the chairman and of the committee. we have copies of legal memorandum. that ithe areas of losaw have covered this common interest they use nonpublic information. we approached the information as a member of ethics. it may be a violation. an advisory opinion released has generally confirmed this approach. because of the allegations, the issue of insider trading has come to the floor.

it is fairly clear that congress did not defend itself from the insider-trading laws. to cut through what i wanted to say, let me speak to two. want to make. -- twooints i want to make. the characterization that a member of congress is one that does not involve the public trust is wrong is a matter of both law and ethics. i'm not the first to say that it involves a public trust. even before the adoption of a constitution, madison noticed this what keeping them virtuous. this is recognized explicitly in the house and the senate. it denotes the member of congress or wheeled public

powder -- congress wielded public power. blic offices and trust signified the officer has been entrusted with public power and that they hd this to be used only for their benefit and never for the benefit for themselves. this duty is one that has been recognized by federal court .piri it is from the second circuit. they apply beef judiciary theory in which the government moved to have it between the member of the house and a private party. the court agreed to impose a

trust of money. there are specific ethic rules that have been in charted. -- that have been interpreted. it provides expressly that any federal official may never use information coming to him confidentially. these factors create this public trust. the executive branch are similar to these legislative branches. you are probably familiar with

the guilty plea to insider- trading charges by federal employee that word for the fda. they arender similar ethical guidelines. i want to make a point about potential issues. there is the debate pvilege that says members cannot be questioned in any other place. i wanted to point out that section 3 would be a house rule and would be interpreted internally by the house ethics committee. there may not be a problem at all. they're being questioned in this place. if you expect that the securities and exchange commission will come in and relate legislative conduct and

a look at information that congress may receive, you may run into evidentiary issues. there will be practical considerations that any one prosecuting that kind of provision will run into. i am not saying do not enacted the law. be aware that the privilege is where it could enter fear -- could interfere. thank you. i will be here to answer questions. >> thank you. i am honored with the information to testify. i have researched and taught in areas including litigation and insider trading for over 17 years. i published an article on congressional insider trading. at the time it was born on urban

myth. congress has exempted itself or was immune from the existing law that prohibits the insider- trading. my article concluded that congressional trading is already illegal under existing law because it violates the broad antifraud provisions and the federal wire fraud statutes. i acknowledge that many distinguished security scholars see gray areas in exiing law and some believe a court would likely rule the other way in prosution. the controversy surrounding the application of existing law to congress stems from the fact that congress has never enacted a federal securities statutes that explicitly prohibits anyone from insider-trading. the act addresses one manifestation of this much larger problem. an explicit definition which

would apply equally to everyone congress included would be the most equitable and appropriate solution. in absence, insider trading is legal only insofar as it is fraudulent. the vast majority of insider- trading prosecution and balls quintessential judiciary like steps. the supreme court has never implied let alone stated that the relationship has to be strictly a fiduciary one for a duty of disclosure to attach under rule 10 b-5. the supreme court uses the term interchangeably with a duty of trust and confidence. the sec and justice department

passed a wide net premised on the misappropriation theory. dozens of those caught have been family members or business associated with nonpublic information that was entrusted them. the security and exchange commission have proven themselves adept at convincing courts at feigning fidelity. i very much in doubt they would have the temerity to conclude that a member of congress lacks a duty of confidence for purposes of the missing misappropriation theory. the constitution refers to public office is being of trust. members also take an oath of

office to discharge their duties. there should be little doubt that a member's undisclosed, self-serving use of knowledge constitution -- constitutes a misappropriation. i recognize that a member of congress has never been prosecuted for insider trading based on non-public congressional knowledge. the justice department has used the wire fraud statutes to discuss -- successfully prosecute officials for defrauding the united states and public there the sun disclose misappropriation of funds and tangible properties. my final point rates to one consequence. i endorse the motivation behind the proposed legislation.

i am concerned that it could be viewed as the only insider trading law that applies to congre. this is troubling. the proposed legislation failed to reach a host of possible insider training ones that would fall within the existing wall. i would be honored to work with the committee and the staff to remedy this concern and to clarify some of the other drafting issues. it relates to the act and over includes events. thank you very much for giving me this opportunity to sharey thoughts. >> welcome. thank you. good afternoon. thank you for ts opportunity to discuss t insider trading

on congressional knowledge act with you. as a former chief counsel and as a former prosecutor, i will add my voice to the voice. this does apply fully to members and employees of congress under the misappropriation theory of trading. i understand the view that not what fans standing rigid notwithstanding the fact that they are enforceable, passage would give more specific and explicit autrity or direction to the sec and department of justice to prosecute. with regard to the provisions of the act addressed en liability, i do read the act as a dressing such instances. i beeve that caution is advisable to make sure the

provisions do not chill the necessary extremes between members and sta and individuals and activities outside of congress. proof is not easy in any context. there is a complicating factor. at the debate clause provides not all actions and activities. this provision may limit admissible evidence. the important thing to keep the mind with respect to speech or debate privilege is that no

matter how carefully the act is drafted, it cannot trump the constitutional privilege where it applies. it does not apply and investigations or proceedings. they could apply to capture unsanctioned insider trading. this provision states that a person and federal government should never do it confidentially in the performance of governmental duties as a means for making private profit. it is whether it is issued at any given instance and was confidential under applicable committee roles and if it could

be problematic. it is addressed under the overarching standard. it includes the securities trading by a member it based on material, nonpublic information and more to come between the house or senate. it would be investigated fully by those offices as constituting conduct for reflecting discredit. these provisions are consistent with and would extend the

general approach with the conflict of interest. public disclosure is emphasized and investment are disfavored. it applies the registration one. this has been acknowledged. they wld raise first amendnt concerns. the act imposes a trigger threshold for ristration and reporting. just one contact and reporting requirements would kick in. the definition of political

contacts in the act is very broad. it would seem to capture communications that would have nothing to do with security trade. thank you very much for the opportunity to speak with you today. i look for to answer questions. >> thank you. normally we have republican and democratic witnesses. this is an extreme complemented each of you. and this case the committee agree that you were probably the most knowledgeable expert witnesses. we invited the three of you unanimously. i want to thank you for your testimony which i read last night. i thought it was very thorough. as a backdrop, many members of

congress have been accused of some and a sensible -- indefensible acts. it has cated a public perception. as a result of tt, the number one misconception and is an insider trading laws and not apply to members of congress. i do believe that we can clarify that. it has an affect.

you are requiring all members of congress to place their assets on a blind trust and eliminate the they're violating the public trust by trading stocks. would that be a good idea? >> the short answer is that it would. there are other concerns that would enter into whether it was a good approach from a practical point of view. listening to your fellow members discuss their proposals today, i understand that proposals would either require theto place their ones and a blind trust or have security transactions. some of the practical concerns that iad with the respect requirement with everyone would

be eliminated. a blind trust is an option for people who have a considerable number of assets to begin with. there are administrative costs that run in connection with that. it is not practical for a member to upend their financial lives. they speak in terms of their election to congress. it would not -- members who had few assests would not be able to trade at all without the provision to up for disclosure trade. >> you stated that congress

should use this controversy to agnose and treat the entire malady of a statuary definition. ven that the sec testified that the changes should be carefully calibrated to ensure they do not narrowed the current law and make it more difficult to bring tradeaction against any such person, how would you suggest we go about drafting the insider-trading law? >> there are a number of approaches they could take for this. congress has never enacted a

federal security statute that prohibits anyone from insider trading. congress would not be starting on a blank state if they chose to undertake that today. in 1987 there was a proposal that came relatively close. the prescriptions act of 1987 would prohibit the wrongful use of material. there is information that has been wrongfully obtained. did the attempt would be to bring all existing law under an express statutory prohibition. in the advantage would be a takes insider trading out of fraud.

it is not displace the anti- fraud the view of it. someone who abstains information and uses it to trade securities but does not breach any fiduciary light duty would have a very difficult time being prosecuted by the sec or the justice department. government prosecutors are creative. did they should be applied did. there's a case involving a computer hacker where the hacking is deemed to be the subjects. we can all imagine situations where information is not obtained in any deceptive matter. a broad prohibition would be a place to start spiri.

we do not need to end right there. bring the congressional officials and federal employees and making it clear that there is a duty of trust in confidence would be a simpler way of going about this. i can talk more about ts. >> thank you. i appreciate the work that you do. they are highly professional group. please explain the fiduciary duty you say members of congress bowed the american public. >> i believe that in certain circumstances that duty can give

rise to a violation of insider- trading law. it will yield this public power for the benefit of the general public. i explained that they rose up to the second circuit and the court went back into the transaction of which they have received money. but since you have a fiduciary relationship, we consider the money you took was not yours but belong to the people, the government. the court allows them to come in

and recover that $50,00 on behalf of the government because of thi relationship that the court recognized. i think it could be strong enough. i agree unanimously with everyone that it can be clarified. it could be useful. have made yourself available to the sponsors of this bill. he worked to do just that. the make certain that the public is certain that these laws apply to the trading and is measured by that. thank you.

>> thank you very much. i would like to thank our panelists for staying here to share with us their expert knowledge about this very complicated subject. i have listened very carefully to our representatives here today. one thing there is a consensus on is that legislators are not exempted from insidetrading. that is very clear based on everybody's testimony. i think it is important to go out among the members of congress. i do believe there was a belief by members of congress that there was an exemption that

somehow you do have access to information thatay are may not be privileged. somehow un not be held accountable through dick -- you cannot be held accountable for it. what is not clear to me is how the details would be worked out. and who will have oversight responsibility, what roles the sec plays. even the justice department as a look at all of this. that does have to be out. it has to be thought through. i have been trying to think about all of these circumstances that members of

congress could be involved in that could be either or. i am focusing on the discussions that go along between sffs. in members of democratic staffs of members of the republicans get together, they're trying to work out problems with legislation. perhaps there are lobbyists involved as they try to work through how to resolve differences. facts beginis, some ta to emerge. they can see how certain actions could advantage and company.

bad on the information that they are concluding, one person may be concluding even there there are no facts to support it. they can say we are working on this legislation. these companies are involved. i believe if we go this way the company will lose a lot of money. there are going to go gain a lot of money. i've been thinking it through. this is what i believed. the staff member does not act upon that information and go out and start trading. do they become a tipster? that person is very smart.

i've always listen to what that person has to say. they say this will le to the company. to i am going to invest. i'm going to trade. what is that? is that tipping? is the undermining the fiduciary responsibility? how would one calculates that? >> under this rule, whether it is the sec or the justice department, the government would have to show that the person who communicated the information breached a duty of trust and confidence. what the supreme court has interpreted that to mean is the communicator it needs to have

made it for a personal benefits. without the personal benefit, there is no motivatio if there is no improper motivation, there is no liability for either the tipper or the tippy. the well-intentioned communication would not be illegal insider trading. i would encourage kong bridge -- congress not to go beyond that. it works reasonably well. it is the motivation of the person communicating the information that is going to be the linchpin. >> let me complicate this a little bit more. the tipper and who was not a consciousne, who would receive

benefits has communicated the general information and thought to someone who could be a relative and that crowd. that relative could be someone who shares profits or lends money to zero would designate that person to be a part of eir business. does that mean that the would- tipper has violated some law? in protracted way, they could be the beneficiaries of the game of the person who actually made the investment without even knowing that they would be a

beneficiary. how is that dealt with? >> the example that you give touts the intention to assist the friends or relatives. the communicator would not have liability because the communicator would not be breaching a duty of trust and confidence. the liability is derivative of the temper. i would submit current law. it would reach it not so much as a tipper but as a misappropriation situation. i mentioned the government passed a very wide net. your hypothetical might be a situation where a knowledgeable

source was sharing information with family members at the dinner table. the supreme court when not be the knowledgeable source. current case law would view it asa person defrauded. the information around the dinner table would be viewed as allowing a trust and confidence to the person sharing that information. such that if the can u tt information in your own trading, the government could bring an action against the yen for defrauding.

it establishes three non exclusive circumstances for finding a duty of trust and confidence. the third category is one appertains to family members. she would not be covered for that section of the role. she would be covered under a second section which says that anyone who has a history pattern or practice can be deemed to have duty of trust and confidence. if the history practice was to respect the confidentiality, the current law could cover that as a fraud on the communicator.

>> would it change your answer? >> is there a lot more scrutiny of our financial disclosure? when we filed the financial disclosures, we include spouses and dependent children. would this be something that whatever o spouses trade.

>> the answer is yes. it is currently applied to this. i think it would. i do not believe the legislation addresses that specifically. >> anybody else have any comment? >> they amended this. spouse and dependent children are covered.

i remember filing one of the first financial disclosures. i got a call. when you do not have time to it wast these fouthings, a railroad car. sometimes we do not pay as much attention. we have somebody to do this. it makes it hard. we have to be very careful. we haveo be careful. i am not sure when you're

talking about speech and debate. if they could explain it but a little more. >> if you have something going on you have two parts. you have a member or other individuals making a transaction and telling the broker to buy or sell stocks. on the other hand, it is based on certain information that the person received within their congressional employment. there's not going to be a problem. to be able to prove that they made an order, that is outside of the legislative spare and process. -- this year and process. or they got that information, they may have a practical issue

with outside enforcement and someone to say a member sits on the committee. the member traded on that. he may run into problems. you cannot introduce that evidence. it speaks to a legislative activity covered under the speech and debate clause. he just look back in the recent history. members of congress ll be prosecuted for things. they have evidence and other ways. if it is on where people got information, let me tl you about one case. the member of congress from georgia was indicted on 10 counts of perjury related to money laundering.

he was convicted on nine counts. they threw out three of the convictions. this idea. this is protected by speech and debate privilege. you expect an outside group to enforce it. there could be evidenciary issues. the ethics committee says you violated the cmission that we enacted. we do not have any problems with this. we are at this place. we can enforce this on to the standard that rob mentioned. you caused the institution to

be denigrated. >> somebody engages in transactions might do 100 transactions on a hunch. 99 times they lose money. society says he must have had insider knowledge. and members of congress should be subject to these rules, and we should, the question is what steps should members of congress take said that we do not bring this institution into further disrepute. in the private sector, if you are officer of one corporation. you know you need legal advice to trade into the stock. i have colleagues who invest in

hundreds of different companies. they're buying and selling every day. you are trading their own stock once every few months. you're getting careful of the vice versa i got colleagues trading from the ipad. does it make sense for members of congress to own shares of individual stock knowing that every one of the companies is affected by congressional action? you could go to a caucus meeting and find out that everybody is talking about x y and z instead of a b and c so companies are safe. have any of you advised those with insider knowledge how to avoid violating these rules?

have we ever had to it by somebody with their knowledge to not relate to just one company but they had insider knowledge affecting everything? >> there is a rule that provides a safe harbor for pre-existing trading plans. >> you can have a pre-existing plan with one company. you may own 20% of it. you will retire. you will sell to% of your shares every month. of your shares every month.

>> want that have are-existing plan for mutual fund investments where you purchased. as long as the person who set up a plan is not communiting with the portfolio managers. the portfolio manager can sell individual securities. >> your almost arguing for what i am arguing for, let them invest in mutual funds. i was lucky to provide each witness who wants to with the answers. what steps do we have to take with regard to the bill we are considering to make sure it makes things tougher and clearer rather than service to allow members of congress to do that which is pretty clearly legal?

what prophylactic policy should be imposed on members to make sure not only that they are not trading on inside information, one of my colleagues makes 10 grand that they should not that worries me. what worries me more is we're down to 9%. if everyone of my colleagues just plays their hunches, there will be one out of eve hundred trades that you can say is another reason to hate or mistress congress. should we have a policy that says do not put your money only into mutual funds.

what would you suggest not to give us the maximum flexibility but to give us the minimum likelihood of opening up congress to attack? thee's the trust of american people. it is a scarce and viable commodity that can be degraded by true and false charges. >> certainly in the measures you suggested and the potential of requiring blind trusts are more prompt disclosure. cluding the one you talk to. i think it may be an unattainable goal to avoid ever

raising public concern. maybe it would tighten up the approach of these things. i think the approach of disclosure that is currently in the act is consistent with the current framework. it would have a fax. -- effects. >> i would be happy to provide a listf steps that could be taken to eliminate the under inclusiveness and to some extent be overinclusiveness as well. i believe the stock act should

make unmistakably clear that it builds onxisting law and that nothingn the act should be read to displace law. in this way, it will be there as a baseline. it makes unmistakably clear how current law applies in the context of congress. >> thank you. >> i want to make sure i am understanding the description. is this legislation really necessary? i am hearing that it may not be necessary.

>> when wrote my article last spring, a question have been raised over whether members of congress owed this for purposes of the ferry. to be candid, i was surprised that there was some difference of opinion. it would strik me -- de bring

that involved relationship that are by no means necessary or fiduciary like wines. i would have thought this was an issue that would not generate much debate. that is what i tremendously respect. it is an issue. some go even further. i am now at a point where i can see much use and clarity that can come from a declaration that members of congress owe a duty of trust and confidence for purposes of existing. i would see this as a defender. my concern would be the defenders is notiewed as

eliminating this. i think we would have taken a step backwards. as lonas it is clear if that they are both defenders i think we could make a good chance at making this as tight as they could be. >> my colleague is in front of me. they do not change anything else. the key bit internal. it is a resolution a better direction to go? maybe he has an opinion on that. >> i would not say it is a better way to go. i would say it is an alternative

way to go that can make the same kind of points about the duty of trust. he could have more specificity in the house rules. that would be aay to go. i have never said that it was unnecessary. i would not say that. >> did not apply the you're saying that but i was hearing it in the context. it may not, because of rule 10- b-5 that we already have established the fiduciary responsibility.

you're starting to talk about that political intel. is this a problem? is this a major problem? is this something we need to tackle and address as well? >> it is interesting. what is the problem? t main a problem in political intelligence? >> is there a problem? thatm not going to say instances of abuse has never occurred. i would say to the extent a member was involved, it was brought to the attention of the ethics committee appropriately through a complai or a letter or a news article. it wou have been addressed in that fashion.

without meaning to be unduly critical, i do think the last portion relating to the disclosure act stands separate from the other provisions. i have concernts as to the potential first amendment issues. >> we had the authors of that amendment needs to happen. in your opinion, it is not necessary, or if you think is the direction need to go, we need to be very cautious about how that would be dealt with. >> i don't want to offer a conclusion as to whether or not it is necessary. to the extent you are asking my

opinion, it seems to me that it could be addressed separately. again, without saying whether or not it merits being addressed, i think it does stand apart from the other provisions of the stock back and maybe more prudent to address that in a separate approach. >> i appreciate it, thank you mr. chairman. >> that concludes the third panel and i appreciate your testimony. i do ask that you work with us over the next few days as we approach a markup, and you are dismissed. the chair notes that some members may have additional questions for this panel, which they m submit in writing. without objection, the hearg record will remain open for 30 days for members to submit written questions to these witnesses and displaced -- to place their responses on the record.

this hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

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