forebearance, maybe not statistics to distinguish it, but concluded principle reduction would more likely result in a performing mortgage than forebearance. ..

it has dropped what from that all the way down to 15%. right now what we have for loans originated in the first quarter of 20116 months later we are down to less than 10%. >> the last time you were here i asked about the settlement by the bank of new york as the trustee for bank of america essentially put the claims and the provisions in that that require the bank of america reach out to the servicing of the mortgages to conclude from what you said earlier and from this settlement anyone regards bank of america is during a good job servicing, and you said that the agreement did not actually required reduction which is correct, but it does specifically say, does it not, servicers must consider

principal production. >> i don't recall the precise wording but i do recall correctly and then what to hear you say it did not mandate that. >> anything to reduce losses including modification. there's been stories the last couple of days at the required self audits by the banks they are servicing and approximately 5,000, close to 5,000 appear to be service members in violation of service members. do you know if any of those were feeney or freddie mortgages? >> i don't know but i know this has been an important issue mrs. petraeus this efp and the department of defense and freddie and fannie have provided updated clarity and communication to their servicers regarding that, and their standards actually were already

quite satisfactory. the cftc and the defense department but it does appear there was confusion on this point and we acted to get improved communication i don't know whether they want to comment more on that. >> the light is red but mr. demarco, you said that we would shortly be hearing more on the subject of principal modification and you're own analysis are you going to be providing your study to the public and if so, when? >> why have we not done it already? >> i certainly explained this numerous times in the committee hearings, and you've provided written communication before it took quite a of congress on it. including you i got a much more detailed request and we are evaluating that. it's quite a number of components, and we have tried to be responsive to all members of congress when the request information from us.

>> but your analysis in writing -- you don't talk about this over the water cooler you've got this in writing. >> we've done the analysis. we will get it out to folks. >> the gentleman from new mexico mr. pierce recognized for five minutes. >> thank you mr. sherman. you had talked about on page to what your testimony about helping families avoid foreclosure. can you kind of expand on what you're doing there? >> yes. since 2009 we have worked to benefit 575,000 families, and that would be all inclusive of all the various tools we use to try to help families said it would be traditional modifications, and modifications, forbearance plans, short sales, the whole range of tools we use to try to keep people in their homes.

>> thank you. mr. demarco on page five you mentioned you are bringing a lawsuit against 18 institutions to recover certain losses, and you are bringing those lawsuits because you feel like that the institutions did not act fairly in the relationship, is that correct? >> it has to go with the security disclosures that these institutions have on security instruments that were approached by fannie and freddie and we believe we have evidence supporting the disclosures of what were characteristics of the loans in the securities did not match what was actually there. >> i don't have exact documentation but it looks like mr. johnson may have ended up with $100 million mr. rains may be 28 million. there may be indications that certain accounting techniques were used so they would accelerate their bonuses.

have you brought any actions against previous directors or previous ceos? >> this predates me but the predecessor, one of the predecessor agencies to the federal housing oversight did bring such civil action against -- >> did we get any return? >> we did. i don't know the numbers of hand. this was all made public at the time so we can get that to you and yes there were penalties associated with that. >> i should know a little bit better if he would help me out to you have a board of directors that the answer to? >> since we do, sir. they were installed -- >> can you pull your microphone of? you answered to the board of directors. are you publicly traded? >> there are shares of real shareholders have been conveyed

to the counterfeiter, and the conservative is the person who appoints both the board of directors and approves the management team. >> if you -- how much worse your losses during the last 12 months? roughly, just roughly. >> roughly $15 billion. >> 15 million -- >> and bottomline. >> did you happen to go to the bombing series was something like that you have to go to the bank how do you make up those operating losses? >> the funds that support the company and fulfill the network also provided by the u.s. treasurer. >> you have to pull the microphone closer. i apologize. >> the funds that are provided that are needed to provide the network for the company are provided by the u.s. treasury upon request from the counterfeiter. >> that is my problem with the testimony and we need to declare that we are a private business. i don't know any other private

business that can go to the bank and get funds the the possibility of going bankrupt if they are mismanaged and then the market takes care of that mismanagement, and i'm not sure the market is being allowed to take care of anything right now, which causes me to say it is acting more like a government agency than a private business, and so if you have observations about that i welcome them, but for me sitting on this side of the desk it sounds like you are a much more government agency. in other words, we see agencies all the time overspend their budgets and they just come back for more, so just that one clarification is critical for me. mr. demarco, have you run tests about how you could start

selling off parts of your mortgage is committed to private investors and there? in other words when you all are taking certain steps, for parents or whatever, have you compared what happened, the cost stream to the agency if you just accepted bids from the outside to take the blocks of loans compared to what you are having to do to make them start processing? in other words there's a lot of money out there that will invest at the right price. >> that's right, congressman. i can say several things about that. companies have been shedding assets. certainly the portfolio that is what peter financing on their own balance sheet and have been declining over the last few years and there is a whole program system in place for that to continue. there have been efforts to sell outside of that progression and identify opportunities to sell

blocks of assets and realize value. my exchange with conagra's when waters about real-estate loans is also to your point of looking at efforts to take assets of the balance sheets and get them back into private hands in a more rapid basis, and finally on the go forward basis we are looking at several ways of having more of the credit risks that freddie and fannie are taking on right now on a new business production and identifying ways to have some portion of the credit risk be financed by private capital and the capitol i believe in the coming year you are going to see more executions that followed that approach. >> thank you, mr. kuran. >> the gentleman from delaware mr. karni. >> thank you for having this year hearing today. i have three lines of questioning i would like to explore. the first is to go back to

mr. pierce's question about the recovery efforts on security disclosure and representations made. there was some reference to that in the financial crisis inquiry commission report that was presented here some months ago and in every party talk about money that was recovered through that process. could you update us on those recoveries? >> sorry, sir, i'm not familiar with the particular dollar amounts. >> on what exactly they had like can speak to the fact that we have thousands of lawsuits with regards to a certain private mortgage backed securities that fannie mae and freddie mac have purchased where we believe that they are deficiencies in the securities offerings that were part of the transactions. we are seeing the emergence marketplace. there have been more and more lawsuits filed by all parties

regarding. >> congressman, we have a separate activity as based on the lost mitigation units that go back and look at loans from that period of time in 2005 to 2008 and whether they should be repurchased because they didn't meet our guidelines. >> they could be repurchased. so how aggressively are we pursuing that, those representations'? >> i believe we are being very aggressive. we stood up as a part of the conversation i was having with the chairman of the growth in the lost mitigation activities. that's one of the big areas we have grown because we are going back and looking at all loans. >> is their public information on that? you can answer that later because my time is ticking.

you've talked a little bit about your foreclosure prevention effort. is their something we can do or other programs or changes in existing programs that would facilitate your efforts? >> i think at this point we've got a lot of changes with these various programs and programs put in place we need to give them time to work. it's like the recent changes. >> the changes are -- would be appropriate for hampered as well in terms of the streamlining that was done? >> really targeted to the different sets of situations. >> i know that, but there were kind of administrative tightening changes that were put in place as high understood it that maybe could apply to hamp. >> over the course of time the

program has become more aligned and more efficient. that wasn't the case in the spring of 09. >> i would like to ask as mr. holderman mentioned one of the big questions out there is to clarify the future of the secondary mortgage market and of course there has been a big discussion with in this committee and members of the committee and pieces of the legislation what to do with fannie and freddie and of course we had the treasury secretary in here months ago presenting the presidents paper which presented a series of options from complete privatization to some hybrid model. could you share your opinion on what the future of to look like?

>> i would say, congressman, i really do believe that this is a critical public policy matter for the lawmakers to decide and the central point for lawmakers is having a ten orie $11 trillion single-family mortgage market. what portion of the mortgage market warrants the american tax payer standing behind could set of mortgages is the ultimate guarantor of the mortgages and then on the other side that leaves the rest of that ten orie $11 trillion single-family market through normal financial mechanisms through private financial institutions exercising private credit assessments and putting private capital risk. >> clearly i don't see the fha program and as credit guarantee programs will certainly assist. one of the things congress could do is make determinations about

adjusting the mission and the potential market scope of those programs and leave the rest private sector or go further and say in addition to the fha there's some other portions that will have an ultimate government guarantee as a career as a little servant is over time the credit guarantee programs get a little hard to manage and keep the pricing associated with the risks that are involved so it is a challenge but on the other hand we have seen the private sector can be challenged and assessing the credit risk as well. >> thank you mr. chairman i've often asked the question what went wrong and when did occur your the first to publicly answer the question i've been asked he said 2005 to 2008 the

bad loans were written i'm assuming both sides that fix the problem that occurred between 2005 to 2008, is that state the fact? >> i've always tried to engage somebody and nobody would answer. the other question was raised by maxine waters and others accountability and private lenders i always believe that has to be paramount if lenders write bad loans they don't have proper underwriting standards the should buy the loans back and if they do that enough times they will do that but one structure i felt was confusing and should never occur to the hybrid model of fannie and freddie taxpayers or on the hook and the private sector made money. we guarantee it as a government and the private sector made all the profits. it is unreasonable. but i do like what i've heard and i agree that there has to be

some facility as a conduit for the floor private sector dollars to the secondary market that has to occur in the future. 15% of the money we receive in this country for the loans come from other countries and if there's not a government guarantee those would not be coming to this country and investors who invested fannie and freddie the bonds would not meet investment if there wasn't a guarantee on those loans. >> if you were required to pay the 10% dividend of fannie and freddie what would your assets be today and possibly would be barred from the treasury few were required to make this payment? >> i can reference you to an analysis that fhfb completed and published in october, 2011 where they took a look at the future drawls dividend payments for

freddie mac going into the future and they have three different scenarios the look at tight to many things but including house prices, house of year with every will have a double-dip recession and whether they will go down and there are three scenarios and under threat to of those scenarios including the most likely or the basis case freddie mac will not need any increment will draw after 2011, and that is despite paying the 10% dividend. >> 10% today what would your assets be currently and with the treasury be on the hook for anything? >> they still would, congressman. maybe one way i can say that and do the math of the top of my head which is dangerous or draw us for 72 billion we've paid 15 billion these are all around numbers there would be the 10%

preferred dividend but i use your interest rate which i remember from your opening remarks of the 5% that would have saved 7.5 billion, instead of 72, it would have been 64 blight 5i think is the math. >> we are in a draw if you had the $15 billion back right now how much would you be drawing? >> the 72 - 15 -- >> would you need more funds this year if you hadn't paid the 15 billion back? >> i am hesitant to make that answer, but even having paid the 10% interest, we are not going to have any under the base case we won't have to draw on the 2012. >> they would be 15 billion rather than consider the role you are not getting so we are taking what liquidity you have a way that charging 10% and the

same question, if we didn't charge 10% we are charging the interest today would you still need to go to the treasury right now for additional funds? >> we have paid over 17 billion of defense referring to the same report as mr. haldeman noted as we move forward the payment of the dividend would be the largest part of the draw but we will continue to draw. >> you didn't have to pay that, the journal might be close to zero? >> in the future. >> congress needs to consider that we had charged the bank's 5%, charging fraud and fannie 10% so we are almost dooming the failure because every time they take that would be processed getting back to the taxpayer's interest and they were making them more and more money to charge more interest on and if it seems like a never-ending circle here what we have caused to happen, but by this believe could guess there needs to be a form of facility to do what you do with disrupting to a facility

or whatever we do to guarantee the flow of money but if there was no facility there mr. demarco to do this is the private sector going to fill this position today? >> i would take an adjustment period for the private sector to be able to do so. but it would take an adjustment period. >> thank you for your time and patience to read >> the gentleman from texas mr. greene. >> thank you mr. chairman and ranking member. to the witnesses, think you. do you have in the gse arms that have not adjusted? >> as i look at the product is predominantly -- >> i can barely hear you. >> they are dominated 15, 20 or 30 your product so i would look at it and say in terms of the products it's a small portion of what we have come and can

probably follow up and give you a member of the future point. >> a smaller portion would you guess that to be 10% or more? >> some of our members up here are having a hard time hearing if you would speak louder and clearer. >> thank you. >> as i was saying the product is predominantly 15, 20 and will be happy to follow-up on the percentage. >> i understand that you are saying fixed rate, is that what you are saying? i'm talking about adjustable rate mortgages. >> it is our point most of the products that are fixed rate of 15, 20 or 30 year products. >> would you respond, please? >> they are a smaller percentage of what we do come a small percent of what we do this and send the question correctly there still would be some some

of the matter is foreseeable in the fifth year and a devotees some that have not yet adjusted if i understand the question correctly. >> in dealing with the services i appreciate your frustration like the member from california i too have had my level of frustration dealing with of the services. notwithstanding all of laws that we passed to limit the liability and encourage them to do things to read the we've been in the position to write down the principle it's not being written down let's talk about, put that aside and talk about what is the situation with refinancing? >> feeney and freddie mac

together refinanced about 9 million loans in the last couple of years and we introduced the home affordable refinance program early 2009 and made major enhancements to it just a month or so ago and what this program is designed to do is designed to help them have a fannie mae or freddie mac mortgage where they are under water on a mortgage or near underwater and some of them are having a hard time being able to refinance we have enhanced their opportunity to be able to refinance their mortgage so we expect this is going to contribute to some additional refinancing of people who have previously been unable to do so. >> the question has been raised as to why not refinance with help being underwater? there are many persons who can pay the current interest rates but can't handle higher rates

and these are hard-working people who qualify but they just can't do it. why would we have to wait until they are under water to refinance? >> am sorry, congressman i didn't mean to leave you with that impression. so those that are not under water i think they are really quite ready market mechanisms and lenders willing to refinance them and certainly freddie mac would be pleased to have those mortgages refinanced, but there's not a market in pediment to them being able to exercise that right through the normal functioning of the way the markets work. there was an impediment the borrowers that have a current loan-to-value ratio about 80% and we have taken some pretty big steps to remedy that, but those who already have at least 20% equity in their home today shouldn't have an impediment to refinancing. >> yeah understand, and i've gone through and i know that is not as easy as one might think.

the point i'm making to you is if we know people are currently making payments that are much higher than if they got a refinance why would we not encourage the refinancing of loans before they get in trouble and try to get them into a payment that they can afford? >> it's a fair question. we are not discouraging it and i believe we are encouraging it, and the opportunities are there but if you are seeing you know your community or the marketplace impediments we should be addressing and would be happy to take a look at that. if i may, the equity that you call to our attention that becomes an impediment. let's assume they don't have the 20% equity that the refinance would allow them to stay in their home. why don't we consider simply

refinancing to get this, get through these loans that are creating problems for us? >> the program is designed to deal with those but there have been proposals made why don't fannie and freddie simply take the mortgage and if it's 6.5% just cross up 6.5 and put 4.5 and send the letter to the borrower saying you are now at this lower interest rate. that's not permissible. that would be a violation of several things, but creating a market opportunity for the bar were to be able to refinance is something that we have done and we are trying to encourage because i would certainly agree with you that that would enhance both the borrowing situation as well as fannie and freddie's position as the guarantor. >> i thank the gentleman. may i just ask one additional liberty? >> very quickly. >> thank you.

in doing this, and we understand that you stepped away from other entities that do these things, but with congressional resistance put you in the position so you could do it, would that create a problem for you if you had something for congress would they be of assistance in this area? could converse be of assistance? >> i'd be happy to go back and think of offhand. i can't think of any particular thing. i think what we've done in the program is meaningful. congress could certainly be of assistance in figuring out what the endgame is was respect to the conservatorship that would be helpful. thank you. >> thank the gentleman. mr. demarco want to go back to this planning issue. did you know that for the 2011

fannie mae is planning to spend $6 million on advertising and freddie mac is going to spend 600,000? >> on the specific numbers, no, sir. i have an understanding with them and they should speak for themselves but the company's advertising the focus on the immediate question of forming the marketplace borrowers and servicers with regard to the changes that have been made and lost mitigation programs and to encourage the outreach with regard to the lost litigation so in the troubled mortgages they know that there is a place to go and a path to follow. >> i think my point is about $2 trillion worth of business on the books and the avernus 3 trillion but a tenfold difference, and i think what this hearing is about today is not really a written plan.

mr. haldeman, do you have a written plan on where you are going with freddie mac? >> we are working with the board on the three-year plan going forward. >> but we are three years into this conservatorship. >> one of the points of this hearing and one of the things from my personal perspective is i think it is time for the entities to come together with some strategic planning to begin to look at how we are spending the money that we are getting because you're going to continue to advance to the last report that you made said that could go up to 230 to $300 billion worth 170 billion now, and i think mr. demarco, you are the boss. these guys work for you and i know that you have more of a hands-off approach and you feel like you tired capable people,

but our job is the people sitting up here is to make sure we begin to minimize to the greatest extent possible and additional money the taxpayers have to put into these entities coming and what i would like to see is for you all to have some comprehensive plans talking about reducing the footprint and of internally the culture within that of making sure the employees understand that they are not on -- somebody else's line right now they are on the american tax payers diane and i would hope we could see some fruit from that as we move forward because i hope you were able unembarrassed by the fact these headlines were not very flattering and don't give a lot of confidence to the american people and it overshadows maybe some of the better things that you are doing on behalf of the taxpayers, but little things matter, and right now 10 million

come 5 million, 600 million, 600,000, those are real numbers to the american people, so i would hope that in the future we can see some comprehensive strategic planning and then i think it would be terry helpful for the three of you than to come back sometime after the first of the year and lay out some strategic plans so that we all have a vision and make sure that the conservator and the congress and the entities themselves are all on the same page. right now i'm not sure i have the confidence that we have that connectivity. >> thank you for those comments mr. chairman and i will commit to you you will see a plan that outlines in the more comprehensive way where we are going in the next chapter with conservatorship but i must hasten to add that while i would be pleased to develop that and make it as it will not just in the subcommittee but in the

public could the american taxpayer to see that i will continue to make my request and state my willingness and desire to work with the entire congress and the administration to see the final chapter is written so we can bring this to them and. >> thank you. >> thank you so much, mr. chairman. earlier i spoke about my concern about them having to pay bank of america to take back the servicing because they were doing such a bad job. got another issue here. in september the inspector general reported on the 2.87 billion settlement entered into by bank of america and freddie mac. they found that freddie only reviewed the loans for the pingree purchase claims two

years after origination even though the examiner and freddie mac's internal auditors noted that the housing boom loans and foreclosures to fight after the origination. the ig said the shift in the foreclosure patterns among housing boom of loans mean most troubled loans are not being reviewed regardless of their potential for volubility for the repurchased claims. in fact a.d. has reviewed over 300,000 foreclosure loans originated between 2004 to 2007. they have an unpaid balance, principal balance exceeding 50 billion. the basis they were making is that freddie could have left money on the table when it settled for the loans that were not originated according to their standards. third, the internal memo said that one advantage of pushing through the settlement is that it would improve the business

relationship with bank of america. i don't even know what you want to continue to do business with bank of america. what do you think of this report preserving the ongoing business relationships and appropriate criteria by which the settlement is appropriate and this report to congress knew very little about the settlements in her into between the bank of freddie and fanny. can you commit you will consistently provide the type of transparency that this report provided as you entered into the settlements talk to us about this. >> if i may it was freddie mac and i would be happy to address this. >> please do. >> the report to the end of the day had two recommendations for the agency each of which the agency agreed to carry out the third of which go to whether one

had to do with an internal sort of policy for the supervision staff that we are addressing and the other had to do with something we had already had under way and the recommendation we agreed to was to continue the work of examining the loan review process. this gets into a rather technical area to try to explain what was going on with regard to the issues raised by viag in this report but if i may have a moment a lot of miss reporting about this i would like to try to clarify a couple things and mr. haldeman is welcome to add his view, but fha had a senior examiner raise the question regarding a subset of loans on freddie mac's books they were interested only and pay option arms and rather the sampling strategy that was used by the freddie mac corporate and during

the call flea control of these two types of loans and interest only in the pay option arms was appropriate given the characteristics of the mortgages and whether these mortgages would bear the characteristics different from other types of mortgages and enhance a different sampling strategy. this was raised, it was something mr. haldeman was aware when the settlement was done at something i was aware of and was factored into the settlement, so we identified that issue to find a potential cost or risk to it and was factored in to the settlement. since then this has received a tremendous amount of scrutiny by the inspector general by our own team and i will tell you that 11 months later, almost 12 months later now after all the scrutiny this transaction was put in front of me with everything i've

been able to learn subsequently, i would sign off on the settlement again today if it were not a billion dollars of taxpayer money left on the table this was a commercially reasonable settlement that was done. the issue that was raised by our own examiner was a legitimate issue. we continue to look into it and we believe the judgment was appropriately assigned in making the settlement and i think that while it is a legitimate issue we've gone through it and i am quite satisfied with the transaction that we took it is also something that underwent a substantial amount of review within kody by the management team, by the board of directors, by outside firms retained by the company to review this and a good deal of scrutiny by my own team making a recommendation to me to sign off on the settlement there are always things that can

be learned from the process. the ig point to this amount and we are taking the appropriate action based on his recommendations. as devotee my question to you is about -- >> i'm sorry and we do have to ask the gentleman to suspend. we have to think a couple of members that want to ask a quick question and call votes here. >> richest want to provide transparency. >> mr. miller? >> i think i will do a favor and pursue this question. i didn't -- i know you said that the criticism of freddie's settlement was reported but i didn't just read press reports at the time i read the ig report. it isn't fresh in my mind at this time it was very critical not it was misinterpreted as being critical. i read it and it was critical, no question about it was very critical. it said it was too cheaply

settled for the wrong reason which was to improve your business relationship. >> the report did not reach a conclusion. >> de e-mails left that impression was a very critical report. i think the question is the same as mine there are now pending litigation involving tens of billions of dollars for the private label security mortgage-backed securities the private label that you all thought. there are other put back claims. how much conservatorship ultimately cost the taxpayers will largely depend on how that litigation is resolved. we have an inspector general report that is very critical of how freddie has settled one set of claims already can the inspector general review these claims in advance before the settlement is entered into? so that someone can look at this and make sure that these are not

settled too cheaply for the wrong reasons and as the e-mail suggested. >> that is a question i would view as highly -- i would expect the answer is they don't review things before the your decided or options are taken that the typical activity is to review. >> someone else to look. >> to that, yes come to that point i believe that we will be taking a different review process to enhance the additional review and opinion the we get in helping us to assess. >> and who will that be? >> i don't have that answer yet >> mr. karni is recognized. >> thank you mr. chairman and ranking member for the time i just want to go back to the last question i asked and didn't have enough time to ask the gentlemen on either end.

mr. haldeman i think it was that said one of the important matters is to determine i guess for us to determine the future of the secondary market. how would you see that we did have the treasury come in and present the administration's's white paper how would you answer that? >> when i took the job they told me i couldn't lobby or advocate and by taking that responsibility pretty seriously and so i really don't want to put on the table my personal view. >> could you frame the issue for us a little bit? she didn't really answer the question either i don't think. >> the issue for me is to what extent if any should the government play in housing finance market and i'm sort of a free-market kind of person but i do think there could be a

legitimate role for the government as some sort of ultimate guarantor for which pretty or family or a participant in the industry could pay an insurance premium to get that kind of ultimate guarantee. the benefit of the ultimate guarantee and as congressman miller said on this side would be i think it would have a greater chance to get the foreign capital to come into the country into the mortgage market if we had the ultimate guarantee but i think it is important that the institutions have to pay an insurance premium to get that guarantee. some if there wasn't do you think we would have the fixed mortgage product? >> i worry about that. i don't think you would be nearly as available to so many people as it is today. >> thank you. i think it is much as mr. haldeman noted to not advocate a specific solution. i think first of all it's very

important that we have a responsible transition to the reform to make sure we do not destabilize the housing market. i think to your question the key thing that policy makers will need to evaluate is how do you support the 30-year fixed-rate mortgage in this market, how do you provide deep liquidity that we have in the mortgage market today, how do you make sure the low moderate and middle-income have the same access to the mortgage financing that upper income americans to and how do you support a balanced policy meaning affordable rental housing as well as homeownership? and those are the four to five key questions the policy makers need to decide as they look at the solutions that are on the table. >> thank you very much. mr. demarco d want to take another shot? thank you mr. chairman. >> i thank the panel and this has been a good hearing. some members may have additional questions for the panel which they may you submit in writing

and without objection the record will remain open for 30 days for members to submit written questions to these witnesses and place those responses in the record. again, thank you for being here and the hearing is adjourned. [inaudible conversations]

[inaudible conversations]

cbs's 60 minutes to this story last month of insider trading in congress. up next the senate homeland security committee examines the current law that prohibit members of congress from trading on information they obtain as lawmakers. the panel also talks about whether the rules need to be strengthened. senator joe lieberman is the chairman >> for some reason this is the first time in my memory that i have arrived earlier than senator collins. there she is. [laughter] >> right on cue. >> you still hold the record for punctuality. the hearing will come to order.

good afternoon. a recent book by peter schweitzer in a story on the book were based on a 160 minutes of raised the very serious question of whether members of congress have been using insider information to make investments that enable them to make money they could not have made if they were not members of congress. the members of congress who have been specifically accused have denied the allegations. our purpose here this afternoon is not to determine the guilt or innocence of individual cases. our purpose is to determine whether the existing law is sufficient to prevent and punish congressional insider trading. perceptions are very important to public service. that means if it seems to allow members of congress to take advantage of the public position

for personal gain, the trust that needs to exist between the american people and the government will be further eroded than it already is. so, what is the state of the law governing insider trading by members of congress? it will surprise most people to learn that there is no explicit provision in bill laws against insider trading by anyone including members of congress, that is to say that term insider-trading is not mentioned were defined in statute. all the investigations and press to prosecution's over the years by the securities exchange commission or the department of justice have been carried out pursuant to the broad antifraud provisions of the securities exchange act of 1934, which makes it in section 10 be unlawful and i could use your employees connection with purchasers sale of any security any manipulative or deceptive

device or contrivance in contravention of such rules, this sounds like it was written in 1934 by the 17 regulations as the commission may prescribe as necessary or appropriate in the public interest for the protection of investors. the specific rules making inside trading illegal are found in a large body of regulatory activities pursuant to section 10 be the broad antifraud statutes i just read and court decisions interpreting those activities. the rules against insider trading now clearly encompass not just corporate insiders but others who have bought and sold securities based on material, nonpublic information they obtain and use in violation of a duty of trust. i gather some have said that congress has exempted itself

from these insider trading rules, but that is not true. in fact in the statement submitted to the committee for the record for this hearing, the director of enforcement at the securities and exchange commission makes it clear the commission has authority to prosecute such wrongful conduct declaring, and i quote, trading by congressional members or their staff is not exempt from the federal security laws including the insider trading prohibitions. this afternoon we are going to hear testimony that a member of congress or a congressional staffer who buys or sells stocks based on inside information they obtain as a result of their job not only violates congressional ethics rules but the security laws as well. on the other hand we are going to your testimony that the law is not as clear as it needs to

be and that congress should specifically prescribe congressional insider trading. i'm with the second school of thought. in my opinion, whether or not there is currently and conclusive evidence that members of congress or staff members have benefited financially from inside information and whether or not the fcc believes it can act against members of congress for insider trading under its existing authority there ought to be a law that explicitly deters such unethical and illegal behavior by members of congress and punishes it when it happens. our goal today is to sort out the facts and determine precisely what legal reforms are needed to ensure that regulators and law enforcers have the tools they need to bring to justice members of congress and the staff who defied the public trust by using inside information for personal gain.

the first witnesses today will call on in a short while will be senator kristen jul brand of new york and senator scott brown of massachusetts, a valued member of this committee. both of whom have taken the lead and introducing legislation to deal with this problem, and that legislation has been referred to the committee which is why we are convening this hearing today the point we are focused on today's narrow, but it touches on much broader values in reality. the fact is that the american people's feith in their elected representatives is the cornerstone of a around which our space republic was built. when that faith eds as it now has to the historical low we must increase our efforts to ensure the people that did the honor of sending us to

washington to represent them are confident that hour only business is their business. i've been reading a lot about george washington lately, and as a case he said something long ago. in fact on the first day of the new government it seems relevant to the hearing today, and i quote, the foundation of our national policy will be lead in the pure principles of private morality and the pre-eminence of the for the government will be at some point by all the attributes which can win the affections of its citizens and command the response of the world end of quote. adopting a new law that explicitly makes insider trading by members of congress a legal would strengthen the foundations of the national policy in washington's words. and i hope in a small way will

help to repair the breach that exists today between the government and our people. senator collins? >> thank you, mr. chairman. unfortunately i don't have an eloquent quote to begin my hearing with to pick up where you left off today but i do want to thank you for holding this hearing to examine whether or not current laws are adequate to prevent members of congress from engaging in the inside trading. i very much appreciate you inviting the two colleagues, senator brown and senator joe lubber and to describe the bills they have proposed to address this concern to refine a co-sponsor of senator brown's bill which is known as the stock act, and i look forward to learning more what senator julca and's bill today.

this hearing is an important step in our efforts to ensure that members of congress are not profiting from trading on inside information. recent press reports on 60 minutes and elsewhere demonstrate why this committee must explore the application of existing laws to congress and identify what actions may need to be taken to close possible loopholes that undermined public confidence in this institution. elected office is the place for public service, not private gains. as demonstrated by recent press stories, however, there are questions about whether lawmakers have been exempt, either legally or practically from the of reach of the laws

prohibiting insider trading. the recent allegations come at a time when the public's fifa in congress is already extremely low. a recent gallup poll shows that 69% of the american public has little or no confidence in congress. others show that americans rate members of congress at or near the bottom of the list when it comes to proceed honesty and ethical standards. this erosion of public trust is not confined to congress but teens the public's entire view of the federal system. why does this matter? well, with so many critical challenges facing the country,

if the american public does not believe that the decisions that we are making are in their interest rather than in our interest, it will be next to impossible to tackle the truly significant problems that we face and we must address the concerns that underpin the public skepticism. we need to ensure the american people that we are putting their interest above our own. seven years ago economist alan published a study that showed that the stock portfolio held by u.s. senators in the mid-1990s outperformed the market buy nearly 12% per year. he concluded from his data that senators have, quote, a definite informational advantage over

other investors, end of quote, so he also was careful to point out that his results should not be used to convert illegal activity. .. >> the purpose of today's hearing is to analyze the need for greater clarity in the scope

of the insider trading laws and i'm eager to hear the views and recommendations of the witnesses on the legislation presented by our colleagues to close any loopholes and also to explore whether this is simply a matter of insufficientv'ó[ enforcement under the existing fraud laws. whatever the problem is, one thing is certain -- we should not be shielding congress from laws that apply to other americans. thank you, mr. chairman. >> thanks very much, senator collins. thank you for the leadership herement you really seized the moment, and as soon as this problem became evident, took real leadership, and it's because you introduced the bills here. we take your elective proposals very seriously, and senator

collin's intent and mine to move to markup as soon as we can, so we welcome you here today. it's a difficult question who you have two senators who do you call on first. we researched it, and senator gilibrand has more seniority or it's clear senator brown is much older. [laughter] >> and he's the member of our committee. >> touche. [laughter] >> thank you, mr. chairman. very grateful for your leadership, ranking member collins, thank you for your leadership. i appreciate you holding this hearing and inviting me to offer testimony this afternoon. your strong leadership together is an example of how important it is to shine light on issues as important as firness, and it's an important step forward in restoring america's faith in our government, just as you said, mr. chairman. i was very surprised to learn

that insider trading by members of congress, family, or their staff using non-public information gained through the congressional work is not clearly expressly prohibited by the law or by the rules of congress. the american people need to know that their elected leaders play by the exact same rules that they play by. they also deserve the right to know that their lawmakers only interest is in what is best for their country, not what is best for their own financial interest. members of congress, families, their staff, should not be able to gain personal profits from information that they have access to that everyday, middle class american families don't. i believe this is not right. nobody should be above the rules. i've introduced the bipartisan bill in the senate with 15 of our colleagues, senators rubio, snowe, nelson, reid, brown, and

baucus, all overred the bill to close the loophole, and the legislation is similar to the legislation first introduced in the house by congresswoman tim walls. i want to thank them for their long standing commitment to the issue and the advocacy on it. i recognize my colleague, senator scott brown for requesting the hearing and his work on the issue as well. our bill, which has received the support of at least seven good government groups, have covered basic important principles first. it says members of congress, their families, their staff should be barred from buying and selling securities on the basis of knowledge gained through their service or from using that knowledge to tip off anyone else. the fcc, the cf thrks c must be empowered to investigate the cases to provide additional teeth, such acts should be in violation of congress' own rules to make clear that the activity's not only illegal, but

inappropriate for members of congress. members should also be requireed to disclose transactions of a thousand dollars or more within 90 days providing dramatically improved oversight and accountability from the current annual reporting requirements. lastly, individuals doing political intelligence work, contacting members of congress, their staffs, or other individuals to gain information and help with investment decisions, they should have to register as lobbyists to provide additional oversight into the industry. there are those who do not want us to succeed and pass this common sense legislation, the american people expect. some critics say that the bill is unnecessary or already covered under current statutes. i've spoken with experts tasked in the path with investigations of this nature, and they strongly disagree. we must make it unambiguous that this kind of behavior is illegal. others may say that the legislation is too weak, so let

me be very clear. our mission here is to pass a strong bill with teeth in it that make any and all insider trading clearly illegal and a violation of our congressional rules for all members of congress, their entire family, and their staffs. as we move forward, there will be technical changes in the language to improve the bill and ensure that the final product meetings this goal. anything less is unacceptable. as my home state newspaper in the buffalo news recently noted, quote, "the stock act would ensure it's the people's business being attended to. this is a step that we must take to begin to restore america's trust in this very broken congress." thank you, again, senators, i'm very grateful you held the hearing today. >> thank you, senator. senator brown, in fact, is your colleague, our colleague, said, requested this hearing and asked us to do it as soon as we can, which is why we're here today.

senator brown, it's all yours. >> thank you, mr. chairman, and ranking member collins. you know, being new here, until the 60 minutes piece came out, i had no knowledge something like this was even allowed, and as a result of that, wanted to do something about it to try to make a difference, and it was the "60 minutes" piece that featured a section of members of congress in there with insider advantage that garnered widespread public attention as you referenced. you know, it's interesting. when you even have to hear about things like this that happened apparently in washington, there's clearly something wrong, and you referenced it, mr. chairman, there's a break down of trust. there's -- we need to reestablish that connection and let people know that we are subjected to the same lies and rules that they are. we shouldn't be passing laws and then not have to adhere to them,

and they are trusting congress is at an all-time low, and that's disturbing, and it's more important than ever to have members of congress affirm that we live by those very same laws that we pass for everyone else in our country. we should be held to the same, and quite frankly, i think a higher standard than the members of the general public and should not be able to profit on non-public information, and that's why i introduced the stock act of 2011, obviously, and i greatly appreciate you jumping on it. it doesn't surprise me at all that you would -- both of you would move quickly to address something that affects our body in such a dramatic way. this, obviously, effects members 6 congress as well as executive branch employees using non-public information ob obtained through want service for the purpose of investing or otherwise making personal financial gain. consider a member of congress during a meeting program, that a program will be cut or

something's going to happen dramatically, and then they go in and either buy or sell his or her stock to score a profit and avoid a loss, and under current law, the congressman would likely walk away with a fatter investment. everyone else, that means jail time. that's not right. arguing that the current law applies to members of congress as you rerchtioned in your -- referenced in your initial opening that we don't need it. well, i disagree. if it's in effect, why have they not done something about these sorts of things? there's only been one prosecution. the fcc has the power, and they use it. the mere existence of the debate shows we have to define the duty we have as members of congress to the american people obtaining to the non-public information, and not refining this duty leaves a gap, and it's clear there's a gap of uncertainty that invites abuse and

contributes to a break down of trust among the american people. that's not right. this legislation is directly aimedded at correcting this programs that academics like professors that you referenced have identified, and in his work, professor's work, found that members of congress investments may have benefited from an informational advantage over members of over general public, and in the recent book, is reports members of congress make a killing in real estate by approving federal funds to projects enhancing the values of buildings or lands they own. that's not right. as members of congress, we all know we have access to information that the public does not through classified briefings, personal conversations, and all of these sources that give us non-public information that we could find of significant value and trade according. we create information in policy as well, and we can influence things that way.

when we act on legislation and negotiate legislative language, frequently, that legislation has real financial consequences to many different industries in the country, and because we have that access, and we create information, we must not, absolutely, not betray the public's trust in everything that we do for our own personal gain. i believe, and i know you two do, and everybody on this committee does, believes 245 diminishing that public trust is why you called that hearing today. i suspect we'll hear from witnesses today that say the existing laws and rules are sufficient. you referenced it, mr. chairman, and i respectfully disagree. like really? once again, why are we he? why was the peace run? why hassing in not been done? basic questions. there's been no successful prosecutions of members or their staff, and i believe the uncertainty 245 -- that existed legal frame work provides excuses for enforcement

agencies to have the politically difficult task for policing congress, especially when we control the strings of the agencies. we have to close this loophole. i believe the vast majority of the members and staff of congress are here to serve their constituents' best interest, they are good people of good will. they are not here to line their pockets, but by explicitly prohibiting the use of material of non-public information for personal gain will vastly increase transparency that everybody talks about here, but sometimes it just doesn't get done. the legislation i've introduced is similar to the bipartisan legislation that has been introduced in the house for many a year now, back in the 109th congress. i know that congresswoman slaughter and congressman baird filed, and now waltz continued their effort, and it's getting more and more support, so i thank them for their efforts.

the media attention has obviously brought a good eye to this, and the american people are watching what we do. they watch more than ever, especially with all of the new media opportunities out there. i'm not afraid of acting in the public's interest, and that's why i introduced this legislation. it's critically needed, and there are differences between the 2w0 bills. mine does not amend the ethics rule or need a 67 vote threshold, but 61 votes. that makes it easier to get it through. we can do the senate resolution side by side. i suggest and request that you take the best of both bills, put them together, have us all join together in a clearly bipartisan, bicam ram matter -- bicameral matter and get this thing done. americans deserve it, and we'll see if politics play a role in it or not. it's up to us. i look forward to getting the committee chair and asking questions. thank you very much. >> thanks senator brown, and

thank you for the the process, and i will note for the record that senator gillibrand nodded her head affirmatively that this are differences between the bills, but there's more similarities, and i hope that the two of you will be able to work with senator collins and me to come up with a joint bill. we may want to separate them as you said. might have a separate resolution on the senate rules so that it'll be separate from the legislative proposal, but i'm going to set a standard of maybe hard to meet, but if we work intensely and we -- it would be great if we can bring this before a markup of the committee in december before we break for the holiday, and we would tentively scheduled a markup for december 14th or 15th so let's set that as the goal, and formed by the second panel, see if we

can put this together. thank you, both, very much. thank you. we'll now call the second panel. melny sloan, center of responsibility and ethics in washington. donna nagi. professor of law at indiana university school of law. donald is professor of law at georgetown university law center, a professor of law at columbia law school. i'm -- i'm having flash backs to those terrible days at law school. i'm fearful. remember, here i'm the one who asks the questions. [laughter] okay. it was not that way in law school. finally, robert walker of ryan, and foreller chief counsel and former staff director to the

senate and house ethics committees. thanks to all of you for being here on relatively short notice. you bring, in various way, a wealth of experience and information, so ms. sloan, beginning with you. your organization has one of the best acronyms in washington. who. citizens for responsibility and ethics in washington. i know you worked together with a number of public interest groups that advocate legislation to deal with this insider trading problem. please proceed. >> thank you, chairman lieberman, ranking member collin, other members of the committee, thank you for inviting me here today to join a distinguished panel. no disrespect to any of you personally, but the fact is, america doesn't trust you. a full 46% of americans believe congress is corrupt. stories like the one on "60 minutes" weeks ago become big news because it confirmed what so many people believe, but many

of your colleagues use their positions not for the public good, but to feather their own nests. my organization, crew, focuses on misconductings of members of congress for years. we seen and complained of numerous legislators abusing their positions to increase the value of their personal real estate holdings, buy into companies, urging agencies to take actionings to finally benefit themselves or family members, and pushing through legislation in apparent exchange for campaign contributions, and finally, even trading on inside information. as others have said, at no time in history, has the public's view of congress been so dismal. the jobless rate is sky high, and the wide swath of the country is suffering severe economic hardship, but members of congress have never been richer. 66% of senators and 41% of house members are millionaires. members have significant stock portfolios, but only some maintain assets in blind trust.

whether or not it's accurate, there's a widespread perception that members of congress are abusing their positions to enhance their personal wealth. members are also willing to accept benefits like generous pensions and health care coverage that most americans only dream about. while at the same time congress exempts itself from laws, like those governing whistle blower protections, and perhaps insider trading that are applied to everybody else. presidential appointees requiring senate confirmation have been requiredded by the senate to divest themselves of interests and companies they oversee as part of the executive branch, but senators are under no such restrictions. for example, the "washington post" found between 2004 and 2009, 19 of the 28 senators on the armed services committee held assets in companies that did business with the pentagon. the senate refused to require senators to file campaign finance reports electronically. all the better to stop the media and watchdogs from comparing

come pain contributions with legits -- campaign contributions. particularly the house counsels office is advancing an aggressive interpretation of the debate klaus allowing members who engaged in bribery to go unpunnished. congress frequently refuses to enforce even its own limited ethics rules failing 20 police the conduct of members other than being so egregious it's sensational wall-to-wall 24/7 news coverage. i'll leave it to the other esteemed panelists leaders in the field to discuss whether or not insider trading laws on the books apply to you. given there's no prosecution of a member of congress for insider trading, and only one member of the house, way back in 1976 has ever been disciplined for remotely related conduct, it's imperative congress passes an act soon. members 6 congress need to -- members of congress need to demonstrate to america you take your ethics seriously.

undoubtedly, there's cases in which the clause of the constitution might prevent prosecution such as where a member traded on confidential information, received pursuant to a committee inquiry. as a result, not only should the stock act provide a role for the fcc and department of justice in addressing the conducts, but the house and senate needs to amend their rules 20 make clear such conduct is prohibited and subject to specific disciplinary action, perhaps including a financial penalty three times the amount of the profit obtained or loss avoided. it must be a component of any legislation. the 90 days under the bills we've seen is too long and should be cut back. after all, electronic con confirmations of trades are instantaneous making such significant time delays unnecessary. members of congress should post information about trades in electronic, searchable data bases. further, as with personal

financial disclosure reports, the willful failure to disclose information should be punishable under the false statements act. the bottom line is americans are increasingly frustrated with the congress viewed as part of the 1%, more than concerned with preserving that status than working to improve the standards of living of the remaining 99%. passing a stock act is a good first step in changing that image. thank you. >> thank you, mrs. sloan. now professor nagi from indiana, school of law. >> i am honored with the invitation to testify. i'm donna, nagia professor at indiana university, and i've co-authored a thesis on insider trading and other articles published in may on the topic of today's hearing. the article sought to debunc

what was at the time, an urban millionth, that congress exempted itself or was immune from the law that prohibits insider trading. congress, in no way, sought to exempt itself. beyond that, the article concludes that insider trading is illegal under existing law. based on my research, i expect a court to hold a member of congress liable for any securities trading that is based on material, non-public information contained through congressional services. if the fcc or doj successfully proves the facts alleged, i acknowledge, however, that many distinguish securities see shades of gray, and some believe a court would rule likely the other way. the controversy surrounding the application of existing law to congress stems from the fact that congress has never enacted

security statutes that explicits anyone from insider trading. a stock act would only address one manifestation of this much larger malady. in the absence of an express statutory prohibition, the offense of insider trading has been prosecuted as a violation of section 10b. exchange act and rule 10 be -- 10b5. the department of justice also prosecutes insider trading as a criminal violation of either rule 10b5 or the federal mail and wire fraud statutes; thru's, in the vast majority of instances, insider trading is illegal only so far as it's deemed an act of fraud. because the term "fraud" is not defined in the statutes, the form path of the determining illegal insider trading defaulted to the supreme court and lower federal courts, and in

literally hundreds of cases, courts have imposed liability where the traders were decidedly not insiders of the issue whose securities were traded. for example, courts routinely imposed liability in so-called outsider trading cases involving family members who trade on information entrusted to them by spouses or relatives. other outsider cases would include federal and state officials who trade on information obtained think government service including an fda chemist who pled guilty last month and now awaits a likely prison sentence. in misappropriation cases such as these as in all cases, a lynch pin is a security's trader who breached a my -- fiduciary like duty profiting from non-public information that rightfully belongs to somebody

else. the constitution refers to offices of being of trust. members also take an oath of office to faithfully discharge their duties. there should be little doubt that members undisclosed, self-serving use of congressional knowledge constitutes a misappropriation that would defraud the united states and the general public among others. for a court to conclude otherwise, it essentially has to view non-public congressional knowledge as a perk of office belonging to an individual member to do with as he or she wished. such as a view would be strikingly inconsistent with the tenants of representative democracy. i recognize that a member of congress has never been prosecuted for insider trading based on non-public congressional knowledge, but the doj has used the federal mail and wire fraud statutes to

successfully prosecute congressional officials for defrauding the united states and the public through the indisclosed misappropriation of congressional funds and tangible property. the supreme court has dictated that material non-public information constitutes intangible property. in some congressional insider trading violates the broad anti-fraud provisions in rule 10b5 and the mail and wire statutes. my final point relates 20 one possible consequence of a staff 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, a 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 tradings scenarios that would almost certainly fall within existing law.

thank you very much for giving me this opportunity to share my thoughts. >> oh, thanks very much, professor. that was very helpful, and we'll come back with some questions. next, professor donald, professor of law at georgetown university law center, thanks very much for being here. >> thank you, chairman lieberman, ranking member collins, and members of the committee. my testimony strongly supports efforts to prescribe trading of congress with their staffs. as intended by the various bills recently introduced in the house and senate. there is no current exemption from the main thrust of u.s. insider trading law for either members of staff, and many forms of trading are tipping by such persons are adequately prescribed under existing legal authority. indeed, as professor ngay just told you, -- nagy, just told you, it's possible they adequately prescribe all of the abusive

trading in securities on capitol hill. i hope they would. there is sufficient doubt, especially in lite of how courts have been reading section 10 b. the primary weapon of cases like this, the my appropriation theory, requires the showing that the trader was in a fiduciary-like relationship of the true owner of the information and deceptively stole information entrusted to them. as applied to legislative activities on capitol hill, this theft of someone else's secrets concept does not fit neatly. the idea that congress or their staffs can freely step ahead of ordinary investors to period of time in information required as a result of their roles is disturbing to say the least. congress should therefore act to eliminate any doubt and state clearly both trading and tipping apply to both members and staff. an insider case against the member or powerful staff person

will always be a matter of great political sensitivity, likely to be brought only to the extent of the case factually and legally is very strong. the external pressures to bring such cases or not bring them will be great when any suspicions arise leaving any ambiguity as to the question of whether and to what extent the insider trading on capitol hill is unlawful is hardly an encouragement to those matters that deserve to be courageously investigated and pursued. it would be extremely unfortunate for them to bring an action and have the member or staff person raise the defense which they surely would that service in congress carries with it no fiduciary-like duty with respect to government confidences. that would be the last headline congress should want to see. while i fully support the intent behind the bills, the legislative language must be carefully crafted to ensure

legislation does not create the very problem it seeks to address, the perception that congress exempted itself from insider trading law. if read as an exclusive statement of congress' insider trade ring restrictions, it's at times too narrow, at times too broad. i'm happy to work with the committee and its staff to resolve these problems which i do not believe at all reflects the true intent of the drafters. thank you. >> thank you, professor. let me immediately accept your offer of assistance. truly, this is obviously a field -- we have a purpose, i think most of us on the committee, but this is a field of law where there's a lot of precedent, and a lot of complications, so in trying to fix this problem, we don't want to create other problems or create other appearances as you said, so i look forward to the question and answer period. next, a professor of law at

columbia law school, quite the distinguished panel here. thank you for being here. >> thank you, chairman lieberman, ranking member collins, and other members of the committee. i'm delighted to be here. i'm going to edit out what i was going to say supportive of what he was saying and make just four points. point one, i believe that congress should act, but narrowly, and i want to under line the words "but narrowly." while reasonable people and reasonable professors can disagree, and reasonable professors almost always do disagree, i think there's clearly enough ambiguities in this field that you need legislative action. senator brown had the point earlier, why not enforcement? i think responsible u.s. attorneys would not indict if there's uncertainty in the law. you don't indict in the case where the law is 50/50. that may be the case. that's point one.

there's ambiguity, and i think you should act. that's been said. point two eluded to, but i want to say more fully, the proposed legislation has language that does not quite work. i say this respectfully, but one of the key concepts in this proposed bill is that the information that you receive has to relate to pending or proposed legislation before there's liability. unfortunately, that's not the most common case that would likely to be seen. i can imagine a department of doves official calling -- defense official calling a congressman saying you know the bill you have pushed for two years 20 pass to get the defense contract, that defense contract will be announced tomorrow for $5 million. there's no legislation there. there's nothing that under the existing language would make that criminal. frankly, congress can spend much of their time exercising oversight, and that oversight function does not fall within the pending or proposed legislation. that's flaw one. flaw two -- there's a reference

that you can't trade in securities of an issuer. frankly, the most likely trading you're likely to see is an options or futures or stock index products which are not securities of an issuer. they are #-rbed by financial -- issued by financial dealers in the market, not particular companies you buy in. you have to play with that language. there's a difference in the two bills with regard whether tipping opposed to yourself receiving information, tipping by the congressman is covered. i think that should be reconciled. there's places where you need to talk a little bit about directly or indirectly. there could be a chain of four or five people and a distance between the congressman and the tipper. i think you want to cover those situations. these are small points i won't go further into. the thirdpoint -- doing less is more. rather than attempting to write a detailed code that would codify terms that have well-recognized judicial meanings like material and non-public, it might be better to write a very simple

one-sentence statute. for example, such a sentence could say, a member of congress is a fiduciary with respect to all material, non-public information that such person acquires in the performance of such person's duties or that such person receives because of his or her status as a member of congress. that sentence does it and you.coop have to define material or non-public. you just say the interpret of the statute, the court views the existing meaning of these terms. if you attempt to do more, ambitious as it is, and have a universal legislative statute, congress has tried that before, and it's proven to be a disaster. i testify in this field 30 years ago in the 197 # 0s and -- 1970s, and congress wisely backed you off of that and changed the penalties in insider trading sanctions. that's wiser because if you adopt legislation with new terms, the federal courts spend

10-15 years resolve whack the terms mean, there's conflicts, and we don't need the confusion. also, if you try to adopt comprehensive legislation, i'm afraid that every special interest group in the united states will want to safe harbor for what they do, and you'll find the statute goes from short to page after page of proposed safe harbors. you don't have to do that to deal with the real problem concerns you which is members of congress. keep it short and simple. okay. last point. members of congress will face some ill liquidity if such a statute is adopted. that's a necessary cost. i want to advise you i don't think the problem of i lliquidty as you might think. there's a rule called 10b51 that permits anyone, including members of congress, to adopt a 10b51 trading plan. that's different than 5 buying trust. there's detailed instructions to a fiduciary, broker, or bank

advising the broker ore bank exactly what you want done if stock prices fall and different things happen. that solves most of the problems. in addition, you can instruct the fcc to give no action letters to you, and finally, rely on the advice of counsel if you have opinion from a lawyer with experience that you're not engaged in material -- not engaged in using material of non-public information, i believe no enforcer will proceed against you where you have a reliable defensive counsel defense. thank you. >> well, thank you. again, very helpful. it -- we're not accustomed to drafting legislation as brief as you suggest. [laughter] it's a very constructive recommendation. robert walker, as i mentioned, comes to us with the unusual and very helpful experience of having been chief counsel and staff director of both the senate and house ethic committees. thanks for being here. >> thank you, chairman

lieberman, and thank you, ranking member collins, members of the committee, thanks for the opportunity to address the important issue of insider trading and congressional accountability. i am not here to advocate against or for any version of the stock act. i will say, however, in my view, insider trading prohibitions do apply fully to members and applies of congress under the misappropriation theory, and i'll say in my view as a former federal prosecutor, the law is more than 50/50 on that. there are substantial proof problems in making out an insider trading case in the congressional context, however. in particular proof that information traded upon was truly non-public, may be an obstacle, probably would be given the continual swirl of information around the capitol. there's a problem of computing insider trading cases, and at least some cases in the congressional context eluded to

in the speech or debate clause of the constitution, certain actions and activities can't be sited or used as proof in legal actions against members brought outside of congress. even the most sweeping conceivable legislation against congress name insider trading could not trump constitutional speech or debate privilege. within congress itself, existing standards of conduct capture and provide basis of sanctioning a congressional individual for profiting from securities trades based on material, non-public information gained through his or her official position. most directly, paragraph 8 of the code of ethics for government service 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. insider trading based on confidential, congressional

information would be a clear violation of this provision, and the mechanism for enforcement would be the congressional ethics process. having said this, it cannot be said as clearly exactly what information would be considered confidential within congress for purposes of enforcement of this code provision. under the rules of the house and senate, there is no blanket duty of confidential for members of senate and staff. rules leave it to each committee and office to determine what information before them is confidential, but relatively few committees of the senate or of the house actually have specific rules imposing duties of confidentiality on their members and staffs, so paragraph 8 of the code of ethics does not provide a systematic tool for addressing allegations of congressional insider trading. use of this provision for pursuing insider trading allegations within congress requires a case by case analysis.

the current focus on insider trading in congress does provide the opportunity for the senate and the house and each of the committees to take a hard look at the rules with respect to the definitions, scope, and duties relating to confidential information. apart from paragraph 8 of code of ethics, insider trading in congress may be addressed under the fail safe of conduct which conjoins members and staff to never engage in conduct that may reflect discredit on the house or senate. if based on material, non-public information were to come before the senate ethics committee, the house ethics committee, or the house office of congressional ethics, and these allegations were more than mere insinuation, the allegations would be pursued by the ethics committee as potentially conduct reflecting discredit on the institution, and they would be so pursued and investigated regardless of

whether any other specific law or rule were applicable. finally, let me turn to the issue of whether members of congress may trade in or hold securities of companies or industries that fall within the jurisdiction of their committee assignments. as you know, recusal and divestment are viewed as extraordinary and disfavored remedies to potential conflicts of interests. the preferred approach to policing potential conflicts in the legislative branch is through public financial disclosure. the provisions of the proposed stock acts that would require public disclosure of securities, transactions within 90 days is consistent with and would extend this approach. there would have, of course, be compliance burden on members and staff, but there would also be a substantial increase in the accessible pool of information based upon which a members con constituents could form their own ultimately conclusive and

unappealable judgments as to the appropriateness of the member's financial transactions, and as to the propriority overall the member's conduct. thank you. >> thank you, mr. walker. going forward with questioning now, and we'll have seven minute rounds for each senator. based on the research that i did before i came in to the hearing today, i reached a ten tentative conclusion formed by the fcc before the testimony filed with the committee today that under existing law, the fcc would have the authority to pursue and prosecute members of congress or staff for insider trading. based on the testimony that the witnesses have begin, i think now i come to a different kind of conclusion which is that there is genuine am ambiguity in

the law. this is -- my original feeling was we should legislate to make clear to members of congress are included within laws against insider trading because the existing state of the law, obviously, as we said earlier, insider trading is not mentioned or defined in law. you have to take a two or three step jump to get there, but now you convinced me that there is ambiguity that has to be resolved, and if i'm hearing you, particularly professor langevoord and professor coffee, it goes to the question of fiduciary duty, and as i understand it, as you mentioned, the supreme court really set the law here because a person can be found to have committed insider trading if the person trades on the basis of material,

non-public information, but only if the person is breaching a fiduciary duty which as i understand it is normally to shareholders or the source of non-public information, so the normal reaction, but it's not necessarily normal reaction does not necessarily prevail in courts of law. in other words, there's a separate vocabulary would be, of course, members of congress have a fiduciary duty. we have a duty to the constituents, to the law, but your testimony leads me to now feel that that is am big -- ambiguous because members of congress and our staffs are in such a different relationship to this non-public materialed information, so i want to ask more particularly the two of you professor langevoord and coffee,

and nagy, if you want. is it a fiduciary duty? if so, how do we define it, or is it a broader duty of trust and confidence, which is the kind of language that we normally would use, or that we think we have. professor langevoord, why don't you go first? >> sure. the courts are still working out the answer to that question. the supreme court established the misappropriation theory. in the context of a case involving a partner and a law firm who miss -- misappropriated information belonging to the law firm and the client, that's a my fiduciary relationship. the law firm has a right to sue a partner due to breach of loyalty and care. as you move away from settings

in which there is an employer, a boss -- >> right. >> a principle who would be -- principal, who would be able to take breach of action against the person in question, the ability to make the kind of argument that the misappropriation theory clearly applies, grows weaker. as i said, i hope the court would make that leap, but i'm not confident. >> yeah. professor coffee? >> let me add a word on that same line. in an on bonk decision, every judge in that circuit participated, they ruled that husbands and wives are in the fiduciaries to each other. that will really surprise you. what more sensitive relationship is there than husband and wife, but not because the second circuit ruled it just to be a relationship with discretionary authority on one side and dependency on the other, and the more it was e quale, it was --

equal; it was not fiduciary, but that relationship only exists when there's discretionary authority on the other and dependency on the other, it's a high standard. no one wants to see that applied, but that's why there's ambiguity, and because there is, there's no downside in passing the legislation and considerable upside. >> right. so if i remember your one-sentence proposal, it dealt exclusively with this question, am i right? >> [inaudible] the advantage of that is only that if you start defining he legislation what material and nonpublic means they say it's not satisfied in this case. >> yeah. it would not be enough, for instance, if we avoided the issue of fiduciary duty for

whatever reason and simply declared # in law that members of congress may not trade on the basis of material, non-public information, which they obtained only because they were members of congress? >> you could possibly do it that way, but what you said doesn't cover the tipping problem. you want to cover the tipper and tipe, of congress. >> you want into this? >> yes, i do. thank you, senator. the tipper, the securities in exchange commission felt the second circuit en banc dually narrowed what was set out at the relationship of trust and confidence, and in direct response to the chesmund case, they patrol mull gaited a rule -- prom mull gaited a rule, there's a presumption that family

members, parents, siblings, and spouses, owe duties of trust and confidence to each other. the rule has two other provisions, and one talks in histories, patterns, and practices in exchanging confidences that can create the requisite duty of truth and confidence. the other point i have is that if courts routinely apply the now discredited analysis to insider trading prosecutions that the securities and exchange commission or the department of justice bring, we would see far fewer victories with the security and exchange commissions and department of justice and far fewer settlements. there's cases involving within relationships where one partner misappropriated information from the other, clearly not a spousal relationship, and the result was a prison term for the boyfriend who had misappropriated from his

attorney girlfriend. certainly, the standard, very high standard of fiduciary relationship, would not have supported a prison sentence in such a case. trust and confidence is where the securities and exchange commission put the emphasis on the the duty. i would ask to imagine a situation where a district court is faced with this hypothetical case. if a district court concludes a member of congress does not owe a duty of trust and confidence to the united states and to the american people, i would be shocked, and we could all anticipate what the headlines the next morning would be on that ruling. >> yeah. >> to which i would say the district judge would likely find the trust and confidence duty under existing law. thank you. >> okay. very interesting. obviously, this is important because we want to get this done, but we're not, if i can use a metaphor, we're not

painting on a blank canvas. there's a lot on the canvas of existing law and supreme court rulings. the other conclusion i have, senator collins, is more personal. i've actually understood what the three law professors said today telling me i'm more prepared to go to law school now than i was when i went. [laughter] senator collins? >> thank you, mr. chairman. professor coffee, you made a very important point that members of congress do more than just legislate. we act as advocates for our constituents. we endorse public funding for them through grants or contracts. we seek expert advice on public policy in order to reach the right decisions. i'm thinking of how many of us during the financial crisis in the fall of 2008 reached out to

financial experts for advice, so i think this is a more complicated issue than it first appears to make sure that when we do act, that we're not having a chilling impact on the responsibilities of the members of congress to their constituents, so with that prohibited -- preface in mind, let me suggest a completely different way of looking at this issue, and you actually started to touch on it in your testimony, professor coffee. what instead of trying to put into law a ban that works to prevent what we would all think was improper and should be illegal behavior if we instead

said that members of congress cannot trade in individual stocks themselves, but must either limit their investments to mutual funds or do, as you suggest, adopt a mechanism approved by the fcc to allow trading pursuant to a written plan that gave detailed instructions to a person overseeing the investments, but the member does not make the trades, or blind trust would be another opportunity for those who have enough assets to have blind trust, but what if we go at it from that perspective? what would be your opinion of that? i'll ask the whole panel. >> i think that kind of 10b5 plan is a means of protection. i think many congressman would find it an imposition if they were told that they had to use blind trust or 10b5 plans even when they had no information at

all. they might, in some cases, do this as a matter of pure precaution, but i think they would find it an unnecessary bid and overbroad regulation saying you can't trade at all because you're a congressman. if you recognize you are going to regularly come in contact with material information, you would be well advised to use a 10b5 plan, but the reason you use it, really, is that it might be criminal if you trieded in your own name -- traded in your own name based on your own decisions. they stick together. you have prohibition and safe harbor. the safe harbor is a 10b5 plan or counsel which can be obtained in many situations quickly. i think you need both of them together. >> does anyone disagree with the professor or want to add anything to that issue? >> let me add something beside the reference of 10b5-1. you mentioned at the outset of the question of moving members of congress away from single stocks to other forms of

financial instruments. that is very difficult because we discovered insider trading is possible with with respect to nearly ever form of financial instruments including mutual funds, which we're aware. with respect to 10b5-1, it's important to know that that's simply a rule, and congress would have to face up to this if it were to go that route that says as long as you execute those instructions at a time when you did not possess material, non-public information, then the fact that the trade was executed after you came into possession of such information does not make you liable. it simply moves the time where we're looking at what did the person know, when did they know it? that doesn't make all that many hard issues go away. >> professor nagy, i'd like your comment, but i want to get to a different issue for you, so if you can answer that quickly so that i have time for a second

issue for you. >> i think blind trusts might well be an effective solution to much of the difficulty here. i'll leave it at that. thank you. >> mr. walker? >> just briefly. you're right, senator collins, blind trusts are really a mechanism basically only for people who have substantial assets because there are administrative costs, and they are only blind in so far as -- they are not blind what you put in initially, only if you put in cash or after a period of time after the assets sold down to a particular level, you're notified you don't have them anymore, but they are not blind what you put into them, and limiting investment opportunities for members and staff, i'd be concerned that you would be, perhaps making it harder to attract the best and the brightest or really even the pretty good and the fairly smart into government service. >> well, i'll try not to be a

offended by that with a person with no assets and would never qualify for blind trust. >> i mean limiting stock -- >> no, i understand. professor nagy, you testified that you feel confident that congressional insider trading is already illegal under existing law. even if you're correct, is there an advantage to congress making the crystal clearly passing such a law? i mean, i realize we have to be careful how we draft it, ect., but -- >> sure. well, one potential disadvantage -- so i can see this could be cured by careful drafting. one risk i would fear is by legislating directly.

that would be taken, then, as an indication that the stock act is the only insider trading law that would apply to members of congress, and as professor at langevoord testified, that can be cured by a statement that says the stock act builds on top of existing law such that rule 10b5 and the federal mail and wire fraud would be there as the floor, and the stock act could come on top, and so i think that's potential risk could be solved and solved easily, and i'd be happy to help in that effort. there is, though, another risk that i think we should think through, and that comes from public perception as well. as i mentioned, the controversy surrounding the application of the federal securities law to members of congress stems from the fact that congress never enacted an expressed statutory prohibition of insider trading for anybody, and so everybody

else has to navigate through what is often described as the maze of decisions. the boyfriend has to decide can he trade on information based on whether he owes a duty of trust and confidence. sometimes that might be hopelessly confusing, and what i could see potentially happening with an expressed statutory prohibition, applying to congress and federal employees, is when all the dust settles from all of this, every day ordinary people saying why do they get the express prohibition and we have to suffer through the maze of what it means to defraud in connection with the securities? i think that's the risk that might not be on the table now, but potentially could be. >> a valid point, and in the

next round and for the record, a question that i want you to be thinking of is whether we should have a law, if we're going to venture into this area, that applies to the executive branch officials as well as explicitly since frankly i think a treasury secretary has access to far more confidential, non-public information than any member of congress. >> thanks, senator collins. ..

i want to start to do something because you indicated that the courts, you know, still haven't decided what to do. if not now, when? that's why we are here. the chairman and the ranking member asked for this very important hearing. i was wondering -- and i want to go to ms. sloane, she has been kind of left out of all the fun. if you would get this kind of situation, would you think it would be a good idea in our disclosures to be more specific as to maybe more periodic update

as to the stocks we own and trade and when we bought them and sold them and the exact of money that we purchased and sold them for that we anybody that is in the media or whomever is in the good government agency look at to see well so and so is on the armed services and he or she bought x amount of the military arms stock when he or she found out that company was going to be terminated. that is i think certainly the initial information the would be used to established that case saying there's an issue we need to look into. would you think that is a good suggestion? >> i think the disclosure is a great way to go because i think that there are a lot of repercussions if you have disclosure i think 90 days is far too long but there are

people who will be looking at the kind of trade very frequently especially if the our searchable and on an electronic database. in this scenario, the example you gave where you learned something in the committee and he went out and made a call that is exactly the kind of calls to make difficult to prosecute and because it is something you learned the legislative committee with no grand jury and no prosecutor would be able to use the information you had obtained in the committee either to obtain an indictment or at a trial. >> that's why we are here. bottomline as i think the fiduciary responsibilities to the american people. that's the relationship that we have come and the professor, the supreme court indicated always saying it is within the commerce power not to the 10b5 as i think you kind of touched upon.

if we choose to run the thing today wouldn't congress be sending a pretty strong message to the supreme court that we do not want to articulate the rule to hold members accountable trading on this material nonpublic information? >> you're an absolutely right, senator. in a number of cases said that largely involving private security litigation has said repeatedly it is congress's job to push on the statute to expand it, not to the court's job in the absence of priority. that's the language that worries me the most in terms of the court coming out the other way. i think you can accomplish a lot by that statement. >> ms. sloane back to you to rebuild america's trust, in your opinion, as you are aware no members of congress have been successfully prosecuted for insider trading. strength in the senate ethics will be a sufficient deterrent and would this reform the

confidence members are held to the same standard and face the same consequences as everyone else? >> people have little confidence in the committee than the house and the senate and they've done a lousy job over the last years and they rarely pulled members to the fire in the cases that have received a lot of press attention and have filed many complaints we don't get responses for three years later so that is not a solution you need a duals solution going to the committee that of the calls is going to kill the prosecution but also having a very clear prohibition and ability of prosecutors to go after you. >> professor in the written testimony the fcc indicates it has all the tools it needs yet we have never seen any prosecution as we have referenced to the members of congress or staff or insider trading and given that the recently lost insider-trading cases as you state in your testimony why wouldn't they want a legal standard that without a

doubt creates a clear, crystal clear framework to prosecute members and staff who trade on nonpublic information? >> they should want that and i think both the professor and i are saying we agree congress should legislate. we are just talking about what the language should be. >> mr. walker if the existing senate rules provide a framework as i think maybe you indicated for the members to trade on material nonpublic information we haven't we actually seen any prosecutions? >> first of all, i do want to say that, you know, there is the study that suggested this practice of inside trading is somehow in the american congress. there is the study that i think says otherwise and says that in fact members portfolios perform before the market's and particularly when you look at the average member's portfolio they do not exceed the market

and they do not meet market performance. and so, i think the question of why haven't there been prosecutions is based on the premise somehow this is happening everywhere. another aspect is the committee's don't have audit functions. they don't go from office to office to investigate what people are doing that happened otherwise been reported either to the more through a complaint or through the media, and so it is not a matter of complaints and allegations coming before the committees that they are not paying attention to. >> i have one more question. some scholars have suggested clearly the finding from the members of congress would be an easy solution that could be done through the senate resolution. do you agree with that, both of you? >> i think passing a statute along the lines you suggested with possible tweaks in the language would be an effective

solution. >> a senate resolution though? >> no, no, no. document legislation. >> that was like a motherhood salute i don't think it accomplishes that much. >> i agree. >> it takes you one step forward but only one step. >> i appreciate all your testimony. mr. chairman i appreciate you and the ranking member bringing this forward. i and my staff will make ourselves available to meet that deadline on the 14th and 15th by have to get down on the floor for the armed services. >> thank you senator brown and we look forward to working with you to move this forward. senator begich. -- before mr. chairman and ranking member. let me first say my view i remember when i was on the right to ethics code at the end of the day i can to the conclusion you are ethical or you are not. you can provide all the rules you want, but if you are going to cheat, you are going to cheat

and set keeping that in mind, one of the views i have in the disclosure and for example you go on my web site and find every single disclosure for might ever found out since 1988, in the office of any public facility that i've participated in. the challenge we have and this is a question i have let me go to your -- i know it's hard to do simple things around here but actually sometimes simpler is better and i like your approach some great ask questions and comments from people but in the senate i asked a constituent of mine in alaska to get a copy of my disclosure form. thank god i have an online because they would have to come to washington, d.c. or have someone here come down to the office and get a copy of it, copy it, and then did it to me. neither one of these bills

requires electronic searchable database. i agree with you you can find all these things very quickly and i've done trades and that's all public disclosure and that's why i disclose it. so i want your comments on either both these bills or any legislation should be required that any trade, any action should be electronically available to anyone at any time via the internet and searchable. i will go down the list here. >> in this day and age other than perhaps a shortage of resources in the office of public record that would be needed to manage it isn't clear to me it would not be and should not be on line. >> but it costs more to deal with what is going on now by a hand processing when people send in their forms that some of

these people around here are very wealthy, i'm not one of them have big disclosure forms. >> the fact of the matter is that there are non-profit and outside groups that are online already so the question is why shouldn't the senate petraeus antioco. >> cingular eight yes? >> what he proposes on page 14 of my testimony that should go on the web site a journalist could immediately find this. constituents do -- they are the best enforcers. >> effective, too. >> i've seen people lose office because of ethical issues but you're right journalists have to do it. >> agree and if you're an executive to you have 48 hours electronically to file -- >> which we required to do. >> that's right. >> that immediately becomes addressed. >> a ibm yes as well. >> softball but also the reason

i ask is because when i say we collectively are so resistant to this for some reason so i'm looking to the two members here that are going to the markup. this will be a system on my part and i will have some expansion not only on the forms but on the disclosure forms because they have an annual report of the trade and if someone wanted to search through that now you can't. of the most ridiculous system i have seen. so just kind of putting that on the record here that if we don't do that we are passing another law that will go off somewhere and they will be hand written and then somebody, the good government groups will be out there, constituents mad at you and your opposition will be searchable database people. second, your comment coming your idea, i'm going to turn to to rest of the floor asking a comment on your idea.

i'm not an attorney i didn't go to law school so no disrespect to of the folks here but simple is better. the more detail the moerenhout walls people have in my view. i won't say what my brothers is but the bigger the bill the more times you will get through in the blank leader. that is a little concerned. let me go down what people think of mr. coffee's comment here or his idea. >> get the idea we are talking about is the one liner that says members of congress have a fiduciary with respect to information they learn in committees or any place i think we need to be careful and we need to think about the potential consequences to what you do as senators beyond financial transactions. for example, the privacy act does not apply to the congress, and you were there for able to do certain things with

information that you received from constituents and others that may not be confident with the privacy act at any rate so you have more freedom to use information than the executive branch. if you create a blanket fiduciary obligation with respect to congressional information i think you do want to be concerned about what could affect your representative functions and your oversight function and function of communicating with others beyond the other transaction area. >> i haven't seen professor coffee's precise language to think i could do it in two sentences but i propose what was just said. i think it has to relate specifically to what inside trading is which is profiting from that information without talking about all of the of their fiduciary possibilities that could be associated.

>> not yet acknowledged, but good. >> i would support one sentence. >> i wholeheartedly agree the whole is better, and i would avoid encouraging the fiduciary altogether such that the sentence would be for purposes of the misappropriation theory, the duty of trust and confidence exists when every person is a member of congress or a federal employee and has learned that information for government service. one possibility would be congress to authorize the securities and exchange commission to add that subsection to existing rules. >> roel 10b52 sets out three nonexclusive situations in which an insider is presumed to be in a relationship of trust and

confidence with the source of the information. that is the family prong working backwards. the history pattern of practice has promised to maintain information and confidence. if congress were to authorize the securities and exchange commission to add a fourth section, i think it would improve the clarity that going back to my point to senator collins before, it would apply the same law to everybody else, and i think it is a very important and sensible -- that should come out of any legislative action congress takes on this matter. >> i have to defer to the law professors and the material put i would caution you that that wouldn't really solve your problem of the future debate clause which would allow prosecution in a lot of the cases so i still would go back to as much as i know of the ethics committee sometimes they are the only option left. >> thank you ranking member for

having this. i'm a big supporter of the concept of the legislation and begin disclosure to me is really critical but also how easy it should be and accessible how to create more enforcement because the public and the media become the enforcers and a lot of ways so thank you very much. >> thank you. senator tester? >> thank you. i assume, senator begich committee or on my bill to make sure the campaign disclosures are from electronically? >> i beat the volume and if i'm not i will be i tell you that. i like it. >> that's good. i first of all want to welcome all of the panel members. i appreciate your perception and comments and i can tell you i'm not as good as the chairman. i didn't understand everything you said that's okay. >> i wasn't under oath. [laughter] >> it's ironic because three or four hours ago mr. coffee on the ranking committee it wasn't you because it was your brother. you look all out of whack. this was a day of your testimony

and we appreciate all your testimony today. you know, what i did here as people talk about the stock at is we need to be careful because there are potential unintended consequences whatever we do and those unintended consequences may be something that limits our ability to legislate and brigade will see and do the things we need to do house senators or house members, so i want to approach it from a similar way than what was talked about earlier here today and that is from a transparency standpoint if we do things like made financial disclosures apparent, if we did things like make our schedules transparent and online, all this stuff has to be done that way. if we require the audits of the senate and the house offices and then i got to thinking maybe there are some unintended consequences.

can you think of anything that we do where it shouldn't be transparent? i come from a transparent -- i believe in transparency and i think we should do the maximum to let everybody know what we are doing and that cleanses all the problems. i believe they were right when they said we need to have a citizen legislature. all that stuff. is there any area you can think we're transparency might be inappropriate? we will start with you, melanie. >> i can't see anywhere transparency would be inappropriate. i think the ethics committee needs to have the ability to audit members. they get all these financial disclosure forms but they make sure their felt right. other is no auditing because they compare them with perhaps a tax reform to see that they are going to get her and if we saw more of that i think we might find some problems. another was a situation in the house ethics committee for example where a member filled out a financial disclosure form and a tax return indicated a

different scenario than the number resigned rather can pay the consequences. >> i cannot think of the downside to transparency there would be enough to articulate at this time in favor of transparency. >> i agree. if somebody is bent on acting unethically they are granted by the lead the disclosure rule. insider trading often takes the form not of transacting securities in your own account because it really is so transparent already, but establishing a friendship in the country with foreign bank accounts, laundering money, laundering ideas if they were never found by one of us we would have been cut noodled. really, don't you think? >> i agree.

i've seen clever enough insider-trading schemes that successfully avoid detection for a long period of time to read all i'm saying is if you try to expand trends currency not to trade the communication of information to others which is the route by which profit often you will run into difficulties with respect to the work you do on the hill. >> thanks. >> i think he can think of a problem for transparency. the way to deal with that is to get the ftc exempted of 40. you could say we have this obligation and we find out there are problems. they've given them their fuel leaking authority for the exemptions. so, what i want to.

certainly there would be many sessions and executive close sessions i could not be transparent. there would be deliberations as u.s. committee members behind-the-scenes that probably on not to be transparent. i think there is even less room today negotiated trade-offs between members of different parties than there has been in the past there would be perhaps even less so and more transparent in that if everything were televised as far as of it function for the committee i don't think -- i think it is a good idea in principle but obviously it would require a vast resources for the committee and whether or not in these days of the tight budget that would be possible is a

question and also i would be concerned if all transgression all communications with whomever word to be transparent to rid be a serious chilling effect. >> a fair point by all. i don't think either one of these bills deal with personal real-estate you brought up, melanie, where a person would increase the value of their own personal real-estate by advocating for policies that wouldn't help them. it seems to me that is much more easy to track down the inside trading. is that a fair statement? i had a very low knowledge i don't have enough to buy stock, so go ahead. >> essentially one possible scenario from the fixable with

the insider trading in the case taking material nonpublic information using it in a real property purchase as opposed to a securities purchase. >> per purchasing property. >> it's also -- that could be another problem as well. it's not the same as using material nonpublic information that one learns in government service to actually purchase physical real-estate. that could be prosecuted under the federal mail and wire fraud statutes for the same reason inside trading can, and there is precedent where a government officials actually in chicago a politician use the information that he came upon an connection with his alterman service and he was prosecuted under cook's federal statute by the department of justice. >> can he use that information to buy land?

>> i believe an apartment building going to receive a tax abatement. >> what about if you own land for the appropriation to buy over it or something along those lines would add value to that property? >> one could imagine a similar situation on the security side to take a favorable legislative action to accompany and so again that could be the problem. >> but this bill wouldn't cover that? >> very good. thank you mr. trend. do you have more questions? >> i got more question but i appreciate panelists perspective and thoughtfulness, and i think just as some might say something mr. chairman, i think that it's very difficult to take a look at

ourselves and say people think we are crooked when you don't think you're doing anything wrong with the of those dealing with the policy, a foreign program from a talking to your neighbors of which may impact of the president week or future something like that. on the other end of the coyness of the important if we operate in a way that is clean and we should make those policies quite honestly mandatory. a transparent is you're point. as far as the forms we felt the serve to build database ought to be on line and we should be letting people know everything they should reasonably know online in a way they can access it not just on line but also -- we need to be aware of this.

it's probably much more than this but it doesn't help and if somebody in the senate or the house does something crooked it reflects on everybody whether they are burning a doesn't create more problems. thank you. hispanics senator mccaskill. i think it's important that we clarify that this applies to congress. i know that there is one of the good old fashioned arguments it's great for the hypothetical in a law firm but for purposes of clarifying to the public i think it would be helpful to pass the legislation and make it clear the rules that apply to

companies and ceo supply just as much in terms of their ability to have and use information not available to the public. >> have you characterized why you think it will be a challenge to start the cases. has that been? >> to talk about the future debate clause ways that will lead to them being difficult but ye in addition to the federal we need tunicate clear the ethics committee they have all over that. spec i fink we address the other up items as well.

it is much clearer when as a public record and what isn't. i think it is more marked in the private companies with this in the public domain and oh doesn't there's a great deal of information that prosecutors could see this as someone who'll can deutsch it might be easier to prosecute because of -- it's hard to have inside information. [laughter] in terms of what kids ought to the public but a great deal of work is publicly.

is to agree with agreed this point, senator. i didn't think because. the libyan obstacle to overcome and if that were alleged in any given case that ultimately the information in question was public. i want to make sure we expand the information, that because we need to.

shorten the time frame to the disclosure. that's important. 90 days is obviously way too long and we do have a measure of transparency now that allowed things to be written even the love of the things that were written were inaccurate or just flat wrong. it's certainly the fact. expanding the types of securities covered, stating specifically leading out in the legislation members cannot get inside tips. those are the five things we need to put in the legislation, and i think. i think the more quickly we can pass this legislation and

demonstrate to the public. people have used the positions inappropriately and have gone to jail in congress, but i think all of us want to make sure the public knows we are not using the fess possession in any way to gain from it and the more we can do to reassure them in that regard, the better and i think we need to write this legislation. the last thing i would ask about is earmarks. they are a tricky area. have a current moratorium on.

i think that knowing that a member would have the ability single-handedly to put public money in a project. since there is absolutely in the pure earmark on whether it is good, bad or indifferent rather than the individual member. have any of you discussed -- >> if i understand what you're saying what kind of be public information if you know you were going to earmark resources or particular benefit companies and buy that stock nonpublic information. >> there have been thousands of earmark some for research and

development in certain types. and a great deal about technology. we cover because. since somebody single-handedly can provide the resources to accompany to make that research and development the reality. >> i would certainly agree on the remarks. as you listed off your five fixes i would encourage you to think about the six which would be a clear statement in any legislation that it's on the floor of the same law so that should not in any case be to the displaced rule in the mail and wire fraud statute in connection with the government employees, a

congressional official member of congress. >> these are good old fashioned fraud cases, right? that would be important because we don't want to start a whole new book not that we don't want the lawyers to stay busy but -- >> it's rather important to not try to redefine the terms. they are redefined in this legislation and that has questions about whether for congress does a different kind of information and ordinary cases so if you say you are adopting the case law with respect to all of the terms that come when the prosecution and you've done that before that gives a greater certainty in the courts. >> i will share that with other co-sponsors of the legislation. there were three or four of us working on this and hopefully we will look for your input as we get it drafted and try to improve it and make it as strong as possible, and we appreciate all of you being here today. we want to do this right.

>> thank you mr. chairman. >> you mentioned that i believe we will get something drafted that we can get a majority of the committee for before we depart in december. i have a couple more questions. i think we've gone over pretty well and helpful to the kennedy what we should do in response to this problem in making clear until all the unambiguously if i may say so that members of congress and our staff are covered by the trading laws. there are two other responses that are possible year. one deals with senator efiks. the first to want to talk about this disclosure which we've also talked about, but -- this is more in the we've prevention or of course that may accelerate the discovery of a problem, so i

wanted to start with you and talk about ideally how would you alter the requirements in the ethics in government act for disclosure? we talked some about obviously senator begich talked about electronic filing and i think that is a very good. you talked about requiring that we file more than once a year presumably after transactions, to invite you to spend a little more time on how you would exchange government with regards to filing. >> the personal financial disclosure forms have very broad range as of assets and i think they could be narrowed substantially. you wouldn't actually have to review didn't want to change the government act which would change for everybody.

so you wouldn't have to go through that but their rangers are so why did is often impossible to tell what a person's assets are and how much income they have had from those. in addition to that, the forms are filed. i anderson and they are burdensome that they are filed once a year and even then six months after the previous year so they are pretty far down the line. those forms, too are not in a form they are searchable, so if somebody is -- i spoke with a reporter who wanted to see if members had any specific outset and two cannot search them for that kind of thing. the technology available there is no reason these forms are not on the web quickly and in the searchable forms so that the information is easily accessible. it can be blunt about quickly and often the court of public opinion. >> i agree. one of the alternatives here i

presume and lust you to respond either instead of or in addition that there could be some requirement to file amendments after the stock traded certain amount. >> i think there would be something separate rather than you do that for once a year but i would say rather than the 90 day period that they have concluded right now i would get it down to something like ten days because i don't think it needs to be so burdensome. they come in the format as it is they can be set up a database somebody had to hit a button to transfer it into the database the san netflix sample could maintain of all such information so would doesn't need to be burdensome and then i would make clear flying on those kind of forms and failing to disclose that information could be a

false statement to congress and those are by the way much more easily prosecuted. >> before i move on to the ethics which would have to be the rules would have to be changed by the senate in this regard. do you have any of your ideas on the panel about how we might alter the existing senate and house disclosure rules to prevent insider trading or at least to make it more discoverable less quickly. >> i do agree the provisions in the actor would call for public disclosure of space transactions within a specific period of time would go a long way to deterring insider trading.

i'm not sure i agree with the attendee period as for the reason that was mentioned, failure to provide full information could be prosecuted under the false statements act. i think ten days is a very short window. 90 days to long but i think that kind of frequent, more frequent periodic disclosure does make sense. >> let's spend eight moment of my series of questions about our rules of the senate. >> you're concerned but the impact on the prosecution of members of congress where and inside trading we are using that information. so how would you change the rules to deal with this program? >> the feature only applies if remembers being prosecuted so it

doesn't have any implications at all for the ethics committee which is why if that works. >> for congress itself. >> so the committee, the prosecutor wouldn't easily be able to obtain and sift through from samples somebody that had no solid information yes because we could review that material so that's why there would be so significant to make sure the committee does have jurisdiction but i think the ethics rules are not clear enough and two days ago issued guidance. again i think it is imperative to make it crystal clear and lee hinault yet the problem is the ethics committee dtca our brief rot and only a mild reprimand for having done something like that. relief that doesn't hurt a lot to invent. if you included something specific which you could come some kind of a pie penalty that

will be conservative and not, like i gave you three times but then will be ( for the profit. >> so what you would do is make clear in the rules that inside trading as a violation of the rules. simple as that? jacinta there are certain penalties. >> based on your experience would do you think of this idea? >> as i said in the statement there are rules that can of justice and the big problem even in the house with respect to the use the draft to the ticker use the interest isn't across-the-board from committee to committee and officers to obligations and their rules and policies regarding information as confidential, and i think

giving at that level is important. there are all tools in place on your finger. it didn't mention in site training specifically peripheral 27 on the financial and trust perhaps a few are crafted in the way you are very carefully considering that wouldn't have other chilling effect. what me just say yes to the notion of the committee accent's i want to ask whether they think that is a soft action. the ethics committees to pursue allegations that have come before them. they are not criminal law enforcement agencies, but i do think if you chose to strengthen the rules within the congress dow would be a reasonable

approach. a good and a final question of bringing to parts of this together if i may ms. sloan mentioned two days ago as you know the house ethics committee released a memo to all house members and staff stating in part, and i will quote here, house rules prohibit members and employees from entering into personal financial transactions to take advantage of any confidential information obtained through performance under the duties, and of quote. some wonder to what extent or to any extent that kind of statement by the house ethics committee establishes the necessary fiduciary duty that we've talked about as a condition of a successful insider-trading case. you are going to get different for sponsors from the three of us. fiduciary duty is a property

right. the relationship deutsch in the director and an employee, mr. principal it's a truck and an ethical duty is far more general rule reaching. look at it this way. the boy scout, i don't give a price to the kind that can i need to know anything i can about the support group. >> i think to a judge predisposed to find a fiduciary duty on capitol hill, that simply ads to the case to a judge not inclined there is always in the world. that disinclined judge would like to see the concept of fiduciary duties lit out into the lobby. >> again i would encourage the use of the term trust and confidence rather than fiduciary duty because the supreme court has made it clear that you don't

have to stand in an explosive relationship to fall under the appropriation theory. i think that the professor's response is largely correct. it would put one more brick on the bill in terms of this their indicia of the duty of trust and confidence. i should save those that prosecutions as well as justice department prosecutions are based on such an initial where every day or individuals will be prosecuted say or not say in index exclusive relationship and what is quoted in the complaint or the justice department indictment is a focal language

in the indictment or in the complaint. so to answer the question, this would be another paragraph in the complaint if it is used to that. estimates before. senator mccaskill. it in terms of disclosure, purchases and. if congress has a fund that the by which is a large whether it is an index fund or some other kind of fun to you believe the duty to report and would be in them for the manager. stocks within the fund with their only be the duty in your mind to prepare for the purchase and the threat of the.

no ability to influence the decision of the manager it would be different if you tipped the manager. stelle nicu no information going from a member of clinton's to the measure. the member had no control over that. senator mccaskill, thinks during much to you. you've been an extraordinarily helpful panel san honchar problem how can we best solved the problem legislatively and i think you helped the committee eventually. you made the mistake of

continuing to feel the billable to. we can do that but i think we have to find a balance here to make sure that -- this is an important and complicated. if we hold parts of this over until january when we come back. we will leave the record of this open for ten days. with that, the hearing is adjourned.

[inaudible conversations] bipartisan bill that tries to make it easier for smaller companies to launch initial public offerings. the measure reduces soon chinley

[inaudible conversations] okay. good afternoon, everybody to read and i want to thank my colleague for his hard work on this bill and our coast connors, senator. we are here to talk about the common sense package that brings lawmakers from both sides of the altogether and is focused on the issue of the top of everyone's mind, jobs through this is a brave person minimum concessions to job and expand neither difficult this jerkily. have been a very important part of job growth. americans rely more on, florida and in patty competitor in lee

asia and latin america. hysterically get the capitol markets are crucial to us to read the there are mrs. six -. especially in the economic recovery. in fact an account. for instance, linked in which just went public in may has already doubled its forces. however, with historically the steam engine holding job creation as clothes and a close to the stop. it's been declining for some

time especially small and medium-sized businesses. in 1996, 761 between. things are much worse now due to the financial crisis and ongoing market volatility. on top of this decline cannot. on average over nine years compared to the five and a half from. they're simply choosing not to go public and they are clearly more causes of different crime bill if you look to the small and medium-size businesses they might as well be some of their message through the u.s. ipo market is not easily accessible for small companies. 85%. that, my friends, is a problem.

with senators warren and the crew pull. by creating l. mark. over time the companies grow. our bill will create a new category of issue worse called emerging growth companies. to qualify, a company must have less than 1 billion revenue, 700 million publicly traded shares and no company all are already publicly would qualify certain as you know encouraging small companies to go public but ensuring that the transition to full compliance occurs over time as they grow. the maximum phasing period would be ten years from the ipo date smaller as the company reaches the billion dollar annual revenue or the 700 million

before that date. about 11 to 15% of companies, 3% of total market cap would qualify at any given time. so the proposal and our bill list to endorse by the task force a group of venture capitalists, entrepreneur some lawyers, bankers and academics and i want to employ the task force for all of their work putting together a comprehensive approach to rebuilding the confidence in our ipo market that is balanced and maintains crucial protection. the proposals are supported by both the new york stock exchange and nasdaq and just this morning at a hearing, they said the bill, quote, what of the largest impact on job creation when compared to several similar proposals debated in the house and the senate likely to react to put it simply, the experts all can agree that this to make it easier for the growing firms to go public is a no-brainer.

so, we hope this nice little proposal can help in the congress and have an impact on job creation and let me turn it over to senator to me. >> thanks, senator schumer and i'm often asked by, and pennsylvania is their anything you can agree on in washington were during the course of the democrats and republicans? here's an example of something very specific, concrete, projective and programs which we do agree. it may come as a shock to you read this is the first time i have been together but i'm delighted to be here and to lead it to be working with you on this, senator schumer and i'm hopeful we will be able to bring more support to this and see this past. i've been an entrepreneur and worked in the financial-services sector small firms and large firms and i've become convinced capital formation and access to capital is the single biggest

important factor encouraging economic growth and job creation, and without a doubt one of the very best and most efficient sources is the public equity market. you can't access the public equity markets until you do your ipo and as senator schumer observed, we've seen in a dramatic decline in the ipo in the country. that cannot be a good thing. as senator schumer observed there are fewer companies going public on average taking longer to go public and that means fewer jobs created. that is what it boils down to because the initial public offering is almost invariably an infusion of capital but then leads to the surge in job creation. this is well documented and nearly universal, and so on think this is very constructive. it's not going to cost the taxpayers a dime and it is going to create jobs.

there's a company in lancaster pennsylvania they have about 250 employees and they need capital and would like to go public and the haven't done so because the cost is prohibited and they said that this bill becomes law the cost becomes more affordable and they will go public and to expand and hire workers and they are just one of many examples across pennsylvania and america of companies that will take it from a touch of this. senator schumer said week read the category of small and medium-sized companies then create a process we call the on ramp by which they will initially and for limited period of time not have to comply with the full panoply of regulations cover so costly not until they've grown to the point they can afford it. this is a very common sense solution to a very real problem and one that i'm sure will create more jobs than we otherwise would have so i hope