Financial regulators have built an elaborate computer apparatus to scan stock markets for signs of insider trading, but the radar isn’t pointed at Congress.
Instead, it is designed to detect more conventional forms of insider trading — a corporate lawyer acting on advance word of a merger or an accountant leaking details about a company’s earnings. A senator who calls his broker after receiving a closed-door briefing might not even raise a blip.
That’s because the radar was built for the brokerage industry to spot the kind of abuses that were historically of concern: trading on inside information related to developments in the private sector. The apparatus is run by an industry self-policing group, which notifies the Securities and Exchange Commission of suspicious activity.
Congress is considering legislation that would make clear that lawmakers cannot cash in on information they acquire through their privileged positions — for example, inside knowledge of legislative negotiations. The House and Senate have both passed versions of the bill, and a conference committee will meet this month or in early March to work out differences.
But the absence of a law may not be the only reason the SEC has never charged a member of Congress with insider trading. Not only are there blind spots in monitoring, but also it could be awkward for the agency to investigate lawmakers, especially those who oversee the SEC and control its funding.
The Washington Post reported this week that the Office of Congressional Ethics is probing whether Rep. Spencer Bachus (R-Ala.), chairman of the House Financial Services Committee, violated insider-trading laws.
“I have fully abided by the rules governing Members of Congress and look forward to the full exoneration this process will provide,” Bachus said in a statement Friday.
In keeping with agency policy about pending investigations, SEC spokesman John Nester would not say whether the SEC is looking at Bachus’s trades.
The matter puts the SEC in a potentially uncomfortable position. Bachus is one of the agency’s primary overseers in Congress, and the committee he chairs holds power over the SEC’s budget.
“He can make life very unpleasant for the agency,” former SEC chairman Arthur Levitt said.
Another former SEC official said the agency has investigated members of Congress for possible insider trading in the past but has decided not to bring charges against them. The official said it was unclear why the SEC refrained — for example, whether there was a lack of proof, or whether existing laws made it difficult to prosecute members of Congress.
A third SEC veteran, former chairman Harvey L. Pitt, said that without the kind of clarification offered by the new bill, the SEC would be unlikely to investigate a member of Congress in connection with insider trading.
“The prevailing feeling is that in the absence of special legislation, this would not be something the SEC could go after,” Pitt said in an interview.
In December, the House Financial Services Committee convened a hearing on the new bill — the Stop Trading on Congressional Knowledge Act, or Stock Act — with Bachus presiding.
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