, Mr. Neugebauer, Mr. Renacci, Mr. 

Fitzpatrick, Mr. Pearce, Mr. Stivers, and Mr. Hurt. So at this time, 

Mr. Posey is recognized. 

Mr. POSEY. No questions. 

Chairman BACHUS. Mr. Duffy? 

Mr. DUFFY. Thank you, Mr. Chairman. And I appreciate the witnesses coming in. Mr. Walz, I appreciate your passion, and I appreciate your leadership on this bill as well. I want to kind of run 

through some of the thought processes of what is included and 

maybe what is not included in the legislation. I know we have a 

21 

$1,000 trigger for the reporting. Is that $1,000 per trade or is that 

a threshold amount? So if I do two $950 trades, I obviously would 

be over $1,000 and then have to report? Or could I trade Apple 

stock, $950 trades, multiple in a day and I don’t have to report? 

Mr. WALZ. It is per trade. 

Mr. DUFFY. Per trade. I could actually— 

Mr. WALZ. Yes. 

Mr. DUFFY. I could trade $50,000 in a stock if I keep every trade under $950. Is that right? 

Mr. WALZ. Theoretically, that is correct. 

Mr. DUFFY. Okay. And that is one of my concerns. Again, I commend you. I think the leadership here is fantastic. 

Mr. WALZ. This kind of goes back to our reporting requirements 

of those zones, which are silly, but we do them I think for ease. 

Again, so your argument I think is well put. 

Mr. DUFFY. And I think to the point I think the American people 

want sunshine. Sunlight disinfects. And I think we should let that 

light shine into every corner. I appreciate your willingness to say 

you know what, it may not be perfect. I am open to suggestions for 

improvement. Is there a reason why we picked $1,000 and not if 

you trade anything, you have to report it? 

Mr. WALZ. I think it was the same reason we do the zones on 

the reporting requirements, is the ease, some of the things Mr. 

Manzullo is talking about, the paperwork on this. We understand 

this, if we went to the pure 48 hours that CEOs on Wall Street 

have to abide by on their trades, the problem we have is we simply 

don’t have the staff to handle that. So part of that was that was 

the threshold level. From a theoretical argument, I am certainly 

with you. One should be the number. 

Mr. DUFFY. We might be excluding ourselves in the amount of 

trades that you and I make, but others in the House might be making larger. 

Mr. WALZ. I think it makes sense. 

Mr. DUFFY. And I notice you didn’t include a blind trust aspect. 

In the bill that I drafted, I included a blind trust. Is there a reason—if you really want to take it out of the hands of Members, and 

Members want to protect themselves, they can take their assets 

and put it in a blind trust. Is there a reason why you didn’t? 

Mr. WALZ. One of the things I will stress again, is this is the 

bare minimum. It took us 6 years to get 7 people, and it was as 

easy as it possibly could be. If we had gone to that level, I think 

we would have probably gotten the same seven. But we tried to 

pass this before it became an issue. We tried to pass it and bring 

it to the committee where it was palatable, like most legislation is, 

leaving openings for improvement from the committee. I am certainly for it. I think you have to be careful that I don’t want to 

incur a fee on a blind trust because I don’t need one. 

Mr. DUFFY. That is why I include an option you can use a blind 

trust or— 

Mr. WALZ. Sure. Then I think that is what this committee should 

do. 

Mr. DUFFY. And I think if we are going do it, I think we should 

do it the right way. I think there is a movement in the House. 

There are a lot of ideas that permeate throughout these buildings 

22 

that don’t come up for years. But when there is a movement to 

move a bill, I think we should get the best bill possible. And my 

fear is that it sounds good and it feels good, but I think the American people, if it doesn’t actually accomplish the goal, they look 

back a couple of years from now and go, man, people are still getting around the great STOCK Act. 

Mr. WALZ. I think it would work, but I do think the STOCK Act, 

I think we have thought about this—it wasn’t crafted overnight. 

And it was a lot of conversations, it has been around for 6 years. 

But I am certainly willing to improve it. 

Mr. DUFFY. And I would throw out that I know we have a 90- 

day time period. Listen, things move quickly. In my bill, I threw 

in a 3-day time period. Why can’t a Member, if you are going to 

trade stock, within 3 days report it to the House? In 3 days, say, 

this is the trade I have made. So if there is big news, and you are 

trading against the big news that is in the Wall Street Journal, 

and you are going in a different direction, it is like, were you meeting with someone who gave you insider information? I think that 

kind of transparency— 

Mr. WALZ. You are preaching to the choir with me, but you might 

have to ask other Members what they think of that one. 

Mr. DUFFY. And quickly, my concern too is we have the House 

and the Senate. The President, I know, oftentimes has a blind 

trust, but I don’t think he is required. But also, his staff comes into 

insider information just like our staff. Why isn’t the Executive 

Branch included in this bill? And then the Judiciary as well? We 

should include the Judiciary and their senior staff as well. If we 

are going to do this in government— 

Chairman BACHUS. Mr. Duffy, they already have their rules. 

Mr. WALZ. Yes. 

Mr. DUFFY. And Judiciary as well? 

Mr. WALZ. Yes. 

Mr. DUFFY. Is it consistent with what you proposed, the 90-day 

disclosure rule, blind trust rule? 

Mr. WALZ. Yes. 

Mr. JONES. Mr. Duffy, if I could very quickly interrupt, and I will 

be very quick, Mr. Chairman, that is why this hearing today just 

shows exactly why we have an opportunity. I appreciate your bill 

going in and your resolution going in. And if nothing else comes 

from this but meaningful legislation that the Congresses of next 

year and the year after that, they know what is right and what is 

wrong, then the American people will win. So thank you for what 

you are doing and what you are doing as well. And let’s come together and make this something that we can all join hands on and 

be proud of because the American people can see we care about integrity in the Congress. So thank you for what you are trying do. 

Mr. DUFFY. Mr. Walz, I appreciate your openness to try to find 

ideas that are going to work. But I would say, let’s do the right 

thing. There is a movement right now to get it done. Let’s do the 

best bill possible. 

Mr. WALZ. We are certainly for being stronger, 170 stronger than 

we were last week. So we are ready. 

Mr. DUFFY. I yield back the time I don’t have. 

23 

Chairman BACHUS. Thank you. Any other questions by Members? If not, the panel is excused. 

Mr. WALZ. Thank you, Mr. Chairman. 

Mr. JONES. Thank you, Mr. Chairman. 

Chairman BACHUS. Our second panel is made up of Robert 

Khuzami, Director, Division of Enforcement, U.S. Securities and 

Exchange Commission. We welcome you and we look forward to 

your opening statement. 

STATEMENT OF ROBERT KHUZAMI, DIRECTOR, DIVISION OF 

ENFORCEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION (SEC) 

Mr. KHUZAMI. Thank you. Chairman Bachus, members of the 

committee, thank you for the opportunity to provide testimony on 

behalf of the United States Securities and Exchange Commission 

on the subject of the application of insider trading prohibitions to 

Members of Congress. 

Insider trading threatens the integrity of our markets, depriving 

investors of the fundamental fairness that comes with markets that 

are open, transparent, and fair, and all citizens of the benefits of 

economic growth and stability that comes with markets that operate on a level playing field. Because these goals are so important, 

prosecution of insider trading has been a top priority of the Division of Enforcement. Approximately 8 percent of the 650 average 

annual number of enforcement cases filed by the Commission in 

the past decade have been for insider trading. In Fiscal Year 2010, 

the SEC brought 53 insider trading cases against 138 individuals 

and entities, a 43 percent increase in the number of filed cases 

from the previous fiscal year. In this past fiscal year, we filed 57 

actions against 124 individuals and entities, a nearly 8 percent increase over the number of filed cases in the previous year. 

Now, there is no express statutory definition of insider trading. 

Rather, the SEC prosecutes insider trading under the general antifraud provisions of the Federal securities laws, most commonly Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b5, a broad antifraud rule promulgated by the SEC under that section. Section 10(b) declares in relevant part that it is unlawful ‘‘to 

use or employ, in connection with the purchase and sale of securities, any manipulative or deceptive device or contrivance’’ in contravention of SEC rules. 

There is no reason why trading by Members of Congress or their 

staff would be considered exempt from the Federal securities laws, 

including the insider trading prohibitions. Having said that, the application of these principles to such trading, particularly with respect to Members of Congress, is without direct precedent and may 

present some unique issues. Just as in any other insider trading 

inquiry, there are several fact-intensive questions that would drive 

the analysis of whether securities trading or tipping by a Member 

of Congress or a staff member, based on information learned in an 

official capacity, violates Section 10(b). 

The first question is whether the trading or communication of 

the information to someone else breached a duty owed by the Member or staff. Although there is no direct precedent for Congressional 

staff, there is case law from other contexts regarding misappropriaVerDate Nov 24 2008 18:12 Jul 06, 2012 Jkt 072631 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\72631.TXT TERRIE
24 

tion of information gained through an employment relationship. 

This precedent is clear that a Congressional staff member as an 

employee owes a duty of trust and confidence to their employer, 

and that a Congressional staff member who trades on the basis of 

material nonpublic information obtained through his or her employment is potentially liable for insider trading, just like any nongovernmental employee. 

With respect to Members, courts have held in contexts other than 

insider trading that Members have fiduciary or fiduciary-like duties of public trust by virtue of their position. That such duties 

exist is reinforced by ethics rules applicable to Members, which 

provides that Members should not use information obtained in connection with their official duties for personal gain or private profit. 

However, this is untested. There is no case law that addresses 

specifically the duty of a Member with respect to trading on the 

basis of information the Member learns in an official capacity. And 

commentators differ on the existence or reach of such duties. 

The second question is whether the information on which a Member or staff trades or tips is material; that is, is there a substantial 

likelihood that a reasonable investor would consider it important in 

making an investment decision? Materiality is a mixed question of 

law and fact that depends on all of the relevant circumstances. In 

some scenarios, it may be relatively clear that upcoming Congressional action would be material to a particular issue or a company, 

while in other cases, it may be less clear. 

The third critical question is whether the information on which 

the Member or staff traded or tipped is nonpublic. The Commission 

has stated that: ‘‘Information is nonpublic when it has not been 

disseminated in a manner making it available to the general public.’’ Whether information is nonpublic would likely depend on the 

circumstances under which the Member or staff learned the information and the extent to which the information has been disseminated to the public. As with all issues of liability with regard to insider trading and other claims under Section 10(b), the conduct at 

issue must be intentional or reckless, or put another way, not in 

good faith. Since all of these issues are inherently fact-specific and 

difficult to generalize, it is hard to come to any general conclusions 

about the likely outcome of any particular scenario. 

Now, while trading by Members of Congress or their staff is not 

exempt from the insider trading prohibitions, there are distinct 

legal and factual issues that may arise in any investigations or 

prosecutions of such case. For example, investigations into potential trading or tipping by Members of Congress or their staffs could 

pose some unique issues, including those that may arise under the 

Constitutional privilege provided to Congress under the Speech or 

Debate Clause. That said, in light of existing insider trading legal 

precedent, any statutory changes in this area should be carefully 

calibrated to ensure that they do not narrow current law, and 

thereby make it more difficult to bring future insider trading actions against individuals outside of Congress. 

Thank you for the opportunity to testify today, and I would be 

happy to answer any questions. 

[The prepared statement of Director Khuzami can be found on 

page 75 of the appendix.] 

25 

Chairman BACHUS. Thank you, Director. On the next panel, we 

are going to hear from Professor Nagy of the Indiana Law School. 

I read her testimony last night. And she states that Congress could 

use this current controversy to diagnose and treat the entire malady through the enactment of an express statutory definition and 

prohibition of insider trading for all individuals. Do you believe 

that the Congress should enact such an insider trading law? 

Mr. KHUZAMI. Mr. Chairman, my view is that I think there is a 

simpler and clearer way to get to the same outcome without risking 

some of the dangers that would flow from a general statutory prohibition that attempted to cover the entire field of insider trading. 

The single biggest issue is, as I mentioned in my opening statement, whether or not there exists a duty, either a fiduciary duty 

or a duty of trust and confidence between Members of Congress 

and others, be it their fellow Members, be it the institution, be it 

the citizenry. And that duty is essential in one form or another for 

there to be the ability to bring an insider trading case. 

From a pure enforcement perspective, I think the simplest and 

cleanest way would be simply to declare that such a duty exists, 

that Members have a duty not to use information gained in the 

course of their Congressional service for private gain or personal 

gain. With that duty, insider trading cases could then be brought, 

assuming they met the other requirements that I mentioned: 

scienter, which means intentional conduct, materiality, nonpublic, 

etc. 

But those concepts I think are well developed in the law, and 

don’t need to be included in a general statutory prohibition, the 

danger of which would be obvious. You might have two sets of 

standards, one in the statute that Congress drafted pertaining to 

itself, and one for everybody else. It could breed litigation or attempts to interpret what Congress did as changing existing law in 

the other areas. 

So from my perspective, I think that is the simplest and cleanest 

way to go. 

Chairman BACHUS. Are you available to work with the sponsors 

of this bill to review the legislation and make revisions consistent 

with what you have just testified? 

Mr. KHUZAMI. Absolutely. Our staff at the SEC have been involved in extensive discussions on the details of the legislation. We 

would be happy to continue to do that. 

Chairman BACHUS. All right. Thank you. Ms. Waters? 

Ms. WATERS. Thank you very much. There appears to be some 

consensus that Members and employees of Congress are subject to 

the same rules on insider trading as others who use or disclose material nonpublic information of a company. But many questions remain as to application to Congress. If the STOCK Act becomes law, 

would the SEC’s existing authority continue to apply to a Member 

or employee of Congress? If not, how would the SEC’s new authorities differ? 

Mr. KHUZAMI. The Act, in some cases, I think narrows existing 

law, and in other cases, it expands it. And so while we would still 

retain our authority potentially to bring our cases under existing 

law, the fact that Congress had passed a new piece of legislation 

to cover the field means that it would really be the source of our 

26 

authority to bring cases against Members of Congress. And if you 

compare it to the existing authority, there are a couple of instances 

in the STOCK Act where it narrows existing authority. For example, as was just previously discussed on the last panel, insider trading is limited to—excuse me, material nonpublic information is limited to that which deals with pending or prospective legislation, 

meaning that information that a Member of Congress might obtain, 

for example, from a briefing from the Executive Branch or a briefing from a regulatory agency, wouldn’t be covered necessarily because it wouldn’t deal with pending or prospective legislation. That 

conceivably is a narrowing of the current law. 

The STOCK Act doesn’t explicitly address tipping, which was discussed in the last panel as well, whereby existing authority says 

if you have a duty to keep information confidential, and it is material and nonpublic and you pass it to somebody else, you, the tipper, can be liable for doing that, as well as the tippee, the person 

receiving the information for trading. But the STOCK Act currently 

doesn’t address that issue directly. 

So I think again, for that reason, in order to have one uniform 

set of standards that apply to everyone, highlighting and establishing a duty on behalf of Members of Congress not to use the information they gain in their Congressional service for personal 

gain, and declaring that a duty would be the simplest way to go. 

Ms. WATERS. Thank you. That is all. I yield back the balance of 

my time. 

Mrs. BIGGERT [presiding]. Thank you. I recognize myself for 5 

minutes. Do you know anything about the ethics procedures that 

we have? I served on the Ethics Committee for 3 terms. Fortunately, that is as long as you can stay on it. But I think it is a very 

important part of the Congress. I am just wondering if what is in 

that covers us at all that you would know of. 

Mr. KHUZAMI. Obviously, as an enforcement authority, our job is 

to investigate and file cases based on a violation of the law. We 

can’t file cases on the basis of ethics violations, obviously. 

Mrs. BIGGERT. Right. 

Mr. KHUZAMI. But anything that enhanced the ethical obligations 

of Members of Congress not to use information for personal and 

private gain, which is I believe currently— 

Mrs. BIGGERT. Which is, yes. 

Mr. KHUZAMI. —currently what the rules provide, helps us, because they help to establish this duty of trust and confidence. So 

if I were to go into court tomorrow with such a case, I would point 

to the ethics rules as a basis to say, yes, a duty already exists. But 

I think the benefit of the legislation that is being discussed is that 

I can’t guarantee how a particular court might rule on that argument one way or another. But if there was a piece of legislation 

that had been passed that made it clear that there was such a 

duty, a lot of that ambiguity and uncertainty would be resolved. 

Mrs. BIGGERT. Do you think that would be enough, rather than 

having the legislation, if the ethics was clearer? 

Mr. KHUZAMI. I don’t think it would be because, again, if there 

is a law that says such a duty exists, that is pretty clear and unambiguous. And I think it would reduce the uncertainty that a 

court might not find such a duty. 

27 

Mrs. BIGGERT. You certainly made it very clear that Members 

are not exempt from the insider trading laws. But there seems to 

be a swell from some people that reports to the contrary, that because Congress is not a corporation or a company or an entity as 

such like that, that they are not subject to the law. How do we 

get—put that all together? 

Mr. KHUZAMI. I think hearings such as today’s and last week’s 

should make it pretty clear that there is no such exemption, and 

that you are subject to the same laws as everyone else, leaving 

aside things like the Speech or Debate Clause. 

Mrs. BIGGERT. Thank you. I yield back and recognize the 

gentlelady from New York, Mrs. Maloney, for 5 minutes. 

Mrs. MALONEY. Thank you for your testimony. And I just want 

to go over what you were saying that you think it should be expanded to cover tipping and other meetings with other agencies. 

Would you also include the SEC no-action letters and other actions 

like that? And do you think that would be broad enough if that was 

all included? 

Mr. KHUZAMI. The no-action letters, along with some other 

means, are designed for a way to carve out certain safe harbors, 

or to give individual Members or individual persons comfort that 

what they are about to do won’t violate the law. So if we pass such 

a law that proclaims such a duty, Members could take advantage 

of no-action letters, get advice from their own counsel, and take 

other steps to make sure that they didn’t do something that inadvertently violated the law. So I think that would be an important 

part of any overall regulation in this area. And that option exists 

already, frankly. 

Mrs. MALONEY. And if we do have a fiduciary duty with the citizens, and an ethics responsibility, how would the SEC investigate 

in those categories? How would they change what you are doing 

now, or would it change what you are doing now? 

Mr. KHUZAMI. First, let me just be clear, I am not sure I would 

necessarily characterize it as a fiduciary duty, because the law also 

recognizes what would be a fiduciary-like duty, if you will, of a 

duty of trust and confidence that kind of has its origins in fiduciary 

duty, but is kind of a different creature. And my view would be it 

should be added as one of the examples of a duty of trust and confidence that would be owed. Because there are potential consequences that the academics and others on the following panel 

probably are better versed to discuss than I am. But there could 

be consequences to proclaiming a fiduciary duty that wouldn’t necessarily be intended or couldn’t be foreseen. 

But that would be my personal view as to the best way to approach it. How would it affect our investigations? Frankly, it 

wouldn’t. It would clear up the law, which means there would be 

less of a risk that a particular court would decide that such a duty 

didn’t exist based on current circumstances. 

The other thing that could be done, frankly, that I think is a 

critically important part of the STOCK Act, is the disclosure portion. Without disclosure of trading on a timely basis, it is difficult 

to get notification of circumstances that might justify investigation. 

We get tips and referrals on insider trading cases by all sorts of 

persons, from the exchanges, and from other sources. And we get 

28 

that often on a real time or near real time basis. And that is critically important to conduct an investigation, to get the information 

fresh. Memories are still sharp. Steps haven’t been taken to cover 

up or conceal activity. So prompt disclosure, preferably electronic, 

and preferably searchable, would be probably the single most important thing that could be done for our investigations. 

Mrs. MALONEY. Are there other legislative approaches out there 

that you are aware of in this area? 

Mr. KHUZAMI. They tend to break down in between, the narrow 

approach, like simply establishing the duty and leaving it to existing law to address the other elements, or a statutory prohibition 

that attempts to define all the terms, such as scienter, and materiality, and nonpublic. And that I think is difficult to do. It was tried 

in the 1980s I think in general, and I think people gave up because 

it is very difficult to write a law that covers all the possible facts 

and circumstances to make sure that no one who should be captured is left to the side. But then you end up not providing the 

kind of specificity and guidance that you might like because it is 

so general and broad. And also, you don’t want to kind of provide 

a roadmap for people to understand exactly what line they have to 

tack against in order to avoid liability. So that is kind of another 

reason why we prefer the narrower approach. 

Mrs. MALONEY. Okay. Thank you. My time has expired. Thank 

you. 

Mrs. BIGGERT. The gentlelady yields back. The gentleman from 

Missouri, Mr. Luetkemeyer, is recognized for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. Director, I 

am just kind of curious, one of the things that concerns me is we 

can promulgate a lot of rules and regulations and new laws, but 

if we don’t enforce them, we have just wasted all our time. And I 

guess my concern is, we have the MF Global situation here, and 

people, when I was home over the weekend, were talking about 

that, and what are you going to do about it? What are you going 

to do about it? I said, well, they broke the law, apparently. And if 

that is the case, they need to suffer some punishment, go to jail, 

whatever. And the rules are already in place. 

So I guess my question to you is, the rules that are in place right 

now, is there an enforcement mechanism in place to enforce those 

rules? 

Mr. KHUZAMI. Yes. There is an Enforcement Division. 

Mr. LUETKEMEYER. If we pass this bill, is there an enforcement 

mechanism in place in this bill? 

Mr. KHUZAMI. By enforcement mechanism, you mean just the 

ability to— 

Mr. LUETKEMEYER. Right. You will be able to enforce this law. 

Is that correct? 

Mr. KHUZAMI. Yes. 

Mr. LUETKEMEYER. Okay. Is there going to be a difference between your ability to enforce the law and the penalties versus the 

rules that are in place right now? 

Mr. KHUZAMI. Yes, in at least one sense. It reduces the risk that 

comes with the lack of clarity in the law as to whether or not such 

a duty exists between Members of Congress or the citizens or others. There is a risk currently that no court has decided that issue. 

29 

If we were to bring a case, a certain judge might look at it and say 

that no such duty exists. Whereas, if we had the legislation, that 

risk would be eliminated. 

Mr. LUETKEMEYER. Okay. Have there been enforcements of the 

rules in the past, or the laws in the past? Have there been cases 

brought? 

Mr. KHUZAMI. Insider trading cases in general? 

Mr. LUETKEMEYER. Yes. 

Mr. KHUZAMI. Yes. 

Mr. LUETKEMEYER. Have they been referred to you by the Ethics 

Committee, or are they referred to you by other outside groups, or 

how do you become aware of them? 

Mr. KHUZAMI. They come from all sources. They come from the 

exchanges, they come from letters, and emails, and cooperating witnesses, and things we read in the newspaper, and a dozen other 

sources. 

Mr. LUETKEMEYER. You made the comment a couple times already with regards to some things that could either broaden or narrow your ability to do your job here. And I certainly hope that the 

authors of the bill will work with you to make sure that happens. 

My only comment I guess is from the standpoint that while the 

American people are outraged about things that happen here, and 

the things that they perceive may be inconceivable or incongruous 

of what we should be doing, the enforcement of existing rules and 

laws I think is critical from the standpoint that if somebody does 

something wrong, there has to be a punishment of some kind. Just 

a waving of the wand of forgiveness over everybody is not necessarily the way it should work. And I am just kind of curious as 

to your perception of how you see this all happening, your ability 

to enforce this and work with everybody. 

I appreciate your views this morning. Thank you very much, and 

I yield back the balance of my time. 

Mrs. BIGGERT. The gentleman yields back. The gentlelady from 

New York, Mrs. McCarthy, is recognized for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Madam Chairwoman. And thank you for giving your testimony. In your testimony you note that right now we have statutory changes needed 

to be carefully crafted to ensure that they do not narrow current 

law, and you talked about that a little bit in your opening statement, making it more difficult to pursue future violations of insider 

trading. The legislation requires your agency and the CFTC to 

adopt rules to help. How do you envision the agencies working together, as well as ensuring that the rules do not have an adverse 

effect on enforcement of inside trading? And I guess, how do you 

pick somebody up who has done inside trading? What are those signals? How do you look for those? 

Mr. KHUZAMI. How do you detect the violations? They come from 

a number of different sources. First, the exchanges have analytics 

and software in which aberrational trading kind of pops out of the 

system. So if they see a spike in options trading 10 days or fewer 

before an announcement of a takeover, that will jump out of the 

system. And then an investigation will be done to trace back to see 

who is trading in those accounts. And then you look to see whether 

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30 

tions to the source of inside information that you would expect to 

see in such a circumstance, such as the bankers or the lawyers or 

the insiders at the company. Do they have a neighbor who happened to work for the investment bank that had the mandate on 

the deal? And so, it is a painstaking process of tracing and sort of 

layering together trading and events leading up to a corporate 

event or other event. And then, the telephone calls and the meetings and the emails, and you put it all together, and you hope— 

you put together a circumstantial case, because invariably it is circumstantial, where you can then reach a reasonable conclusion and 

hopefully convince a jury this person had access to the information. 

They had a conversation. And look what they did, they had never 

owned anything other than a mutual fund before, and all of a sudden, they bought $20,000 worth of deep in the money options the 

day before the announcement. And that is the kind of circumstances that give rise to the inference that they acted wrongfully. 

Now, on other occasions, as we did in the Galleon cases, with Raj 

Rajaratnam and others, we are up on wiretaps—we are not up on 

wiretaps, the criminal authorities are, but we are working closely 

with them, where you can actually detect conversations in real 

time where you actually capture the inside information being 

passed. We have cooperating witnesses who will—maybe they are 

in trouble somewhere else, and they come to us and they say, ‘‘you 

know what, I happen to know about some insider trading that occurred.’’ We have a whistleblower program now under the DoddFrank Act which may give us additional leads as well. So it comes 

from all sources, but inevitably it is a piece by piece building of a 

case. 

Mrs. MCCARTHY OF NEW YORK. So basically, also just to follow 

up on that, if someone is calling their broker to make these trades, 

then you actually have two people who would be dealing with inside trading? 

Mr. KHUZAMI. Potentially, if the client making the call to the 

broker has material nonpublic information that they are trading on 

in breach of a duty, they will have violated the insider trading 

laws. The broker, the tippee to be liable, has to know that the information is coming in breach of a duty. So if all the person said 

was buy 100 shares of IBM, it probably wouldn’t do it. If they said 

buy me 10,000 deep in the money options and I need it done before 

noon because I just heard something from my friend who works on 

the board at IBM, that is a different story. He might be liable if 

he then traded himself. 

Mrs. MCCARTHY OF NEW YORK. Just to follow up, because I don’t 

know, how do you see your agency and the CFTC working together 

to do this? I think it is kind of confusing for many of us. I am sure 

almost every Member here puts in the same kind of hours I do, 

whether we are here or meeting with constituents or anything else 

like that. That is why you have a broker to do what they are supposed to be doing. My concern is that we do our compliance once 

a year. That is usually right after tax season. And if they want to 

do a thousand dollar trade, we would have to report that. Wouldn’t 

it be easier to report it like every 3 months in groups, instead of 

having—I have no idea if he trades at a thousand dollars, or what 

31 

the bunches are, or anything like that. I guess we get statements 

once a month at the end of the month. So that means I would have 

to go through every trade to look? 

Mr. KHUZAMI. It depends on where you set the threshold. Look, 

in the corporate world, corporate insiders have to file within two 

business days of the transaction. That is standard practice under 

those circumstances. In many situations, the disclosure is done 

electronically. So in some sense, there is no greater burden to file 

the $100 trade than there is the $5,000 trade. You can just file 

electronically with your brokerage statements just getting sent directly to whoever is maintaining the database. 

Look, I recognize there are burdens associated with it. Speaking 

selfishly from an enforcement point of view, I want as much information as soon as I can. 

Mrs. MCCARTHY OF NEW YORK. Would that add a cost onto the 

brokerages, a service charge, or yourself or— 

Mr. KHUZAMI. No, if it came to whoever maintains—whether or 

not it is Ethics or the Clerk of the House or whoever it might be 

who maintains it, they would have to have the capacity to do that. 

It wouldn’t cost any more money for the brokerage, because that 

would typically just mean hitting a button and sending account 

statements. And generally, we wouldn’t get it directly, so it 

wouldn’t increase our costs. 

Mrs. MCCARTHY OF NEW YORK. I do hope that you will be able 

to work with the Members, because obviously, most likely we are 

going to do something, but hopefully we are going to do something 

that is correct. My personal belief is that this becomes a witch 

hunt, and the majority of Members here are not out to make a 

quick buck. But thank you for your testimony. I yield back. 

Chairman BACHUS. Mr. Canseco? 

Mr. CANSECO. Thank you, Mr. Chairman. And thank you, Mr. 

Khuzami, for coming here and answering questions on this very 

important issue. I personally am particularly concerned about Section 3 of the STOCK Act, which seems to contradict the Speech or 

Debate Clause. And as you mentioned in your testimony, in the 

case of Gravel v. United States, the Supreme Court stated that the 

Speech or Debate Clause was designed to assure a coequal branch 

of governmentwide freedom of speech, debate, and deliberation 

without intimidation or threat from the Executive Branch. So as 

Members of Congress go before CNN or MSNBC or CNBC and 

other networks, at all times Section 3 of the STOCK Act could essentially bar them from publicly saying anything that may or may 

not move markets or stocks, which really gags them from commenting on very important legislation for the American people. 

Do you feel that Section 3 violates the Speech or Debate Clause? 

Mr. KHUZAMI. The Speech or Debate Clause is for me a separate 

matter that is going to exist irrespective of what is done with respect to establishing a duty or passing legislation that prohibits insider trading. And it is something that we in the enforcement authorities have to navigate through and both respect—I am probably 

not the best person to opine on that. I am happy to consider that 

and get back to you with a response. There are some areas where 

the Speech or Debate Clause’s application is clear, and there are 

other areas where it is less so. So I guess I would ask for the opVerDate Nov 24 2008 18:12 Jul 06, 2012 Jkt 072631 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\72631.TXT TERRIE
32 

portunity to get back to you on that and give it a little more 

thought. 

Mr. CANSECO. Thank you. 

Mr. KHUZAMI. The only thing I would say is that all the insider 

trading laws require scienter and intent. So that is the single biggest thing that protects the unwary from being trapped in a violation that inadvertently occurred. You have to be acting with corrupt intent, knowledge, or recklessness. If you act in good faith, 

you are not going to be guilty. 

Mr. CANSECO. Which is the definition of scienter. 

Mr. KHUZAMI. Yes. 

Mr. CANSECO. Does the SEC have an opinion on how they could 

determine exactly which public companies could have their trading 

affected by Members’ comments? And how would you determine 

this? 

Mr. KHUZAMI. In a typical insider trading case that really speaks 

to the issue of materiality. Was the information as it is defined in 

the current law— 

Mr. CANSECO. Let me interrupt you. 

Mr. KHUZAMI. Sure. 

Mr. CANSECO. This would be with regards to Section 3 of the 

STOCK Act, which is if I go out there in front of the microphone 

and TV and tell them what bill I am contemplating to push 

through the Floor of the House. 

Mr. KHUZAMI. If that is all you did as part of your Congressional 

duties, and acted in good faith, I think that would be a difficult 

case to make from an insider trading point of view, particularly if 

you disseminated the information broadly to a wide audience. 

Mr. CANSECO. Let me clarify this. Section 3 states that a Member 

or employee shall not disclose material, nonpublic information relating to any pending or prospective legislation, action, relating to 

any publicly traded company if that Member or employee has reason to believe that the information will be used to buy or sell. And 

that would include any kind of comments with regards to bills that 

are coming before the Congress of the United States or that you 

are contemplating using under Section 3 of the STOCK Act. So 

aside from the fact that if I know—assuming that I don’t, but I 

do—if I know something that is happening with some bill, and I 

go back into my office and call my broker and say buy, or sell, or 

short, or go long, that would obviously be apart from Section 3. I 

am speaking specifically about speaking in public about a bill that 

could move a market. 

Mr. KHUZAMI. That is one of the reasons why I think that if 

there was a clearly defined duty with respect to that information, 

that would clarify the law in this area and make it clear what kind 

of conduct stepped over the line and what kind of conduct did not. 

Mr. CANSECO. With respect to Section 3 of the STOCK Act, which 

is the getting out in public and talking about a bill or legislation 

that is coming on there, do you think that it is the duty of the SEC 

to go out there and police 535 Members of Congress? 

Mr. KHUZAMI. No. We are just looking for people who violate the 

law. 

Mr. CANSECO. All right, sir. And is it workable within the SEC’s 

enforcement operations to go out there and oversee 535 people of 

33 

Congress as to what they say publicly that may or may not move 

markets? 

Mr. KHUZAMI. No. Our job would be to either identify or have 

brought to our attention trading that looks suspicious, and then to 

determine whether or not all the elements of the offense have been 

satisfied. 

Mr. CANSECO. But I am speaking under the STOCK Act, assuming that the STOCK Act is passed and made into law. 

Mr. KHUZAMI. I don’t think we would be generally conducting a 

policing operation of what 535 Members of Congress were doing. 

Mr. CANSECO. Thank you very much, Mr. Khuzami. I see that my 

time has expired. 

Chairman BACHUS. Mr. Scott? 

Mr. SCOTT. Thank you, Mr. Chairman. Dealing with the stock 

market, trading on the New York Stock Exchange is sort of like the 

cornerstone of our entire economic system. And it is basically based 

upon seeing pertinent information. When you are trading in stocks, 

it is sort of like just trying to be in the right area listening to the 

right gossip about what is going on at the right time. And so the 

question becomes, how do you enforce this? How will we really enforce this? Give me an example of what is nonpublic material. That 

is the core of this. Where would I go wrong? Give me an example, 

as a Member of Congress, give me some examples of what I would 

be doing which would be in violation of this Act. 

Mr. KHUZAMI. In general, if as a Member of Congress you became 

aware of a company, say, that was going to be—you learn that it 

was going to be subject to a piece of legislation that would have a 

significant impact on their business, and as a result of that information which was not public in the sense that it was only known 

to a small group of people and not shared generally with the public— 

Mr. SCOTT. Could you give me an example of what that information would be? 

Mr. KHUZAMI. Let’s say if you learned about a contract that was 

to be awarded to a certain company, if you were to learn about legislation that might greatly restrict the business opportunities of a 

certain company, if you were going to do something to the FDA 

drug approval process that might make it harder for companies 

to—specific companies to have drugs approved, those things can all 

have a significant impact on the price of a company’s stock. If you 

took that, and then while it was nonpublic went and traded on that 

information, you could have violated the insider trading prohibitions. 

Mr. SCOTT. And under this legislation, what would happen to 

me? What would be the penalty? What is the real axe in this legislation if I did that? 

Mr. KHUZAMI. The penalties from the SEC’s perspective are well 

established, which means you could be subject to, obviously, an enforcement action filed against you, and you could be required to 

disgorge all your ill-gotten gains or your profits. In addition, you 

could be assessed a penalty of up to 3 times of the amount of that 

disgorgement. So if you made $100, you have to give the $100 back, 

and you could be penalized $300. 

34 

Mr. SCOTT. So in other words, there is no criminal sanction, 

there is no misdemeanor, there is no felony record. You don’t go 

that far with the law. 

Mr. KHUZAMI. We don’t because we don’t have criminal authority. However, the Department of Justice prosecutes insider trading 

cases on the exact same statutes. So they too could charge a person 

under those circumstances, in which case jail time, and restitution, 

and other remedies could be available. Now, the criminal authorities have a higher standard of proof of course. They have to prove 

guilt beyond a reasonable doubt. We at the SEC, as a civil authority, have a lower standard of simply proving by a preponderance 

of the evidence. 

Mr. SCOTT. This bill opens up another area which we haven’t 

touched upon or explained, and that is this concept of political intelligence. What is that? 

Mr. KHUZAMI. My understanding is that these are firms sort of 

in the business of signing up clients who pay for their intelligence, 

which they in turn gather from mining various sources they have 

about what is going on with respect to pending legislation and 

other developments in Congress and in the Federal Government. 

Mr. SCOTT. And at what point would a Member of Congress know 

that what he may be saying or responding to a constituent or anybody, which we do, he is engaging in political intelligence? 

Mr. KHUZAMI. If you were having a conversation with such a firm 

and just talking about what is going on, you wouldn’t have any insider trading exposure if you were acting in good faith and you 

didn’t purchase or sell securities on your own. So I don’t necessarily think it would have a chilling effect on bona fide, legitimate conversations that you might otherwise have. 

Mr. SCOTT. One final point, Mr. Chairman? These political agencies may just want to call a Member of Congress. They could set 

him up, and then pass on and say to someone, I just got this bit 

here from—unbeknownst to the Member of Congress, he has been 

used. What protects that Member of Congress? He thinks he is 

doing a job of responding to a constituent. 

Mr. KHUZAMI. Again, like I said, under those facts you generally 

wouldn’t have liability for insider trading. You may have passed 

some nonpublic information, and that may have other repercussions not from an enforcement perspective, there may be ethical or 

other issues, I am not familiar with them, but from a pure insider 

trading perspective that would not render you exposed to insider 

trading liability. 

Mr. SCOTT. Thank you, sir. 

Chairman BACHUS. Thank you. Mr. Renacci? 

Mr. RENACCI. Thank you, Mr. Chairman. And thank you, Mr. 

Khuzami, for being here. If I understand it correctly, and I try to 

be a good listener, today, currently, Congress and their staff are 

not exempt from the Federal securities laws, including insider trading prohibitions, and this is from your testimony, through the application of these principles to such trading. So today as it stands 

Congress is not exempt and their staff is not exempt from any insider trading rules? 

Mr. KHUZAMI. Correct. 

35 

Mr. RENACCI. Okay. With that being said, this bill that we are 

talking about really, and I heard you say this earlier, just clarifies 

that. 

Mr. KHUZAMI. No. I think what I was saying is the approach that 

I personally might prefer would be a narrower bill that simply declares that there is such a duty by Members of Congress to keep 

information that they obtain in the course of their Congressional 

service confidential, and not use it for private gain. That is the 

simpler approach that I think accomplishes the same end. The 

STOCK Act attempts a broader proscription to try and define all 

of the elements or many of the elements of insider trading. And I 

think in some cases, it may be at odds with existing law. In some 

cases, it may be underinclusive, and in some cases, it may be overinclusive. And I think there is just some danger in having that law 

exist as well as the law as currently developed. So that is what I 

was saying, that would clarify it. 

Mr. RENACCI. So we could almost clarify this whole bill in another sentence that you just stated that would narrow it into a simple focus and— 

Mr. KHUZAMI. Or maybe replace it. 

Mr. RENACCI. Okay. Now, the other thing this bill does is it requires quarterly reporting of transactions of $1,000 or more. But 

every Member of this Congress today is required to report every 

stock transaction of $1,000 or more already on an annual report. 

So they are already reporting that. So the question I would have 

is where is that going? If every Member is reporting it and they 

have been reporting it for the last whatever, 20 years, 30 years, 

what are you doing with that information? Are you looking at it? 

Because it gets back to some of my colleagues. We can report everything we want to report, but if there is never any enforcement— 

So what are the enforcement mechanisms when a Member of Congress reports every transaction that he or she has had for the last 

year? 

Mr. KHUZAMI. I think the disclosure would be greatly beneficial 

from a pure enforcement perspective if it was made on a timely 

basis, and was made electronically, and is searchable. It just creates ease with which we can identify trading and determine whether or not any investigation is warranted. If it is not reported, it is 

just—there is a long passage of time before you might have access 

to the information. Memories go stale. 

Mr. RENACCI. Excuse me, though. I don’t mean to interrupt, but 

it is reported every year. 

Mr. KHUZAMI. Yes. 

Mr. RENACCI. And every transaction you can pull up off the 

Internet. So those transactions of every Congressperson are already 

reportable, and on the Internet, and can be picked up and looked 

at. 

Mr. KHUZAMI. But a year or however long after the events in 

question. 

Mr. RENACCI. So what is normal with insider trading? You could 

still pick up insider trading if somebody filed a report in April and 

you did something with it, that report, you looked at all the Members and you saw some unusual transactions in April of last year 

36 

or June of last year, you could say, let’s do an investigation on that. 

Is there anything being done in that regard? 

Mr. KHUZAMI. You could. It’s just, investigations that take place 

as close in time to the events in question are just, as a general 

matter, more effective. Memories are sharper, information is easier 

to obtain, and there are fewer opportunities for concealing what 

took place. So— 

Mr. RENACCI. But if you are not looking at the 535 reports that 

are done today on an annual basis, are you going to look at the 

535-times-4 reports that are done? That is what I am trying to get 

at. If you already have those reports and you are not doing anything with them, what would 4 more reports times 535 people do 

for you? 

Mr. KHUZAMI. Some of the trading would still potentially be referred to us, if they took place on exchanges, still referred to us 

through the normal referral process that we get from the exchanges where the trades occur. But the problem is, if they are 

not—if they are not reported over that long a period of time, it is 

more difficult. 

And frankly, in addition, if you are trying to, for example, sort 

of track the progress of a particular piece of legislation and understand when people knew certain things, it is just much harder to 

do with the passage of time. And, yes, it would be more burdensome to do it four times rather than once, and for us as well, but 

it is potentially more effective. 

Mr. RENACCI. Again, more effective, but if you are not—it gets 

back to what a number of my colleagues have said. If there are no 

enforcement procedures in place today, maybe what we need to do 

is get the enforcement procedures in place and use the information 

we are getting already. 

So that is all I am getting at. If we give you 4 times the information, and you still don’t have any procedures to really do checks 

and balances, it is no better than giving it to you one time. 

I am okay with the way this Act reads, if we clarify it more. I 

am just not sure if throwing more information at you that you are 

already not using is appropriate. That is the question I was trying 

to ask, but I know I have run out of time. 

Thank you. 

Chairman BACHUS. Thank you, Mr. Renacci. 

Mr. Green? 

Mr. GREEN. Thank you, Mr. Chairman. 

I thank the witness for appearing today. 

You seem to be indicating, sir, that a single sentence can replace 

the bill. Is this correct? 

Mr. KHUZAMI. I wasn’t necessarily suggesting a single sentence, 

but a briefer statute that defines and identifies the duty. 

Mr. GREEN. The duty of, may I use the phrase, confidentiality? 

Mr. KHUZAMI. Probably more technically a duty not to use information obtained in the course of Congressional service for personal 

gain or private profit, or words to that effect. 

Mr. GREEN. And as you have been performing your duties, have 

you assumed that such a duty exists? Or have you been performing 

your investigations predicated upon a lack of such a duty? 

37 

Mr. KHUZAMI. I think, we assume that one exists, and in the appropriate—we wouldn’t not file the appropriate case simply because 

there is some ambiguity in the current law as to whether or not 

such a duty exists. But we also have to recognize that because it 

is untested and a little uncertain, a court may not agree with us, 

and that is why there is some risk associated with such a theory. 

Mr. GREEN. Let me restate my question. Have you, prior to this 

moment in time, performed your duties, assuming that such a duty 

exists? The question simply is, is there an investigation that you 

would not have pursued because you were not sure that a duty existed? 

Mr. KHUZAMI. No. 

Mr. GREEN. So, as you have performed your duties, you have assumed that the duty for Congressional Representatives exists not 

to disclose this type of information, true? 

Mr. KHUZAMI. That is correct. 

Mr. GREEN. If this is true, is it fair to assume that you would 

not perform investigations in the future to any greater extent than 

you do currently because you currently assume that the duty exists? 

Mr. KHUZAMI. I think the answer to that would be yes, although, 

like I said, the disclosure aspects of this may, in fact, encourage 

more investigations, but— 

Mr. GREEN. I understand. 

Mr. KHUZAMI. —aside from that, yes. 

Mr. GREEN. But the gravamen of your testimony appears to be 

the duty. There are other things; the tipping is important and 

other things. But the gravamen appears to be the duty. And if you 

have been proceeding assuming that the duty exists, I am just trying to ascertain whether or not there would be some difference in 

the behavior of your investigations in terms of how they are triggered, for example. 

You have indicated that your investigations are triggered by a 

trade, generally speaking. Is that a fair statement? 

Mr. KHUZAMI. Correct. 

Mr. GREEN. And once you have a trade, then what you try to do 

is ascertain—a trade, by the way, not just any trade, but one that 

sort of stands out. Once you have this trade, then what you try to 

do is ascertain whether or not the person who made the trade had 

some sort of insider information or communicated with someone 

who communicated insider information. True? 

Mr. KHUZAMI. Correct. 

Mr. GREEN. Now, would any of this change if we codified the 

duty? 

Mr. KHUZAMI. No, you would still take the same general investigative approach when you are talking about inquiring into the 

facts of what happened. 

Mr. GREEN. Before my time expires, I need to say this for edification purposes. I believe that no one should be above the law by 

virtue of your station in life. I believe that no one should be beneath the law by virtue of your station in life. I think the law 

should apply to all equally. 

What I am trying to find out, however, is whether or not there 

would be some change in the way you conduct your investigations 

38 

once this duty is established. And I think I am hearing you say, 

not likely. I will give you some wiggle room. 

Mr. KHUZAMI. Thank you. 

Mr. GREEN. A final comment or perhaps a question. When you 

perform these investigations—and this was triggered by something 

you said, my question—you indicated that you check with neighbors, you check phone records, you check emails. 

Do you do this with the person that you have focused on having 

knowledge of what you are doing? Do you do this with a warrant? 

How do you perfect these searches such that you can acquire the 

intelligence necessary to prosecute properly? 

Mr. KHUZAMI. Unfortunately, as a civil authority, we do not have 

the legal ability to engage in certain undercover or surreptitious activities. So we can’t do search warrants, we can’t do wiretaps and 

other things like that. 

We partner with the Department of Justice frequently, as we did 

in the Rajaratnam case, where wiretaps were used, where often we 

will work jointly and they will engage in those kinds of activities, 

and we get the benefits of some of those investigative things. 

But for us, our investigations, although we are trying to change 

this as much as we can, are often overt, which means we have to 

question witnesses with our target knowing that we are doing that. 

Mr. GREEN. But you use civil litigation? 

Mr. KHUZAMI. Yes. 

Mr. GREEN. And subpoena duces tecum? 

Mr. KHUZAMI. Yes. 

Mr. GREEN. Thank you, Mr. Chairman. I yield back. 

Chairman BACHUS. Thank you, Mr. Green. 

Mr. Pearce? 

Mr. PEARCE. One of the questions that I have about the legislation is, is there anything in the legislation that is not against the 

law right now? In other words, are we just restating things that 

are—it is not legal for Members of Congress to do insider trading, 

is it? 

Mr. KHUZAMI. No, not in our view. 

Mr. PEARCE. So is there anything in the bill that is new, that 

does not already exist in law as a prohibition? 

Mr. KHUZAMI. It changes some of the—it narrows in some cases 

and expands in some other cases terms that are currently in use 

as the insider trading laws are applied. 

Mr. PEARCE. Could you tell me exactly what you are saying 

there? 

Mr. KHUZAMI. Yes, sure. So, for example, it is limited to material 

nonpublic information dealing with pending or prospective legislation. There isn’t really such a restriction in the law in general. And 

so, in the case of Members of Congress, if you got information from 

the Executive Branch or a regulatory agency, it wouldn’t be covered 

by this legislation. 

It is limited to securities or the swaps of certain issuers, which 

means it doesn’t cover options, it doesn’t cover exchange-traded 

funds, or it doesn’t cover mutual funds. Those things would generally be covered in insider trading law as it currently exists. The 

tipping, there is no explicit provision— 

Mr. PEARCE. Is there a reason for this piece of legislation? 

39 

Mr. KHUZAMI. Again— 

Mr. PEARCE. Would you take this legislation and go to work on 

Members of Congress who have been getting by with things? Would 

this open the door to you to undergo things that right now you 

won’t take on because you don’t have enough powers? 

Mr. KHUZAMI. No. I don’t think that is the case. 

Mr. PEARCE. Okay. 

One of my suggestions is that the White House and the Administration are completely not mentioned in here, and, as I look at the 

numbers of regulations, they have far more impact—in other 

words, the BART rule, Best Available Replacement Technology on 

coal-fired turbines, Mac boilers—those things have far more effect 

on the price of stocks than much of what we do. 

Is there something in law like this that prevents members of the 

Administration or members of the Cabinet from doing the same 

thing? Because the regulations have greater immediate impact on 

stock prices than 90 percent of the stuff that passes through this 

body. 

Mr. KHUZAMI. I don’t know if there is anything on the ethical 

rules or other aspects that cover the Executive Branch or others, 

but we have brought cases. We just brought a case against an FDA 

chemist, for example, who was trading ahead of FDA drug approval 

announcements. And that was based primarily on his agreeing to 

ethical rules, where he agreed not to use— 

Mr. PEARCE. But do you think that we should have something 

that specifically prohibits this? In other words, if we are going to 

highlight possible actions by people in the Congress and their employees, we should take in all of Washington. Because, frankly, the 

people at home don’t identify the Congress and Senate as being the 

problem; they say Washington is the problem. They see us all 

rolled up. 

And so, yes? No? You think so? Maybe? 

Mr. KHUZAMI. Certainly, our current approach is we don’t draw 

any distinctions. 

Mr. PEARCE. All right. 

Now, when I consider abuses, I look back at Global Crossing. Did 

you all ever do anything? There were a lot of people on the—a lot 

of people made a lot of money. About $700 million appeared to 

evacuate out of the price of that stock. And that wasn’t necessarily 

just Members of Congress, but there were people who were associated with Members of Congress, people in the party structure. 

Have you all ever taken a formal look at that? 

Mr. KHUZAMI. Congressman, I have only been with the Commission since March of 2009— 

Mr. PEARCE. Could you get me an answer on that? 

Mr. KHUZAMI. I could certainly get back to you, sure. 

Mr. PEARCE. And this was probably now 5 to 7 years ago. 

Mr. KHUZAMI. Sure. 

Mr. PEARCE. And, also, I had asked when you all were here previously—I appreciate what we are trying to do to get transparency 

here. I am still wondering about the big fish. Are we still doing 

anything on Madoff? Are we investigating him? Have we put him 

in jail? Is he gone? 

40 

Mr. KHUZAMI. The criminal authorities put Mr. Madoff in jail, 

and he is serving a very lengthy prison term. In addition, we, as 

well as the criminal authorities, have continued to charge civilly 

and criminally a number of individuals associated with him. 

Mr. PEARCE. Yes. My question, though, was, inside the agency, 

a lot of people were looking the other way. And so I know that we 

got Mr. Madoff. Have we done anything inside the agency? And 

that is what I have never been able to—I see my time has elapsed, 

but if you could get with my office, we have asked this question before. What has happened internally? 

Mr. KHUZAMI. Sure. 

Mr. PEARCE. Because he was existing for a long time. And I know 

we got him. What about us, part of the agency? 

Thank you very much. I yield back. 

Mrs. BIGGERT [presiding]. The gentleman’s time has expired. 

The gentleman from Missouri, Mr. Cleaver, is recognized for 5 

minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

Mr. Khuzami, thank you for being here. 

This body and Washington always overreacts to everything. And 

the way this system is designed is, when someone introduces a bill 

like this, even if it is bad, people vote for it because they don’t want 

to be accused the next morning of being unethical and 

‘‘slimebaggish.’’ That is my word. And so what happens is we do 

things that create this never-moving cloud that hangs over Washington. 

Not long ago, a member of this committee held a fundraiser and 

a bank appeared before our committee, which also attended the 

fundraiser, so then somebody filed an ethics charge against him. 

Now, he actually ended up voting against the measure. You mentioned earlier, you said it is a difficult case—you were responding 

to a Member—you said it is a difficult case to make. 

That is irrelevant in this situation, because all that is needed is 

for somebody to make an allegation. We are in Congress. If somebody makes an allegation, it is in the newspapers. It is irrelevant 

about whether or not it is a difficult case to make; it is the allegation that does the damage, and it ends up in the newspapers. And 

so, political enemies use it to talk about how horrible Washington 

is. Now, it doesn’t matter that they will spend several million dollars trying to join Washington. 

And we have another Member who got into trouble because his 

staff did something and the committee said that he should have 

known. 

So I sit in this committee, I get some information, I am talking 

to Congressman John Doe, just sitting around talking, and I tell 

him what just happened in the committee, and he tells somebody, 

and they end up taking advantage of some information. So then, 

somebody is in trouble, right? Somebody goes and takes advantage 

of the information, and now they are in trouble. Am I right? 

Mr. KHUZAMI. You mean you, as the source of the information, 

would you be in trouble under those circumstances? Is that what 

you are saying? 

Mr. CLEAVER. Yes. 

41 

Mr. KHUZAMI. Legally, no. Again, because you have to have acted 

with sort of, corrupt intent and knowledge. 

Mr. CLEAVER. Not if you are in Congress. 

Mr. KHUZAMI. Well— 

Mr. CLEAVER. Not if you are in Congress. All you have to do is 

be in Congress. 

Mr. KHUZAMI. I can’t speak to the court of public opinion. I can 

only speak to the legal court. But I understand your concern. That 

is one of the reasons why, look, we are careful. Our investigations 

are confidential. We don’t make accusations before we have done 

a full investigation. We are very— 

Mr. CLEAVER. But you would—I am sorry. That is impolite. Go 

ahead, I am sorry. 

Mr. KHUZAMI. We recognize the impact that allegations can have, 

and that is why we are very careful about the confidentiality of our 

investigations. 

Mr. CLEAVER. Is there another way for Congress to deal with this 

issue without passing a law that, in my opinion, is flawed and is 

going to create problems? Look, when it comes to the Floor, everybody is going to vote for it, because that is what we do. We vote 

for things that probably the majority realizes are bad. And the 

media is going to say it is good, anytime you can do anything that 

holds people more accountable. 

I am just afraid that this is one additional deal we are piling on 

ourselves that is flawed. And everybody knows it, and few are willing to say it. It is flawed. 

And I hope there is another way of doing this. If we are going 

to do this and—I don’t know if a blind trust is the deal that we 

have to do, I don’t know, an SEC no-action letter, something. I 

think it would be helpful if you could suggest something other than 

something that I think and others believe to be terribly, terribly 

flawed. It will create problems for the image of Congress because 

there is no way that we can end up not talking about this issue 

among ourselves. 

Thank you, Madam Chairwoman. 

Mrs. BIGGERT. The gentleman’s time has expired. 

The gentleman from Ohio, Mr. Stivers, is recognized for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Khuzami. I appreciate your testimony. And I think we all take this issue very seriously, and I think 

it is important that we address it in the proper manner. 

I want to follow up on some statements and questions that Mr. 

Luetkemeyer, Mr. Canseco, and Mr. Renacci had, as well as, I 

guess, Mr. Pearce. Can you just state one more time for the record 

whether Members of Congress are exempt from insider trading 

laws? 

Mr. KHUZAMI. They are not. 

Mr. STIVERS. Thank you. 

I think we need to keep any fix here as simple as we can. I do 

have a concern for the Constitutionality of Section 3 of the STOCK 

Act with regard to the Speech and Debate Clause. And I think enforcement is really important. 

So my first question revolves around, you have given us a solution earlier in your testimony and in your questions by just creVerDate Nov 24 2008 18:12 Jul 06, 2012 Jkt 072631 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\72631.TXT TERRIE
42 

ating a duty that says that Members of Congress—and I hope the 

Administration would be included in that, as well—cannot use information gained for either personal gain or private profit. Do you 

think a duty like that would conflict with the Speech and Debate 

Clause? Because I don’t think it sounds like it does. 

Mr. KHUZAMI. Again, I am not an expert, but I wouldn’t believe 

so. 

Mr. STIVERS. And then with regard to tipping, because I think 

that is the other piece that might be worth addressing here, 

wouldn’t it be pretty easy to add to that duty some responsibility 

not to tip others who have the purpose of personal gain or private 

profit? 

Mr. KHUZAMI. You could easily draft language like that, but that 

kind of—the tipper/tippee liability is already well established in the 

law. And so, again, in order to avoid a potential conflict between 

what already exists and what might be in the bill, I think my view 

would be, you have the legislation and you basically include in it 

what would be called a savings clause or language that would say, 

this is not intended to affect other law. 

Mr. STIVERS. Okay. So a simple legislative change that would 

create that duty, and then make sure that we enforce the laws that 

are on the books—and I want to get to enforcement in a second— 

would not change or conflict with the insider trading laws that are 

on the books today, correct? 

Mr. KHUZAMI. I think that is right. 

Mr. STIVERS. And isn’t there some risk of creating dual standards 

that then nobody knows how to enforce or what applies to whom? 

Mr. KHUZAMI. I think there is some risk of that. 

Mr. STIVERS. So, let’s get to enforcement for a second. Do you 

think that you have enough—you talked in the beginning of your 

testimony about some of the statistics of your enforcement and how 

it is going up and you are—obviously, the SEC is doing a little 

more of it. 

Do you have the resources you need to do the enforcement that 

is necessary to clean up insider trading, whether it is by a Member 

of Congress or somebody else? 

Mr. KHUZAMI. We don’t have the resources to do the job acrossthe-board of enforcing the securities laws that we need. 

We have made great strides in the last few years, both in terms 

of the number of cases, quality of cases, particularly the credit crisis cases, that we brought cases against over 80 individuals and entities, 40 CEOs, CFOs, and senior executives across-the-board. We 

are doing a lot of great things, but it is a significant challenge, 

given the additional Dodd-Frank burdens and just the numbers. 

We have 1,300 people across the Nation in the Enforcement Division, and we are responsible for 35,000 regulated entities—brokerdealers, investment advisors, transfer agents, and others, as well 

as any citizen who might choose to violate the law. 

So, resources are a real challenge for us. And if we put more into 

insider trading, we are doing less somewhere else. It is a zero-sum 

game. 

Mr. STIVERS. Let me ask you about—can you tell the members 

of this committee what happens to the ill-gotten gains that you are 

able to get back through the process of insider trading? And is 

43 

there a way to help use those, the way we do drug profits, to go 

back into enforcement? 

Mr. KHUZAMI. It does not—as a general matter in securities 

cases, we often take disgorgement or the ill-gotten gains and penalties and return it to the harmed investors. We have returned, I 

think, $3.6 billion in the last 2 years to harmed investors. 

In insider trading cases, it is a little harder, because identifying 

the victim or if it was just somebody on the other side of a trade 

who didn’t have the information—and because the amounts are so 

small, those numbers often end up going to Treasury, rather than 

being distributed to people on the other side of the trade. 

Mr. STIVERS. I only have 15 seconds left here, but what do you 

think about the idea of insider trading, maybe using some of those 

gains to help you with your enforcement costs? 

Mr. KHUZAMI. I would love to be able to have—we attempted to 

get self-funding; it didn’t happen. We have some additional means 

now. But, our budget doesn’t come at the expense of other government agencies because it is funded by fees, transaction fees and 

other fees by Wall Street, and I think that is appropriate. I 

wouldn’t want to see us funded directly from penalties or sanctions. 

I think that probably sets up a bad incentive. 

Mr. STIVERS. Okay. 

Mrs. BIGGERT. The gentleman’s time has expired. 

The gentleman from Minnesota, Mr. Ellison, is recognized for 5 

minutes. 

Mr. ELLISON. Thank you, Mr. Khuzami, for being here. 

There was the big story on ‘‘60 Minutes,’’ a lot of people were, 

I think, probably given more attention than they wanted and a 

type of attention they didn’t want, and we come up with a bill, and 

here we are. Of course, the bill existed long before, and I don’t 

want to imply it didn’t. 

But I was intrigued by the idea that you think it is—this is an 

already—Members of Congress already cannot use inside, nonpublic information in order to enrich themselves. Could you expand 

on that? 

Mr. KHUZAMI. Yes. I think the point is that law currently prohibits insider trading, and there is no special exemption or special 

carveout for Members of Congress. 

Mr. ELLISON. Right. 

Mr. KHUZAMI. And I think the point that I was trying to make 

is that, while that is true, there is some legal uncertainty about 

how those principles that currently exist would be applied to the 

special situation of Members of Congress. And that is why establishing this explicit duty I think would be very helpful. 

Mr. ELLISON. And, in that same vein, as Members of Congress, 

we have a—as you and others make the point, we have a public 

duty, and our responsibility is to pursue the public interest. Now, 

if we are doing something to pursue our private, narrow interests 

at the very same time, that puts both of those interests at odds, 

you know. 

And this ‘‘60 Minutes’’ piece—of course, I don’t want to attribute 

that to being absolutely accurate. It is media, it is actually entertainment too. Part of what they were saying is that one Member 

was supposed to be trying to stabilize the economy at the same 

44 

time they were purchasing equities or options that could enrich 

them if the economy went down. 

That seems to me, if—and, again, if—and this is a two-letter 

word that means a whole lot—if that is to be believed or proved, 

I think there is already ample stuff to say that you cannot do that. 

Specifying it may be a great advantage. That is why I am a coauthor on the STOCK Act. But I just wanted to make it clear that 

I already think that the things that this news broadcast brought 

out you can’t do already. 

Let me ask this: How do the varying designations of the term 

‘‘confidential information’’ among Member offices and committees 

affect the determination of when material, nonpublic information 

has been disclosed? Do you understand my question? 

Mr. KHUZAMI. How do the various definitions— 

Mr. ELLISON. Yes. How do the varying designations of ‘‘confidential,’’ the term ‘‘confidential information’’ among Member offices 

and committees affect the determination when material, nonpublic 

information has been disclosed? 

Mr. KHUZAMI. If there is an explicit agreement that the information is confidential, then that generally establishes a kind of duty 

of trust and confidence between the two parties who made that 

agreement. And if one of the parties who had that information then 

turns around and uses that information for private gain, they have 

violated that duty of trust and confidence. 

Mr. ELLISON. And, do you think there is any problem with the 

perhaps multiple understandings of how this term might be applied 

in various circumstances? Do you think the rule—or do you think 

one of the things we need to focus on is how we can come up with 

perhaps a standard understanding? 

Mr. KHUZAMI. The more standardization, the better. It may not 

always be possible, but certainly that is correct. 

Mr. ELLISON. Yes. 

What kind of information would be regarded as relating to commodity and futures contracts within the context of Members of 

Congress? What kind of information would be considered as related? Do you understand my question? 

Mr. KHUZAMI. What kind of insider trading might— 

Mr. ELLISON. Yes. 

Mr. KHUZAMI. If you are talking about certain commodities, any 

legislation that might impact companies involved in the commodities business would certainly fit that definition. 

Mr. ELLISON. Okay. 

And under what circumstances would a Member or an employee 

of Congress be considered to have reason to know that a person requesting information would use the information obtained to trade 

securities or futures contracts? 

Mr. KHUZAMI. If that were the law, you could look at the circumstances. If you had a friend who was a day trader and you secretly whispered to them some information that you learned about 

some nonpublic legislation, you would have a pretty good basis to 

say you either knew or should have known that this person was 

going to take that information and trade on it. Other cases would 

be less clear. 

Mr. ELLISON. Yes. 

45 

At what point do prognostications as to the prospects of legislation become political intelligence? 

Mr. KHUZAMI. I am not sure I—that would be a difficult question 

to answer without knowing the facts and circumstances of a particular situation. 

Mr. ELLISON. It is a very fact-based question. 

Mrs. BIGGERT. The gentleman’s time— 

Mr. ELLISON. I am out of time. Thank you for your cooperation, 

sir. 

Mrs. BIGGERT. Thank you. 

The gentleman from Michigan, Mr. Huizenga, is recognized for 5 

minutes. 

Mr. HUIZENGA. Thank you, Madam Chairwoman. I appreciate it. 

And, actually, we are running out of time from my colleague 

across the way here, but I would like you to—maybe we can pursue 

that a little bit. As I was hearing that interchange, something 

struck me, and it is called the farm bill. All right? We are going 

to be reauthorizing this thing soon, and whether it has to do with 

ethanol or direct or indirect subsidies or payments or any of those 

things, it seems to me that this may cause some huge headaches 

for not just Members but a number of others who are involved and 

engaged in the legislative process dealing with a major portion of 

our economy. This isn’t just Wall Street; this is Main Street and 

grain elevators out in Michigan and Nebraska and wherever else. 

And so I am just curious, maybe we can keep, kind of, unpacking 

that a little bit, along with the whole notion of this political intelligence information. And, is it really just a judgment call what is 

or isn’t on your part? Or explain that a little bit, if you would. 

Mr. KHUZAMI. When something, whether it is farm bill legislation or a corporate takeover, at what point it crosses the line from 

being just very preliminary or tentative and at what point it 

crosses the line to being material, which means it is kind of an important matter to a reasonable investor in an investment decision, 

is at the end of the day a determination based on all the facts and 

circumstances of what happened. 

And that is why in the course of our investigations, we spend a 

great deal of time trying to tease out every fact and every event 

to make sure we understand what had occurred and make our professional judgment as to whether or not that factor has been satisfied, and thus everything else was as well, whether or not it was 

a case that we would file. 

The same is true for scienter or intent. You can’t look into somebody’s mind, so you have to look at the circumstances under which 

they may have passed the information. Did they put down a taped 

telephone line, instead pick up their cell phone and ask someone 

to call them back on an untaped line and speak cryptically or take 

some steps to conceal what they had done? You look at all these 

things to figure out whether or not people have acted with bad intent, whether or not it is material, in order to decide whether or 

not you have the sufficient basis to file a case. 

Mr. HUIZENGA. Do you see any problems with what we are trying 

to do here? Because I do think that this is a good idea, but I, like 

myself and a number of my other colleagues, have had previous 

lives that follow us here. My family happens to be involved in conVerDate Nov 24 2008 18:12 Jul 06, 2012 Jkt 072631 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\72631.TXT TERRIE
46 

struction back in Michigan, in real estate. I own a gravel company; 

I have three employees. But if I vote on a highway bill which 

means we are going to be using more concrete, and suddenly sand 

and stone is more expensive, and I somehow benefit from that, is 

there a pitfall here that would be—I am assuming that would be 

an unintended consequence to something like that. 

But I see that with the farm bill and a number of these other 

things that are, sort of, regular order and regular business here 

that may cause some problems. And I know there had been one 

proposal out, that when you got elected to Congress, you had 90 

days to liquidate everything, and the only thing that you were allowed to hold would be a government treasury bill. And I can tell 

you, that is not something I would be interested in doing, especially 

in this real estate market. 

How do we strike this balance? Because I think there is a real 

need here to make sure that we have transparency and that we 

aren’t unduly using information that is coming to us. 

Mr. KHUZAMI. Right. There are a number of protections. Proposed legislation is discussed openly, it becomes public. And, therefore, if you were to discuss it, it is not nonpublic and therefore 

wouldn’t give rise to any sort of liability. 

Again, you have to act with knowledge and bad intent. You have 

to purchase or sell securities. The information has to be material. 

You have to meet all those elements. If you were to simply discuss 

proposed legislation with a group of people and they went off and 

traded, and you were doing it consistent with your duties and obligations as a Member of Congress, it would be hard to see how that 

would give rise to a case. 

Mr. HUIZENGA. So me talking at the local rotary isn’t going to get 

somebody in trouble when suddenly that is viewed as insider— 

okay. I appreciate it. 

Thank you, Madam Chairwoman. 

Mrs. BIGGERT. Thank you. 

The gentleman from Colorado, Mr. Perlmutter, is recognized for 

5 minutes. 

Mr. PERLMUTTER. Thanks, Madam Chairwoman. 

And, Mr. Khuzami, thanks for sitting through this for so long. 

I am generally supportive of the legislation as it has been proposed. I guess I bring the same concerns to the table that you do, 

that in trying to define this, you end up exaggerating one piece and 

forgetting another. 

And, you focused primarily on legislative activities of the Congress. So, in the legislative arena, we have two parts. We make policy, and we either fund it or we don’t. Okay? We have oversight of 

your organization and every other organization of the Federal Government, in which case either in a public forum, as today, you provide us with information and in certain instances we have maybe 

private briefings, a Secretary comes to somebody’s office or whatever. 

So we have legislative, we have oversight, and then we have constituent relations, which is what Mr. Huizinga was talking about. 

Speaking to the rotary or somebody comes to my office and says, 

you know what, they are thinking about, well, like last week, 

fracking, okay? Fracking in my neighborhood. Shouldn’t there be 

47 

some legislation about disclosing what is in those fluids? And I 

know the SEC is having to deal with subjects like that. And we 

have every subject under the sun, from farming to foreign policy, 

etc. 

So I do fear that, in trying to define all this, we forget the 

breadth of the activities that we face here in Congress. So can you 

comment on that? 

Mr. KHUZAMI. I think I would probably give somewhat of the 

same answer I gave previously, which is I think that there are a 

lot of protections that are inherent in the insider trading law that 

prevents it from becoming a trap for the unwary because of the 

various legal requirements that have to be satisfied. 

And it may be that that is not sufficient, that you need some sort 

of carveout through a no-action letter that would give you some 

comfort going forward that a certain type of activity, if you met the 

requirements, would protect you from any sort of liability. 

I realize it can be a challenge. It is, frankly, a challenge on the 

corporate side, as well, where you have corporate officers who are 

responsible for all sorts of communications and outreach to their 

shareholders and others. And so I don’t mean to underestimate the 

challenge, but I am hopeful that conscientious people can come together and figure out a solution. 

Mr. PERLMUTTER. I think of the day when we had TARP on the 

Floor of the House of Representatives. And there was—that was 

one where, are you going to pass it or not? Now, under this bill, 

that would be public, because it was as public as possible, that everybody who was transacting business on the markets, could see as 

we—were we going to pass it, were we not going to pass it. 

What would the agency do—let’s say a Member is counting up 

votes, and he realizes that it isn’t going to pass. Now, I don’t know 

that any of this would happen, but he counts up votes, and he realizes this is not going to pass, and he goes and sells whatever. What 

happens then? 

Mr. KHUZAMI. I wouldn’t want to speculate about particular circumstances. 

Mr. PERLMUTTER. I know you wouldn’t, but that is—we are in 

the legislative arena, so you have to. That is what we have to—we 

have to look forward like this. 

Mr. KHUZAMI. Right. 

Mr. PERLMUTTER. And that is why this is the legislature as opposed to the Judiciary. We have to look at the broad expanse. 

Mr. KHUZAMI. Right. No, that is right, that is right. That set of 

circumstances could conceivably give rise to a case, because it certainly was material to investors, and if the vote was that close or 

there was uncertainty about it, it certainly would be nonpublic, and 

to trade on that, if a court were to find that a duty existed, that 

could, in fact, be a violation. 

Mr. PERLMUTTER. Okay. No, I could see that one as being, wow, 

what do we now? It is right here in front of everybody all at the 

same time, but this guy counted the vote an hour ago. 

Mr. KHUZAMI. Right. Now, it could also raise Speech or Debate 

Clause issues, as well. 

Mr. PERLMUTTER. Okay. 

48 

Mr. KHUZAMI. It occurred on the Floor, and there would be, in 

all likelihood, a challenge on those grounds. 

Mr. PERLMUTTER. All right. And just to close, you are going to 

work with the sponsors of this bill to try to tighten it up as best 

we can? 

Mr. KHUZAMI. Yes. 

Mr. PERLMUTTER. Okay. Thank you. That would make me more 

comfortable. 

Thanks. 

Mrs. BIGGERT. The gentleman yields back. 

The gentleman from Delaware, Mr. Carney, is recognized for 5 

minutes. 

Mr. CARNEY. Thank you, Madam Chairwoman. 

And thank you, Mr. Khuzami. There aren’t many questions that 

haven’t been asked, but I have a few. And I appreciate your forbearance through this long hearing. 

I am just trying to understand your testimony. You said earlier 

that you would prefer—I am a supporter of the bill and a cosponsor. I was surprised to learn that Members of Congress may not 

be covered by the rules for insider trading. You say that you assume that they are, that we have some duty. I accept that and 

make the same assumption. 

I also believe that Members of Congress ought to be held to a 

higher standard. And my hope, frankly, in this legislation or what 

ultimately passes will set up a system that does hold us to a little 

bit of a higher standard, just because we have a special trust with 

the public in the duties that we do. 

So do you think a narrower bill with a simpler approach is a better approach? 

Mr. KHUZAMI. I do, because I think it accomplishes everything 

that needs to be accomplished to make it clear and to eliminate uncertainty as to whether or not such a duty exists, but at the same 

time avoids— 

Mr. CARNEY. So, for you, the big question is to eliminate that uncertainty. 

Mr. KHUZAMI. Correct. 

Mr. CARNEY. And you had a back-and-forth with Mr. Green about 

whether it would change anything you do, or you would do the 

same. Have you prosecuted any of these cases? Have you actually 

taken them to a court and had prosecutions to find out what might 

happen currently? 

Mr. KHUZAMI. No. In my time at the SEC, there has not been a 

filed case against a Member of Congress for insider trading. There 

have been cases against members of the Executive Branch, FBI 

agents, and others, but not Members of Congress. 

Mr. CARNEY. So, given the attention that this issue has gotten 

right now—which, for me, is a bad thing because it besmirches the 

reputation further of this institution which really should be the 

people’s House and they should have trust in it—it is an opportunity to do something to improve that. How would you do that? 

How would you improve it? And I appreciate the fact that you are 

going to work with the sponsors to do that. 

Mr. KHUZAMI. In a couple of ways. One is this process, obviously, 

to work on the legislation to clear up these issues. And the second 

49 

is, when any sort of suspicious trading or other activity is brought 

to our attention in insider trading or in any aspect of the Federal 

securities laws, we take a look at that and we conduct our inquiries 

and determine whether or not there is a basis for a violation of law. 

Mr. CARNEY. So I think some of that, as I understood your testimony, comes through disclosure practices, right? And this would require a 90-day disclosure compared to the 1-year, the annual disclosure that we do now. And you mentioned, I think, in reference to 

corporate directors or something, an obligation of 2 or 3 days or 

something. 

What is an appropriate—and what kind of trade would you be 

talking about for that kind of disclosure? 

Mr. KHUZAMI. I am sorry, what kind of what? Trade? 

Mr. CARNEY. Trade or activity. 

Mr. KHUZAMI. I think, in general, our preference from an enforcement view would be, we would like to see the shortest period of 

time between the trade and the disclosure so that we have a better 

chance of getting the information, and to have it done in a searchable and electronic format. 

As it is now, we do look at trading by Members and anybody else 

if we have reason to conduct an investigation, but what you can’t 

do is you can’t search a database in general without kind of a tip 

or a complaint, just search it in order to determine whether or not 

there is something suspicious. And you can’t bring into the analysis 

other information you may have, because if it is in a paper format, 

it is just too unworkable. So electronic filing would really have the 

ability to manipulate the data and analyze it and combine it with 

other information just to make your inquiries much more thorough. 

Mr. CARNEY. Right. So you mentioned earlier, too, some things 

that were not included under this legislation. Could you elaborate 

on that again? I don’t see them in my notes here. 

Mr. KHUZAMI. What is not included is I think it is a—because it 

speaks of material, nonpublic information in terms of pending or 

prospective legislation, it wouldn’t cover other information that 

Members receive that might be material and nonpublic, including— 

Mr. CARNEY. But it includes all kinds of transactions. I thought 

you mentioned certain transactions that wouldn’t— 

Mr. KHUZAMI. Oh, I am sorry, types of securities. 

Mr. CARNEY. Yes, I am sorry, types. 

Mr. KHUZAMI. Yes, yes. It is limited to securities and swaps of 

issuers. So it wouldn’t include options, which are not a security of 

an issuer; an option is bought and sold by an exchange. It wouldn’t 

include an ETF, which is put together and traded by and sold by 

a dealer on an exchange. It wouldn’t include mutual funds because 

mutual funds in general are diversified. There are lots of different 

issuers in a fund, so it is not really—and it is issued by investment 

advisors or investment companies. So those would all be exempt. 

Now, there are not many insider trading cases in mutual funds. 

Because they are diversified, it is harder to move the market. But 

options are typically the insider trader’s first choice because they 

offer a great leveraged opportunity. 

Mr. CARNEY. So I see my time has run out, but you will work 

with the sponsors on those, as well? 

Mr. KHUZAMI. We will. 

50 

Mr. CARNEY. Thank you, and thanks for your testimony today. 

Mrs. BIGGERT. The gentleman’s time has expired. 

The Chair notes that some Members may have additional questions for this witness which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to this witness and to 

place his responses in the record. 

Thank you so much, Mr. Khuzami, and thank you for giving us 

the time and the expertise that you have. 

Mr. KHUZAMI. Thank you. 

Mrs. BIGGERT. With that, I will call up the next panel. 

Without objection, your written statements will be made a part 

of the record, and you will each be recognized for a 5-minute summary of your testimony. 

We will hear from: Mr. Jack Maskell, legislative attorney, Congressional Research Service; Professor Donna Nagy, Indiana University Maurer School of Law; and Mr. Robert Walker, of counsel 

with Wiley Rein LLP. 

Thank you all, and thank you for your patience. You will each 

be recognized for 5 minutes. 

Mr. Maskell, we will begin with you. 

STATEMENT OF JACK MASKELL, LEGISLATIVE ATTORNEY, 

AMERICAN LAW DIVISION, CONGRESSIONAL RESEARCH 

SERVICE (CRS) 

Mr. MASKELL. Thank you very much, Madam Chairwoman. 

Good morning, and thank you to the chairman and the members 

of the committee for inviting me here today. The committee has a 

copy of a legal memorandum that I previously prepared addressing 

in a little more detail what I will be discussing today. 

One of the areas of law that I have covered for CRS since 1973 

is governmental ethics and conflicts-of-interest law. And when 

questions have come in to CRS from time to time over the years 

about Members of Congress using nonpublic information for their 

own personal benefit, we approach the issue generally as a matter 

of Congressional ethics. Our advice over the years has consistently 

been that such conduct may be a violation of specific House and 

Senate ethics rules as well as contrary to recognized and accepted 

ethical guidelines and norms in Congress. A recent advisory opinion from the House Ethics Committee released last week has generally confirmed this kind of approach. 

Because of the allegations that we have all been talking about, 

the issue of insider trading has now come to the fore. And as I 

mentioned and as was mentioned earlier, I think it is fairly clear 

now to everyone following the issue that Congress did not exempt 

itself from the insider trading laws. So, to cut through some of 

what I wanted to say and which would be fairly redundant, let me 

speak to really two points I would like to make today. 

The first point is that CRS considers that the characterization 

made by some critics of Congress that the position of a Member of 

Congress is one which does not involve the public trust or a general 

duty of entrustment is wrong as a matter of both law and ethics. 

I am certainly not the first to say that the office of the Member 

of Congress involves a public trust. Even before the adoption of the 

51 

Constitution, James Madison noted in the Federalist Papers the 

importance of measures to keep Members ‘‘virtuous whilst they 

continue to hold their public trust.’’ The phrase ‘‘public office as a 

public trust’’ is recognized explicitly in both the House and the Senate, and that phrase is more than merely an aphorism, because it 

denotes that Members of Congress wield public power, and have a 

fiduciary-like responsibility to use that power in the interests of 

the general public, who are supposed to be the beneficiaries of that 

trust. 

The Senate, in its standing orders, has stated it this way: ‘‘Public 

office as a public trust signifies that the officer has been entrusted 

with public power by the people, that the officer holds this power 

and trust to be used only for their benefit and never for the benefit 

of himself or a few.’’ And that is in the standing orders for the Senate, and the House has similarly recognized that standard. 

This fiduciary duty of Members toward the public is one which 

has been also expressly recognized by Federal courts. In 1978, the 

United States Court of Appeals for the Second Circuit—and it is interesting that it is from the Second Circuit, which covers New York 

and Wall Street—applied the fiduciary theory of public trust owed 

by a Member in a case in which the government moved to have the 

proceeds from an illegal transaction between a Member of the 

House and a private party recovered by the government under a 

theory of a constructive trust. The court agreed with the lower 

court decision to ‘‘impose a constructive trust on moneys the Member received in breach of his fiduciary duty as a United States Congressman.’’ 

There are also specific House and Senate ethics rules that have 

been interpreted to mean that Members may not use their official 

positions for personal gain. Significantly, the House of Representatives has expressly recognized the continued application to the 

House of the ethical guidelines and standards adopted in the Code 

of Ethics for Government Service, which provides expressly that 

any Federal official, including a Member of Congress ‘‘may never 

use information coming to him confidentially in the performance of 

governmental duties as a means for making private profit.’’ 

We think these factors create this public trust and this duty of 

trust of Members to the general public, including the investing 

public. 

And I would point out that the ethics rules in the Executive 

Branch of government on using information for private gain are 

similar to these Legislative Branch ethics rules. And, of course, you 

are probably familiar with and the last witness spoke about the 

guilty plea to insider trading charges this summer by a Federal 

employee who worked as a chemist for the FDA. They are under 

similar ethical guidelines, that they can’t use inside information for 

their own use. 

The second point I want to make today is about potential issues 

with enforcement of any measure that you propose. The express authorization and duty for Congress to discipline its own Members 

under Article I, Section 5, is there in part because there is the 

Speech or Debate privilege in Article I, Section 6, that says Members can’t be questioned in any other place for their legislative conduct. 

52 

And so I also want to point out that Section 3, which some Members questioned and brought up, would be a House rule and would 

be interpreted internally by the House and by the House Ethics 

Committee. So there may not be a problem at all with Speech or 

Debate with the House interpreting the rule because they are being 

questioned in this place and not some other place. 

But if you expect that the Securities and Exchange Commission 

or any outside entity is going to come in and regulate legislative 

conduct and look at information that Congress may receive because 

of a hearing or a deposition that a Member takes or something, you 

may run into evidentiary issues concerning the Speech or Debate 

privilege that are certainly going to be practical considerations that 

anyone prosecuting that kind of provision would run into. I am not 

saying don’t enact the law, but just be aware that privilege is there 

and that could interfere with some of the enforcement opportunities. 

Thanks for the opportunity to be here. I will be available to answer any questions you may have relative to my testimony. 

[The prepared statement of Mr. Maskell can be found on page 83 

of the appendix.] 

Chairman BACHUS. Thank you. 

Professor? 

STATEMENT OF DONNA M. NAGY, C. BEN DUTTON PROFESSOR 

OF LAW, INDIANA UNIVERSITY MAURER SCHOOL OF LAW 

Ms. NAGY. Thank you, Chairman Bachus, and members of the 

committee. I am honored by the invitation to testify. 

I have researched and taught in areas including securities litigation and insider trading for over 17 years. Last spring, I published 

an article on Congressional insider trading. The article sought to 

debunk what at the time was bordering on urban myth: that Congress had exempted itself or was somehow immune from the existing law that prohibits insider trading. My article concluded that 

Congressional insider trading is already illegal under existing law 

because it violates the broad antifraud provisions in Rule 10b-5 

and the Federal mail and wire fraud statutes. 

I acknowledge that many distinguished securities law scholars 

see gray areas in existing law, and some believe a court would likely rule the other way in a prosecution. 

The controversy surrounding the application of existing law to 

Congress stems from the fact that Congress has never enacted a 

Federal securities statute that explicitly prohibits anyone from insider trading. The STOCK Act addresses one manifestation of this 

much larger problem, but an explicit statutory definition and prohibition of insider trading that would apply equally to everyone, Congress included, would be the most equitable and appropriate solution. 

In the absence of a statutory prohibition, insider trading is generally illegal only insofar as it is fraudulent. To be sure, the vast 

majority of insider trading prosecutions involve quintessential fiduciary-like relationships where the trader is an employee or agent 

alleged to have defrauded his employer or principal. But the Supreme Court has never implied, let alone stated, that a relationship 

has to be strictly a fiduciary one for a duty of disclosure to attach 

53 

under Rule 10b-5’s misappropriation theory. Rather, the Supreme 

Court uses the term ‘‘fiduciary duty’’ interchangeably with a ‘‘duty 

of trust and confidence.’’ 

The SEC and the Justice Department have cast a tremendously 

wide net in Rule 10b-5 investigations premised on the misappropriation theory. Dozens of those caught have been family members, 

friends, or business associates who misappropriated material, nonpublic information that was entrusted to them. In all of these 

cases, the Securities and Exchange Commission and the Justice 

Department have proven themselves quite adept at convincing 

courts to find the type of feigning fidelity that is essential to liability under the misappropriation theory. 

In view of these precedents, I very much doubt that a Federal 

Court would have the temerity to conclude that a Member of Congress lacks a duty of trust and confidence for purposes of the existing misappropriation theory. The Constitution refers repeatedly to 

public offices being of trust. Members also take an oath of office to 

faithfully discharge their duties. So there should be little doubt 

that a Member’s undisclosed, self-serving use of Congressional 

knowledge constitutes a misappropriation that would defraud the 

United States and the general public, among others. 

I recognize that a Member of Congress has never been prosecuted for insider trading based on nonpublic Congressional knowledge, but the Justice Department has used the Federal mail and 

wire fraud statutes to successfully prosecute Congressional officials 

for defrauding the United States and the public through the undisclosed misappropriation of Congressional funds and tangible property. And the Supreme Court has dictated that material, nonpublic 

information constitutes intangible property. 

My final point relates to one possible consequence of the STOCK 

Act. I applaud and endorse the motivation behind the proposed legislation, but I am concerned that in the absence of a modification 

to its wording, the STOCK Act could be viewed as the only insider 

trading law that applies to Congress. This risk is troubling, because the proposed legislation fails to reach a host of possible insider trading scenarios that would almost certainly fall within the 

existing law. 

I would be honored to work with the committee and its staff to 

remedy this concern and to clarify some of the other drafting issues 

relating in large part to the Act’s underinclusiveness, and in some 

respects overinclusiveness. 

Thank you very much for giving me this opportunity to share my 

thoughts. 

[The prepared statement of Professor Nagy can be found on page 

86 of the appendix.] 

Chairman BACHUS. Thank you. Mr. Walker, I welcome you. 

STATEMENT OF ROBERT L. WALKER, OF COUNSEL, WILEY 

REIN LLP 

Mr. WALKER. Thank you. And good afternoon, Mr. Chairman, 

and thank you, members of the committee, for this opportunity to 

discuss the Stop Insider Trading on Congressional Knowledge Act 

with you. As a former Chief Counsel of the House and Senate Ethics Committees, and as a former Federal prosecutor, I will add my 

54 

voice to the chorus: Current Federal insider trading prohibitions do 

apply fully to Members and employees of Congress under the misappropriation theory of insider trading. 

I understand the view of many that notwithstanding the fact 

that insider trading prohibitions are enforceable against Congressional Members and staff, passage of the STOCK Act would give 

more specific and explicit authority, maybe even direction to the 

SEC and the Department of Justice to prosecute such cases if they 

arise. However, at least with regard to the provisions of the Act addressing so-called tippee liability for information coming from within Congress, and I do read the Act as addressing such instances, 

I believe that caution is advisable to make sure that the provisions 

do not chill the legitimate and necessary exchange of information 

between Congressional Members and staff, and individuals and entities outside of Congress. 

Proof of insider trading cases under the misappropriation theory 

is not easy in any context, whether inside or outside of Congress. 

There is, of course, a unique complicating factor for enforcement by 

the DOJ or the SEC of insider trading prohibitions against Members of Congress. The Speech or Debate Clause, as you know, provides that certain, but not all, actions and activities of Members of 

the House and Senate may not be cited or used in proof in prosecutions or legal actions against Congressional Members. But this provision may limit available and admissible evidence in outside proceedings involving allegations of any sort, not just proceedings involving insider trading. 

The important point to keep in mind here, however, with respect 

to Speech or Debate privilege is that no matter how carefully the 

STOCK Act is drafted, it cannot trump this Constitutional privilege 

where it applies. The privilege does not, of course, apply in investigations or proceedings of the Congressional Ethics Committees or 

offices. In such proceedings, for example, paragraph 8 of the Code 

of Ethics for Government Service could apply to capture and sanction insider trading by a Member or employee of the House or the 

Senate. This provision states that a person in Federal Government 

service should never use any information coming to him confidentially in the performance of governmental duties as a means for 

making private profit. Securities trading by a Member or employee 

based on confidential Congressional information would be a clear 

violation of this provision. 

Having said this, however, proof of whether the Congressional information at issue in any given instance was in fact confidential 

under applicable House, Senate, or committee rules could be problematic. Allegations of insider trading in Congress may also be addressed under the overarching Congressional standard of conduct 

which enjoins Members and staff never to engage in conduct which 

may reflect discredit on the House or the Senate. In the House, this 

standard is set forth in paragraph one of House Rule 23, the Code 

of Official Conduct. If a specific credible allegation of securities 

trading by a Member or employee based on material, nonpublic information were to come before the Ethics Committees of the House 

or Senate, or before the House Office of Congressional Ethics, such 

an allegation would be investigated fully by those offices as constituting potentially conduct reflecting discredit on the institution. 

55 

Turning to the provisions of the STOCK Act that would require 

public disclosure of securities transactions within 90 days, rather 

than as currently on an annual basis, these provisions are consistent with, and would extend, the general approach to policing 

conflicts of interest in the Legislative Branch. That is an approach 

in which public disclosure is emphasized and recusal or divestment 

are disfavored. 

Finally, three brief points on the section of the STOCK Act that 

would amend the Lobbying Disclosure Act, the LDA, to apply the 

Act’s registration, reporting, and other requirements to a newly defined class of individuals and entities; that is, to so-called political 

intelligence consultants and firms. First, as has been acknowledged, these provisions would raise First Amendment concerns, 

and so there must be a compelling interest to impose this regulatory scheme. Second, the Act imposes a hair trigger threshold for 

registration and reporting. One, just one political intelligence contact, and registration and reporting requirements would kick in. 

And third, the definition of political intelligence contact in the Act 

is very broad, and would seem to capture communications that 

would have nothing to do with securities trades. 

Thank you very much for the opportunity to speak with you 

today, and I look forward to answering your questions. 

[The prepared statement of Mr. Walker can be found on page 99 

of the appendix.] 

Chairman BACHUS. Thank you. Normally, the committee has 

both Republican and Democratic witnesses. And this is an extreme 

compliment to each of you panelists. In this case, the committee 

agreed that you were probably the most knowledgeable expert witnesses, and we invited the three of you unanimously. So I want to 

thank you, and I want to thank you for your testimony, which I 

read last night. I thought it was very thorough. 

As a backdrop, many Members of Congress have been accused of 

really some indefensible acts had they taken place. And so, I think 

it has created a public perception. As a result of that, the number 

one misconception is that insider trading laws do not apply to 

Members of Congress. However, I do believe that we can clarify 

that and make it clearer to restore public trust. Because when an 

accusation is made, it has an effect, even if it is a false allegation. 

Even if it is totally false. 

Let me ask Mr. Walker, in your view would requiring all Members of Congress to place our assets in a blind trust eliminate the 

concerns that they are somehow violating the public trust by trading stocks or options or futures? Would that be a good idea? 

Mr. WALKER. The short answer to whether it would eliminate allegations that the Members themselves were trading stocks on inside information, the short answer to that is yes, it would. There 

are other concerns that would enter into whether it was a good approach to take, at least from a practical point of view. In listening 

to your fellow committee members discuss some of their proposals 

today, I understand that proposals in this area would either require Members to place their assets in a blind trust or to disclose 

within a very brief window of time securities transactions. With 

that latter part added on, some of the practical concerns that I initially had with respect to a requirement that everyone put their asVerDate Nov 24 2008 18:12 Jul 06, 2012 Jkt 072631 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\72631.TXT TERRIE
56 

sets in a blind trust would be eliminated. Because in fact, a blind 

trust is an option for people who have a considerable number of assets and level of assets to begin with. There are administrative 

costs that go on in connection with it. And it is just not practical 

for a Member who may be here for a 2-year term to upend their 

financial lives, put it in a blind trust, and then they are ‘‘one and 

done,’’ so to speak, in terms of their election to Congress. And it 

would not—and if you had that requirement, simply, Members who 

had relatively few assets would be in a position of not being able 

to trade at all unless you had that additional provision where they 

could opt for disclosure of trades within a very brief window of 

time. 

Chairman BACHUS. Thank you. Professor Nagy, you stated in 

your testimony that Congress should use this current controversy 

to diagnose and treat the entire malady through the enactment of 

an express statutory definition and prohibition of insider trading 

for all individuals. Given that the SEC testified this morning that 

any statutory changes in this area should be carefully calibrated to 

ensure they do not narrow the current law, and thereby make it 

more difficult to bring future insider trader actions against any 

such persons, how would you suggest that we go about drafting an 

insider trading law? 

Ms. NAGY. Mr. Chairman, I think there are a number of approaches that Congress could take. As I mentioned at the start of 

my testimony, Congress has never enacted a Federal securities 

statute that explicitly prohibits anyone from insider trading. Congress would not be starting on a blank slate if it chose to undertake 

that mission today. In 1987, there was a proposal that came relatively close to enactment: the Insider Trading Proscriptions Act of 

1987. That proposed Act would have prohibited the wrongful use 

of material nonpublic information and the use of information that 

has been wrongfully obtained. The legislation sought to bring existing law under an express statutory prohibition. The advantage was 

that a statutory definition would not limit insider trading to fraud. 

It would include fraud, so it wouldn’t have displaced the anti-fraud 

view of insider trading. But it would build on top of that fraudbased prohibition. 

So for instance, someone who misappropriates material nonpublic 

information and uses that information to trade securities, but 

doesn’t breach any fiduciary-like duty of trust and confidence, poses 

a prosecutorial challenge for the Securities and Exchange Commission or the Justice Department. Government prosecutors are incredibly creative, and I think they should be applauded for advancing new legal theories. There is a case involving a computer hacker 

where computer hacking is deemed to be deceptive. But we can all 

imagine, and I realize I risk sounding like a law professor here, but 

we can all imagine situations where misappropriated information 

is not obtained in any deceptive manner. So a broad statutory prohibition like the Insider Trading Proscriptions Act would be a place 

to start. However, we don’t need to end right there. An alternative 

short of that would be bringing Congress and Congressional officials and Federal employees explicitly within existing law and 

making it explicitly clear that there is a duty of trust and confidence. 

57 

I could talk some more about that in answer to other questions. 

Chairman BACHUS. Thank you. Mr. Maskell, I appreciate the 

work that you do, and the Congressional Research Service. 

Mr. MASKELL. Thank you. 

Chairman BACHUS. They are a highly professional group, and of 

great assistance to us. Please explain the fiduciary duty that you 

say Members of Congress owe to the American public. And do you 

believe that the breach of that duty can give rise to action under 

Section 10b-5 in certain circumstances? 

Mr. MASKELL. Yes, I do believe that in certain circumstances, 

that duty can give rise to a violation of insider trading law. This 

is a concept that has been around as long as the Nation has been 

around, that Members of Congress, public officials particularly, but 

especially Members of Congress who pass legislation and make 

laws, wield this public power for the benefit of the general public. 

And the general public are the beneficiaries of the trust that Members have. I explained in this one case, United States v. Podell, which arose out of the Second Circuit, that the court actually went 

back in, there was a transaction in which a Member had received 

money to help an airline industry get a route to Florida, a very lucrative route from New York to Florida, and the Justice Department came in and said since you have a fiduciary relationship to 

the public and a public trust, we consider that the money you took 

was not yours, but really belonged to the people, to the government. And the court agreed with them and allowed them to come 

in and recover that $50,000 on behalf of the United States Government because of this fiduciary relationship that the court, the fiduciary duty that the court recognized in that case. 

So I think it could be strong enough. I agree almost unanimously 

with everyone that it could be clarified. And certainly, this legislation would make it more explicit. And any legislation that does 

make that duty more explicit could be useful. 

Chairman BACHUS. Thank you. I would just conclude by asking, 

on behalf of the committee, that the three of you make yourselves 

available—and you have made yourself available—to the sponsors 

of this bill and to the committee staff as we work to do just that, 

to clarify and make certain that the public is certain that these 

laws apply to us, and that our trading is measured by that standard. 

Thank you. Ms. Waters? 

Ms. WATERS. Thank you very much, Mr. Chairman. I would like 

to thank our panelists for their patience, and for staying here to 

share with us their expert knowledge about this very, very complicated subject. I have listened very carefully to all of our presenters here today. I think one thing that there is a consensus on 

is that legislators, Members of Congress, are not exempted from insider trading. I think that is very, very clear based on everybody’s 

testimony. And I think it is important for that word to go out 

among the Members of Congress, because I do believe that there 

was a belief by Members of Congress that there was an exemption, 

that somehow based on the work that we do, we do have access to 

information that may or may not be privileged or public, but somehow you would not be held accountable for discussing that or sharing it in some way. And I understand that. And that is accepted. 

58 

What is not clear to me is how the details of this legislation will 

be worked out, and who will have oversight responsibility, what 

role will the SEC play, what role will the Ethics Committee play, 

and even the Justice Department as we look at all of this. So that 

really does have to be ferreted out. That has to be thought through. 

Now, having said all of that, I have been trying to think about all 

of the circumstances that Members of Congress could be involved 

in that could be either/or. And I am focusing on the discussions 

that go on between staffs. For example, if members of Democratic 

staff and members of Republican staff get together, they are trying 

to work out problems with legislation, and perhaps even in what 

they are doing there are lobbyists involved as they are trying to 

work through how to resolve differences. In doing this, some facts 

began to emerge, or thoughts that may not be facts, that as these 

members look at what they are dealing with they could see how 

certain actions could either advantage or disadvantage a company 

or companies. And based on the information that they are concluding, or one person may be concluding, even though there are 

no facts to support it, that they could go out and they could say 

to a neighbor or a friend or a group at a party, ‘‘We are working 

on this legislation and these companies are involved. And I just 

kind of believe that if we go this way, this company is going to lose 

a lot of money. And if we go this way, these companies are going 

to gain a lot of money. I have just been working on this, I have 

been thinking it through, and that is really what I believe. 

Now, the staff member does not act upon that information and 

go out and start trading, but do they become a tipster because 

somebody they are talking to, say, that person is very smart, and 

I have always listened to what this person had to say on so many 

levels and I think if they think that perhaps this is going to lead 

to this company making a lot of money, I am going to invest. I am 

going to trade. I am going to invest in that. 

What is that? Is that tipping? Is that undermining the fiduciary 

responsibility? How would one calculate that? Professor? 

Ms. NAGY. Right now under Rule 10b-5, whether it is the Securities and Exchange Commission or the Justice Department bringing 

an action, the government would have to show that the person who 

communicated the information breached a duty of trust and confidence in doing so. The Supreme Court has interpreted the requisite breach to mean essentially that the tipper, the communicator 

needs to have made that communication for a personal benefit. 

Without the personal benefit, there is no improper motivation. And 

if there is no improper motivation, under current law there is no 

liability for either the tipper or the tippee. So the type of well-intentioned communication of information from a knowledgeable 

source to another would not be illegal insider trading under Rule 

10b-5. And I would encourage Congress not to reach beyond that 

established precedent. I think that works reasonably well. So under 

Rule 10b-5 it is the motivation of the person communicating the information that is going to be the linchpin for liability. 

Ms. WATERS. Let me complicate this a little bit more. The tipper, 

who is not a conscious tipper who would receive benefit in any way 

from the tipping, has communicated this general information and 

thoughts to someone who could be a relative in that crowd where 

59 

you are talking. And that relative could be someone who in some 

way shares profits with, or would lend money to, or would designate that person in some way to be a part of their business. Does 

that mean that the would-be tipper then has violated some law? 

Because in a protracted way, they could be the beneficiary of the 

gain of the person who actually made the investment without even 

knowing at that time that they would be a beneficiary. How is that 

viewed? How is that dealt with? 

Ms. NAGY. Congresswoman, in the example you give, without the 

intention to assist the friend or relative, the communicator of the 

information would not have liability because the communicator 

would not be breaching a duty of trust and confidence. And in the 

tippee-tipper type scenarios we are talking about, the tippee’s liability is derivative of the tipper’s. But current law would reach the 

type of scenario you are talking about not so much as a tippertippee situation, but as a misappropriation situation. I mentioned 

before that the government casts a very wide net vis-a-vis its application of the misappropriation theory. 

Your hypothetical involves a situation where a knowledgeable 

source was sitting at the dinner table, sharing information with 

family members. The Supreme Court would not view the knowledgeable source—or a current court, I should say, would not view 

the knowledgeable source as a tipper. Rather, current case law 

would view the knowledgeable source as a person defrauded. That 

is, the recipients of that information sitting around the dinner 

table would be viewed as owing a duty of trust and confidence to 

the person sharing that information. So if Aunt Tilly, for instance, 

used that information in her own personal securities trading, the 

government could bring an action against Aunt Tilly for defrauding 

the person who told her that information, assuming the government could show a relationship of trust and confidence. 

Now, there is a rule that the Securities and Exchange Commission promulgated that establishes three nonexclusive circumstances 

for finding a duty of trust and confidence. And the third category 

in that rule is one that pertains to family members. But it defines 

family members as parent, child, spouse, and sibling. So Aunt Tilly 

wouldn’t be covered under that section of the rule. But she would 

potentially be covered under a second section which specifies that 

anyone who has a history, pattern, or practice of exchanging confidential information can be deemed to have a duty of trust and 

confidence. And so, if this family’s history, pattern, and practice 

was to respect each other’s confidentiality, then current law under 

the misappropriation theory could cover that as a fraud on the 

communicator. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Chairman BACHUS. Any of the panelists, if the tippee or tipper 

were Tipper Gore or Tip O’Neill, would it change your answer to 

the question? Never mind. Mrs. Biggert? 

Mrs. BIGGERT. A quick question. It seems like with all of the financial disclosure that we have now, and if this is in the forefront, 

there is going to be a lot more scrutiny of our financial disclosures 

for good or bad. What I was wondering is, when we file the financial disclosures, we include spouses and dependent children, I 

guess is what their stocks are. Would this be something that could 

60 

be, with all of the whatever our spouses trade or anything, would 

this be included under a STOCK Act for Members? Maybe Mr. 

Walker, you could— 

Mr. WALKER. I had been assuming that the answer to that is yes, 

to the same extent that the financial disclosure requirements currently apply to interests of spouses or dependent children. I think 

it would, although I don’t believe the legislation addresses that specifically. 

Mrs. BIGGERT. Okay. Does anybody else have any comments on 

that? 

Mr. MASKELL. I agree with Rob. The legislation amends, though, 

Section 103 of the Ethics in Government Act of 1978. As Rob said, 

spouses and dependent children are covered. And you have to disclose transactions by spouses and dependent children because it 

tries to close an obvious loophole that you could just put money in 

your spouse’s name or child’s name. 

Mrs. BIGGERT. It is just that with that further scrutiny, I always 

go back to maybe, Mr. Walker, you were in Ethics at that time, but 

I remember filing one of the first financial disclosures, and I had 

put in there ‘‘covered hopper.’’ So I got a call, what is a covered 

hopper? I said, I don’t know. You don’t have time to always look 

at these things. A covered hopper is a railroad car. But I had to 

go and ask what it was. And I think that sometimes we don’t really 

pay as much attention because we have somebody to do this. So it 

is going to make it hard for us sometimes on this. I think we have 

to be very careful. 

My other question is really on the Speech or Debate Clause. I am 

not really sure what you meant, Mr. Maskell, when you were talking about the Speech or Debate, we might have a problem with 

solving how this is going to work. If you could explain that a little 

bit more. 

Mr. MASKELL. When you have something going on like an inside 

trade, you substantially have two parts. You have a Member or 

other individual who is covered by the statute making a transaction, telling this broker, whomever, to buy or sell stock. And then 

on the other hand, there is this—it is based on certain information 

that the person received within their government employment, 

their Congressional employment. The first part of that is there is 

not going to be a problem with Speech or Debate. To be able to go 

in and prove that a Member of Congress made an order, bought 

stock, sold stock, all of that is outside of the legislative sphere and 

outside of the legislative process. 

However, it is that second part, where the Member got that information, where you may have a practical issue with outside enforcement. Someone to come in and say, a Member sits on this committee, and they took a deposition of a witness, and that Member 

traded on that. That may run into problems with Speech or Debate 

privilege if a Member can say, wait, you cannot—I claim my privilege. You cannot introduce that into evidence because that speaks 

to a legislative activity that is covered under the Speech or Debate 

Clause. It is not a complete bar to a prosecution. You just look back 

in the very recent history, and Members of Congress can be prosecuted for things that are based on official acts, for bribery and all, 

because they have gotten evidence in other ways and they have 

61 

been able to bring that in. But if it is strictly on where someone 

got information, there could be an issue. 

Let me tell you about one case, United States v. Swindall, which 

concerned at that time a Member of Congress who was at that time 

from Georgia. He was indicted on 10 counts of perjury related to 

money laundering. He was convicted on nine counts. The U.S. 

Court of Appeals and the Eleventh Circuit threw out three of the 

convictions because the Justice Department argued that the Member of Congress had ‘‘unique and specific knowledge’’ of these kinds 

of transactions because he sat on the committee that dealt with 

these. And the court said, you can’t introduce the fact that he sits 

on this committee and that he has dealt with that information. 

That is protected by Speech or Debate privilege. So this case went 

up, and cert was denied by the Supreme Court. 

So I am just saying when you enact something and you expect 

an outside group to enforce it, there could be evidentiary issues 

that they run into, which would not be a problem if the Ethics 

Committee says, you violated the statutory provision that we enacted. And even though the SEC might have problems, we don’t 

have any problems with this because we are this place, we are the 

House Ethics Committee or the Senate Ethics Committee for Senators, and we can certainly enforce this under the standard that 

Rob mentioned, which is that you have caused the reputation of the 

institution to be denigrated, and therefore because you violated the 

statutory provision, we have authority over it. 

Mrs. BIGGERT. Okay. Thank you. I yield back. 

Chairman BACHUS. Mr. Sherman? 

Mr. SHERMAN. Somebody who engages in transactions might do 

100 transactions, just on a hunch, and 99 times, they lose money. 

Once they make a fortune, society looks at that and says, aha, he 

must have had insider knowledge. If Members of Congress should 

be subject to these rules, and we should, and I believe we are, and 

I believe we should clarify that, the question is what steps should 

Members of Congress take so that we don’t bring this institution 

into further disrepute? 

Now, in the private sector, you are an officer of one corporation, 

you know you have to get legal advice to trade in the stock of that 

one corporation. I have colleagues who invest in hundreds of different companies. They are buying and selling every day. So the 

corporate executive is trading in his own company stock once every 

few months, or according to a preexisting plan, getting careful advice, and I have colleagues trading from their iPads on the Floor— 

or maybe. Does it make sense for Members of Congress to own 

shares of individual stock knowing that every one of those companies is affected by Congressional action or inaction? You could go 

to a caucus meeting and find out that everybody is talking about 

X, Y, and Z, so they are not talking about A, B, and C, so companies in that industry are safe. 

Have any of you advised those with insider knowledge how to 

avoid violating these rules? And have you ever had to advise somebody where their insider knowledge didn’t relate to just one company, but they had insider knowledge of facts affecting everything 

on the board and in the pink sheets? Can anybody reflect their personal experience on this? 

62 

Ms. NAGY. The SEC has promulgated a rule, Rule 10b5-1, that 

provides a safe harbor, so to speak, for preexisting trading plans. 

Mr. SHERMAN. And you can have a preexisting trading plan with 

one company. You may own 20 percent of it, you are going to retire, 

and you are going to sell 2 percent of your shares every month or 

whatever. But I don’t know anybody who has a preexisting trading 

plan with regard to a portfolio of 50 stocks that they are in and 

out of every day. 

Ms. NAGY. Potentially, one could have a preexisting trading plan 

for mutual fund investments where purchases are pre-arranged. 

Now, as long as the person who sets up the plan is not communicating with the portfolio manager of the mutual fund and sharing 

information, the portfolio manager can purchase and sell individual 

securities in that mutual fund portfolio, and there would be nothing wrong with that. 

Mr. SHERMAN. You are almost arguing for what I am arguing for, 

and that is to let Members invest in mutual funds, but not in individual stocks. I would like, for the record, for you to provide—each 

witness who wants to, to provide us with the answers to two questions. First, what steps do we have to take with regard to the bill 

we are considering to make sure that it makes things tougher and 

clearer rather than serves to allow Members of Congress to do that 

which is pretty clearly illegal? And then second, what prophylactic 

policies should be imposed on Members, or recommended—I would 

say imposed, to make sure not only that they are not trading on 

inside information, because if one of my colleagues makes $10,000 

that they shouldn’t, that worries me. But what worries me more is 

we are down to 9 percent. And if every one of my colleagues just 

plays their hunches, then out of every hundred trades, there is 

going to be one that you folks out there can say is another reason 

to hate Congress, or to distrust Congress. So should we have a policy that says don’t—put all your money only into mutual funds and 

U.S. and State bonds. If you are in mutual funds, don’t buy or sell 

more than 5 percent of that fund in any month? What would be the 

rules that you would suggest not to give us the maximum investment flexibility, but to give us the minimum likelihood of further 

opening up Congress to attack? Many of those attacks are unfair. 

But Congress’ position, and the trust of the American people in 

Congress is a scarce and valuable commodity that can be degraded 

by both true and false charges. 

Mr. Walker, you were trying to say something? 

Mr. WALKER. Yes. Certainly, the measures that you have suggested, and the potential of requiring blind trusts or more prompt 

disclosure would be prophylactic measures, including ones you have 

talked about about having a policy of investing in mutual funds. I 

think it may be an unattainable goal to avoid ever raising public 

concern about potential conflicts of interest. I am not sure you are 

going to protect against that completely if someone is of a mind to 

raise an issue. 

With respect to other provisions of the Act that would tighten up 

the approach to these things, I do think that the approach of disclosure that is currently in the Act, as I have said, is consistent with 

the current framework for addressing conflicts, and would have 

beneficial effects. 

63 

Mr. SHERMAN. Yes, Professor? 

Ms. NAGY. Congressman, I would be very happy to provide a list 

of steps that could be taken to eliminate the underinclusiveness, 

and to some extent the overinclusiveness as well. The one point 

that I would like to make now is that the STOCK Act should make 

unmistakably clear that it builds on existing law, and that nothing 

in the STOCK Act should be read to displace existing law. This 

way, Rule 10b-5 and the Federal mail and wire fraud statutes will 

be there as a baseline, and the STOCK Act can be read as legislation that makes unmistakably clear how current law applies in the 

context of Congress. 

Mr. SHERMAN. Thank you. 

Chairman BACHUS. Thank you. Mr. Huizenga? 

Mr. HUIZENGA. Thanks, Mr. Chairman. I don’t want to put words 

in your mouth, but I want to make sure I am understanding as I 

was hearing you. Description of the fiduciary with people, with the 

public, is this legislation really necessary? And I am kind of hearing that it may not be necessary, that the legislation may not be 

necessary. I think, Professor Nagy, you talked about it being a little too explicit at some points. But is it just sort of belt and suspenders legislation? And is that your point, and why you want to 

make sure that it is not supplanting or that it rather is building 

on current case law? 

Ms. NAGY. Yes, Congressman. When I wrote my article last 

spring, I wrote it in response to questions that had been raised as 

to whether Members of Congress owed a duty of trust and confidence for purposes of the misappropriation theory of insider trading. To be candid, I was surprised to hear that there was some difference of opinion on this issue. It would strike me that since the 

Constitution refers to a public office being ‘‘of trust’’, that should 

settle the matter. And when I think of the many cases the Securities and Exchange Commission and the Justice Department bring 

that involve relationships that are by no means ordinary fiduciary 

ones, or fiduciary-like ones, this is an issue that shouldn’t generate 

much debate. But that doesn’t appear to be the case. Securities professors whom I tremendously respect see this as a gray issue. And 

some go even further. So I am now at a point where I see that 

much use and much clarity can come from a declaration that Members of Congress owe a duty of trust and confidence for purposes 

of existing misappropriation theory law. 

So yes, I would see this as a belt and suspenders legislation. My 

concern would be that the STOCK Act’s suspenders are not viewed 

as somehow loosening or eliminating Rule 10b-5 and Federal mail 

and wire fraud statutes as the belt. Because then, I think we would 

have taken a step backwards. But as long as it is clear that this 

is belt and suspenders, we can make a good attempt at getting the 

suspenders as tight as they can be. 

Mr. HUIZENGA. So let me ask this. My colleague right in front of 

me here, Mr. Canseco, has a resolution. It is not legislative, but it 

is a resolution that goes in, and in the brief description that I have 

heard, might be that belt and suspenders. It doesn’t change or 

move anything else; it keeps it internal. He was talking about that 

dealing with ethics. Is a resolution actually a better direction to go? 

64 

Maybe Mr. Maskell, you would have an opinion on that. Is a resolution a better direction to go than a legislative proscriptive? 

Mr. MASKELL. I wouldn’t say it is a better way to go. It is an alternative way to go that could make the same kind of points about 

the duty of trust and confidentiality of information, not to use it 

for your own personal benefit. You could have more specificity in 

the House rules. That would be one way to go. I have never said 

that the STOCK Act is unnecessary. I personally wouldn’t say that. 

I know CRS would never say that, because I don’t want to usurp 

your position. 

Mr. HUIZENGA. I wasn’t implying that you were saying that. But 

I was hearing that in the context that it may not, because of Rule 

10b-5 and the Constitutional notion of trust, that we already have 

established in law the fact that we have a fiduciary responsibility 

to the public. 

Mr. MASKELL. And that is a fair statement. Absolutely we do, 

yes. 

Mr. HUIZENGA. The other quick thing I wanted to address, and 

Mr. Walker, you were starting to talk a little bit about this, is political intel and the political intelligence. In your experience here 

on the Hill, is this a problem? And is this a major problem or a 

small problem? Is it something that we need to tackle and address 

as well? 

Mr. WALKER. It is interesting. The question is what is the problem? You mean a problem in political intelligence— 

Mr. HUIZENGA. Or maybe is there a problem, the fact that we 

have people— 

Mr. WALKER. I am certainly not going to say that instances of 

abuse of the gleaning of information—I am not going to say that 

has never occurred. I would say, however, that to the extent that 

a Member or staffer was involved, and knowingly involved, and it 

was brought to the attention of the Ethics Committees appropriately, either through a complaint, or a letter, or a news article, 

it would have been addressed in that fashion. And without meaning to be unduly critical of any portion of the legislation, I do think 

that the last portion of the legislation relating to amending the 

Lobbying Disclosure Act, it in a way stands separate from the other 

provisions of the STOCK Act. And I do have the concerns I have 

raised as to the breadth of some of the terms and the potential 

First Amendment issues that would be raised. 

Mr. HUIZENGA. Earlier today, we heard the authors of the bill, 

at least one of them, argue vigorously for that provision, that this 

is a major problem on the Hill, and that amendment needs to happen. So in your opinion, it is not necessary, or do you think if it 

is a direction we need to go we need to be very cautious about how 

that would be dealt with? 

Mr. WALKER. I don’t want to offer a conclusion as to whether or 

not, again, it is necessary. To the extent that you are asking my 

opinion, it seems to me that it could be addressed separately. And 

again, without saying whether or not it merits being addressed, I 

think it does stand apart from the other provisions of the STOCK 

Act, and may be more prudent to address that in a kind of separate 

approach. 

Mr. HUIZENGA. I appreciate it. Thank you, Mr. Chairman. 

65 

Chairman BACHUS. Thank you. This concludes the third panel. 

We appreciate your testimony, and we do ask that you work with 

us over the next few days as we approach a markup. And so, you 

are dismissed. 

The Chair notes that some Members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

This hearing is adjourned. 

[Whereupon, at 1:45 p.m., the hearing was adjourned.] 

(67) 

A P P E N D I X 

December 6, 2011 

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