Verret Testifies on Unfair Trading by Government Officials

Professor J.W. Verret testified on July 13 before the Committee on House Financial Services Subcommittee on Oversight and Investigation regarding HR 682, a bill introduced by lawmakers that would bar members of Congress and other federal employees from trading in stocks based on information not released to the public. The bill also aims to prevent outsiders from trading stocks based on private information derived from legislative or executive branch employees.

Verret expressed his view that substantial risks are posed by Section 2 of the bill, which limits a private investor from trading on information obtained from government sources, and emphasized that an immunity provision in the Securities Exchange Act specifically protects insider trading by the Treasury Department, something the bill does not address.

Verret told the committee that changes to the Congressional ethics rules and agency policies could address concerns over trading by individuals in executive agencies, particularly the SEC Enforcement Staff, more efficiently than the changes to the Securities Exchange Act included in the bill.

House bill would ban improper trading in Congress,The Associated Press, July 13, 2009. By Marcy Gordon.

"Slaughter and Baird testified on the proposal at a hearing Monday of the House Financial Services subcommittee on oversight.

"'By explicitly prohibiting the improper use of sensitive information for personal gain, we will be taking an enormous step in providing transparency while preserving and strengthening public faith in our government and the democratic process,' said Slaughter, who is chairman of the House Rules Committee.

"A gap in the law occurred because it hasn't been made clear by courts whether the ban against insider trading under federal securities laws also applies to profiting from the use of legislative or government information, experts say.

"The bill also would prohibit employees in the executive branch from profiting on nonpublic information in securities trading.

"But J.W. Verret, an assistant law professor at George Mason University School of Law, said changes to congressional ethics rules and federal agency policies make more sense than enacting legislation that could hurt the ability of investment managers and pension fund trustees to get the best returns for investors. A provision of the bill bars private investors from trading on information obtained from government sources.

"Currently, employees of the Treasury Department and Federal Reserve have an exemption that shields them from being held liable for insider trading under federal securities laws, and that wouldn't change if the proposed bill were enacted, Verret said."

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