The term “confidence” in the context of securities law does not mean faith in a particular institution — indeed it would be difficult to legislate confidence in Congress or any branch of government — but rather keeping matters in confidence. And under the “duty of confidentiality” imposed with regard to publicly traded companies, many have been prosecuted for sharing information as well as trading on it.
A so-called “tipper,” wrote attorney Nelson Ebaugh in the Texas Journal of Business Law, “is exposed to insider trading liability for simply communicating material, nonpublic information even if he did not personally use the information to trade in the company’s securities.” Ebaugh added that courts are split on whether a “personal benefit” is even required for guilt.
Ebaugh and other experts have argued that insider-trading rules have been applied so broadly to such “tippers” of corporate information that they inhibit disclosure about corporate wrongdoing. If these rules were applied to information about upcoming congressional action, it would have serious effects in muzzling whistleblowers.
In addition to the e-mail to activists from the beginning of this article, conference calls and off-the-record meetings with ideological activists, such as the famed “Wednesday meeting” created by conservative activist Grover Norquist and similar gatherings organized by liberals, could also be curtailed. In the corporate world, the Securities and Exchange Commission has cracked down on what it calls “selective disclosure” to analysts. As a result, under Regulation Full Disclosure, most public companies put information about conference calls on their website or post the recorded call for all to hear.
Following this precedent, if the STOCK Act is passed, the SEC may require meetings and calls in which Congress members and staffers participate to be open to the public or not occur at all. The result would be less outflow of information from Congress and a less informed public.
Fortunately, some simple language — a “mens rea” or “guilty mind” requirement — could be added in conference to help ensure that the new rules don’t inhibit the free flow of information necessary for accountability in Congress. A clause could be added stating that disclosures of information are illegal only if they are made for the purpose of making a profit, or with knowledge that the information would be used by the recipient (or others acting with the recipient) to make a profit.
The First Amendment is also threatened by a measure added to the Senate bill by Senator Charles Grassley (R., Iowa) that would require “political intelligence” firms to register as lobbyists. But these firms do not lobby for legislation; they merely gather information for investors, businesses, and, as University of Minnesota law professor Richard Painter points out, sometimes non-profits such as churches and unions. The work they do is not that different from the news-gathering of high-priced investment magazines and newsletters for wealthy subscribers, which no one doubts has First Amendment protection.
As Senator Joseph Lieberman (I., Conn.) said on the Senate floor, “We are ultimately dealing with First Amendment rights here, and ought not to legislate until we are prepared to do so in a reasoned way.” Fortunately, the House bill did not contain Grassley’s amendment, but Grassley and Democrats will fight to reinsert the measure in the conference bill.
The exposés of Schweizer and others raise serious issues about power and privilege that need to be addressed. The STOCK Act contains some sensible measures, such as more rapid and specific disclosure of investment holdings. Unfortunately, the “political intelligence” provision of the Senate bill and the “duty of confidence” in both bills would muzzle the communication necessary for sunlight and reform. For the sake of transparency and accountability, this muzzle must be removed.
— John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute, a free-market think tank. David Bier is a research associate at CEI. Ryan Radia, CEI’s associate director of technology studies, contributed to this article.