[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                     H.R. 1148, THE STOP TRADING ON
                      CONGRESSIONAL KNOWLEDGE ACT

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 6, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-90



                  U.S. GOVERNMENT PRINTING OFFICE
72-631                    WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 6, 2011.............................................     1
Appendix:
    December 6, 2011.............................................    67

                               WITNESSES
                       Tuesday, December 6, 2011

Jones, Hon. Walter B., a Representative in Congress from the 
  State of North Carolina........................................     7
Khuzami, Robert, Director, Division of Enforcement, U.S. 
  Securities and Exchange Commission (SEC).......................    23
Maskell, Jack, Legislative Attorney, American Law Division, 
  Congressional Research Service (CRS)...........................    50
Nagy, Donna M., C. Ben Dutton Professor of Law, Indiana 
  University Maurer School of Law................................    52
Slaughter, Hon. Louise M., a Representative in Congress from the 
  State of New York..............................................     8
Walker, Robert L., Of Counsel, Wiley Rein LLP....................    53
Walz, Hon. Timothy J., a Representative in Congress from the 
  State of Minnesota.............................................    10

                                APPENDIX

Prepared statements:
    Donnelly, Hon. Joe...........................................    68
    Fitzpatrick, Hon. Michael....................................    69
    Slaughter, Hon. Louise M.....................................    70
    Walz, Hon. Timothy J.........................................    73
    Khuzami, Robert..............................................    75
    Maskell, Jack................................................    83
    Nagy, Donna M................................................    86
    Walker, Robert L.............................................    99

              Additional Material Submitted for the Record

Khuzami, Robert::
    Additional information provided for the record in response to 
      questions posed during the hearing by Representatives 
      Canseco and Pearce.........................................   106


                     H.R. 1148, THE STOP TRADING ON
                      CONGRESSIONAL KNOWLEDGE ACT

                              ----------                              


                       Tuesday, December 6, 2011

             U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the committee] presiding.
    Members present: Representatives Bachus, Hensarling, Royce, 
Manzullo, Jones, Biggert, Capito, Garrett, Neugebauer, Pearce, 
Posey, Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Hayworth, 
Renacci, Hurt, Dold, Schweikert, Grimm, Canseco, Stivers; 
Frank, Waters, Maloney, Ackerman, Sherman, McCarthy of New 
York, Baca, Lynch, Miller of North Carolina, Scott, Green, 
Cleaver, Moore, Ellison, Perlmutter, Donnelly, and Carney.
    Chairman Bachus. The hearing will come to order. The 
Committee on Financial Services has been convened.
    Today, we will examine an issue that has received a 
significant amount of attention in recent weeks. The American 
people deserve an answer to questions that have been raised 
about whether insider trading laws apply to Members of Congress 
and their staffs. They also have an absolute right to demand 
that the people they elect to represent them in Congress 
conduct themselves according to the highest ethical standards 
and do not seek to profit from their positions.
    During this hearing, we will address this concern. We will 
seek to learn whether a Member of Congress or any citizen is 
exempt from the law, and we will discuss H.R. 1148, the Stop 
Trading on Congressional Knowledge Act (the STOCK Act). 
Accordingly, we will hear from several witnesses today, 
including: the sponsors of H.R. 1148, our colleagues; the 
Director of Enforcement at the Securities and Exchange 
Commission; and other experts on the subject.
    I thank all the witnesses for appearing today and I look 
forward to hearing their testimony. I especially want to thank 
Representatives Slaughter, Walz, and Jones for joining us to 
talk about the bill they sponsored.
    I will now recognize Mrs. Maloney for 1 minute for an 
opening statement.
    Mrs. Maloney. Thank you.
    I am very pleased to welcome our witnesses today: Mr. 
Jones; Ms. Slaughter; and Mr. Walz. And I look forward to your 
testimony.
    I am particularly proud of my New York colleague, Louise 
Slaughter, who was the first person to introduce this bill, 
when she discovered a staffer was making trades from his office 
based on inside information. And I am proud to be a sponsor of 
H.R. 1148, as I was in the last Congress. I am pleased to see 
that we are moving with great speed to address this issue and 
hopefully pass it into law.
    Elected officials really should be like Caesar's wife in 
avoiding the appearance of impropriety. The potential for 
trading on inside information within these halls is undeniable, 
and we need to move to address it.
    While the SEC has said recently that existing insider 
trading laws apply to Members, I can't remember the last 
prosecution under any existing laws. In addition, the House 
Ethics Committee guidance has been that House rules prohibit 
Members and their staff from entering into personal 
transactions that trade on confidential information, and we 
need to ban this. It remains clear to me that the need to 
expressly prohibit this activity in statute cannot be 
overstated. This bill is needed, and action on it is long 
overdue.
    I have a series of editorials from across the country that 
I would like to place in the record, all of which support this 
bill and say we should have passed it yesterday.
    I thank my colleagues, and I look forward to your 
testimony.
    I yield back. Thank you.
    Chairman Bachus. Thank you.
    Mr. Hensarling for 1\1/2\ minutes.
    Mr. Hensarling. Thank you, Mr. Chairman, for calling this 
hearing. And I thank my colleagues on the panel for their 
leadership in this area.
    Before we debate any given policy, I think it is critical 
that we first get right the principle, and I would suggest that 
two principles apply here: first, with the exception of 
statutory compensation, the American people have to have 
confidence that Members of Congress will not profit from their 
office; and second, with the exception of the Speech or Debate 
Clause enshrined within our Constitution, our constituents 
deserve to know that Members of Congress are going to be living 
under the same laws that apply to them, and people need to know 
that these principles are inviolate.
    Now, it is clear that ``60 Minutes'' still enjoys pretty 
good ratings, since I heard about this issue over the weekend 
on several occasions, but our constituents also deserve the 
facts. Let me quote from one of our witnesses from the 
Congressional Research Service: ``I think it is now fairly 
clear to everyone following this issue that Congress did not 
exempt itself from insider trading laws.'' I also note that 
under our House ethics rules, Members are expressly prohibited 
from ``using their official positions for personal gain.''
    The subject matter of today's hearing is very, very 
important, but before we prescribe a remedy, let's ensure we 
have identified the right problem. The challenge may be lax 
enforcement. The problem may be inadequate disclosure. It may 
lie in vague statutory definitions. It does not appear to lie 
with a Congressional exemption. But wherever it lies, the 
American people rightfully demand accountability, and we owe it 
to them to provide it.
    I yield back the balance of my time.
    Chairman Bachus. I thank the gentleman.
    Mr. Scott for 3 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman.
    I want to just commend our fellow Members of Congress who 
have taken the bold leadership on this legislation: Mr. Jones; 
Ms. Slaughter; and Mr. Walz. You are certainly to be commended.
    And I want to thank you, Mr. Chairman, for holding this 
hearing today on the Stop Trading on Congressional Knowledge 
Act.
    It is very important that we honor the trust that the 
American people placed in Members of Congress, and the STOCK 
Act would bar Members of Congress and Federal employees from 
profiting from information that is not publicly available that 
they obtain by means of their elected positions. The STOCK Act 
would also direct the Commodity Futures Trading Commission to 
prohibit someone from buying or selling a commodity for future 
delivery or swap while in possession of material information 
that is not public--very important and should be the case.
    Currently, as a matter of fact, insider trading is not 
forbidden by law. However, there have been reports that Members 
of Congress and their staffs have been engaging in day trading 
of securities, and I find this very, very troubling. I believe 
that my House colleagues and I, as well as staff, should be 
subject to the very same rules as those that are not directly 
associated with Congress.
    Although there seems to be a consensus on this fact, some 
have questioned the legislation's narrow scope. I think that 
this deserves a particular mention, and that is, namely, its 
application to only material that is nonpublic information 
relating to pending legislation and the omission of tipping by 
Congress or employees of the Executive Branch.
    So I will be very interested in finding out today from our 
witnesses how our witnesses view the legislation under 
discussion, and then what should be done to increase this 
narrow focus, the focus of it, the effectiveness of it, if we 
feel it is necessary.
    So I look forward to this hearing. Thank you very much, Mr. 
Chairman. And, again, the American people are depending upon us 
to do the right thing and play by the same rules that all the 
other American people are playing by when it comes to trading 
on the exchanges.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mr. Royce?
    Mr. Royce. Thank you, Mr. Chairman.
    I want to see us strengthen the law as it applies to 
insider trading as it can be practiced by Members of Congress.
    I think that many people look at the government today and 
see that it has entered into every facet of the economy. We 
have massive Federal spending now. We have taxation policy that 
is not uniform. We have the government intervening in the 
economy on behalf of some firms and not others. And with that 
increased size and increased influence, there is a heightened 
sense that political pull and insider knowledge are enriching a 
select few. It is that perception of crony capitalism which 
threatens our free enterprise system and our republic.
    And it is that perception that we have to address here in 
Congress. Washington must be held to a higher standard. And 
whether this is achieved through the STOCK Act or Mr. Duffy's 
legislation, of which I am a cosponsor, I believe that, at the 
end of the day, now is the time to act. After this hearing, we 
should mark up legislation.
    And I look forward to hearing the witnesses, their 
testimony here this morning.
    Thank you. I yield back, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mr. Frank?
    Mr. Frank. Thank you, Mr. Chairman.
    And I want to express my admiration for the efforts of my 
colleagues.
    I will now acknowledge that during the 4 years I chaired 
the committee, it was during that period that I think this 
first surfaced, and I did not see it, apparently incorrectly, 
as an issue. It, frankly, seemed to me inconceivable that 
Members of Congress would be doing that. But I now accept the 
fact that it has been happening, and it is both a matter of 
right and a matter of what we owe the country to correct it. So 
I thank my colleagues for persevering.
    I still think the best thing for Members of Congress to do 
is to be very cautious. To some extent, there are going to be 
elements of knowledge we have that are going to be hard to 
capture under the law. Our prediction about how a vote may go, 
if you don't have all the commitments signed in your pocket, 
probably wouldn't be inside information, but it is something 
that ought not to be there.
    I will say, this had occurred to me some time ago as a 
potential issue, and I think I have resolved it the best way I 
can. Almost all of my investments are Massachusetts municipal 
bonds, which also have done pretty well lately because the 
rating agencies underestimate the commitment of the States. 
And, in fact, if anything, I have acted against interest 
because I have been urging the rating agencies to reduce the 
risk component that they impute to municipal bonds, which would 
make the interest rate go down.
    I acknowledge the fact that I am getting an unduly high 
return because of the nonexistent possibility that they are 
going to default. But I also thought that owning the bonds of 
the State I am enjoined to represent would minimize any 
argument of conflict of interest. To the extent that I oppose 
anything that would undermine the fiscal soundness of the State 
I represent, I would assume that would be considered to be 
okay.
    But to go back, there is an area of ambiguity. And no 
matter what we do, I think it is important that we pass this 
legislation, and I thank my colleagues for doing it. I must 
say, I am skeptical of the blind trust. I gather we got a last-
minute entry into this derby to talk about mandatory blind 
trusts. I think there are problems with trusts being more or 
less blind and supervising who the trustee is. I believe that 
the approach my colleagues are taking is a very thoughtful one, 
and I will be working to sharpen the legislation. I understand 
there are obviously some ambiguities.
    Let me just say, for those who might argue it is not 
necessary, I will rely on my most important legislative 
principle: Redundancy is clearly preferable to ambiguity when 
you are passing laws, especially since we know that some of 
those who are telling us that this is unnecessary, if hired to 
represent one of us, would immediately argue that it was too 
ambiguous. So let's clear this up.
    Thank you.
    Chairman Bachus. Thank you.
    Mr. Duffy for 2 minutes.
    Mr. Duffy. Thank you, Mr. Chairman.
    I think there is a cloud over Members of Congress and the 
trades that they make. Whether that is just perception or 
whether there is really wrongdoing I don't know. But I would 
commend Ms. Slaughter and Mr. Walz for introducing this bill, 
the STOCK Act. I think it is a first step in the right 
direction.
    But I think we have to go a step further. We can't take a 
half step here. I think we should take the full step and leave 
no gray area with what Members of the House, Members of the 
Senate, the President, or the Judicial Branch do in regard to 
their trades. And that is why I have introduced H.R. 3550, the 
RESTRICT Act.
    What we do there is we mandate that each Member have a 
blind trust, and if they opt out of the blind trust, they can 
opt for disclosure of trades within 3 business days of that 
trade. And I think if we do that, it will shed light on any 
trades that go on with Members or senior staff. And if there 
was a meeting with a high-ranking business official and 3 days 
later or 2 days later a Member is trading, we will be able to 
see that. I think that kind of transparency, the immediate 
transparency, is imperative.
    If we are going to introduce legislation, this can actually 
get the job done. My fear is that if we only take half a step, 
there will still be too much gray out there for members of the 
public to see that Members could skirt around the new rule. I 
think my bill goes the distance and makes sure that there will 
be no doubt within the minds of the American people that 
Members of Congress, the Executive Branch, or the Judiciary are 
not going to use insider information to trade.
    And, with that, I would yield back.
    Chairman Bachus. All right. Thank you, Mr. Duffy.
    Mr. Lynch for 1 minute.
    Mr. Lynch. Thank you, Mr. Chairman.
    I want to thank our distinguished panel and sponsors of 
this legislation for coming forward.
    I certainly think that recent revelations have created 
doubt in the integrity of the whole process here, whether or 
not Members are capitalizing on inside information that they 
get through the legislative process. So I certainly--I am a 
cosponsor of Mr. Walz's bill. I think it needs to be addressed, 
and I think we need to do it quickly and in a fashion that I 
think restores America's confidence that we are operating 
aboveboard here and not taking undue advantage of our 
positions.
    So, with that, I want to congratulate the sponsors of this 
bill and Mr. Jones, Ms. Slaughter as well. Thank you very much.
    I yield back the balance of my time.
    Chairman Bachus. Thank you, Mr. Lynch.
    If there are no further Members--Mr. Canseco?
    Mr. Canseco. Thank you, Mr. Chairman.
    While today's hearing focuses on a specific piece of 
legislation, I feel the greater discussion revolves around the 
public's perception of Washington and the current lack of trust 
that voters across the country have in their elected leaders. I 
think it is pretty clear that if a Member of Congress trades 
off of material, nonpublic information, as it is defined for 
private citizens who trade off of such information, there 
should be penalties and there should be accountability.
    But we also must keep in mind that innuendo and bad 
research do not make for justifiable allegations against 
Members of Congress. To this end, I feel that the STOCK Act 
offers a completely unworkable solution to these allegations. 
The bill would likely lead to political witch hunts and, 
judging by language in Section 3, could disallow a Member of 
Congress from ever getting in front of a camera again to 
discuss pending legislation. This would have the perverse 
effect of decreasing transparency and further eroding the 
public's trust in Washington.
    I feel there are better ways to address this issue, and 
that is why I have introduced House Resolution 480, which would 
amend House rules and require that every Member of Congress 
either place their assets in a blind trust or disclose all of 
their trading activity on a monthly basis for the public to 
see. The resolution bars insider trading by Members of Congress 
and grants enforcement power to the House Committee on Ethics, 
thereby avoiding the Constitutional problem of having an 
Executive Branch agency investigating the Legislative Branch. I 
feel this would be an important step toward Washington 
regaining some of the trust of the American people.
    With this in mind, I look forward to discussing these very 
important issues at today's hearing, and I yield back the 
balance of my time.
    Chairman Bachus. Mr. Miller?
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    In the 1960s, when Americans were asked in polls if they 
believed that government officials, their government officials, 
could be counted on to do the right thing or at least try to do 
the right thing, they overwhelmingly said ``yes.'' They might 
not agree with their decisions, but they didn't question the 
motives. They thought that the people who held responsible 
positions in their democracy came from the people and wanted to 
do the right thing by their country. They were patriotic 
Americans, just like other Americans.
    That trust is now gone. In polling now, overwhelmingly, 
Americans do not think that of people who hold positions of 
government. That is toxic for our democracy. We cannot survive 
this democracy unless there is more confidence in our elected 
officials than there is now.
    Part of that has been the result of the conscious effort to 
discredit government, to discredit everything that government 
does. Part of that is the result of the financial crisis and 
what happened. Most Americans think that everything done in the 
financial crisis was done to help specific institutions and 
specific people, not to help the economy. And there is too much 
truth to that.
    Part of that is the result of another story on ``60 
Minutes,'' although it has been widely reported, on the failure 
to prosecute in the face of what appears to be clear evidence 
of criminal misconduct. Certainly, in a democracy, no one can 
be too big to prosecute. And then, finally, this: There has to 
be an understanding that people have to believe, and it has to 
be true that people in responsible positions are not using 
their positions to enrich themselves.
    We have to restore the trust of the American people in 
their democracy, and the first step to restore their trust is 
to be trustworthy.
    I yield back the time I don't have.
    Chairman Bachus. Thank you, Mr. Miller.
    We have completed opening statements.
    We have three of our colleagues here to testify: 
Representative Walter Jones; Representative Louise Slaughter; 
and Representative Tim Walz. And you are free to make an 
opening statement at this time.
    Walter, we will start with you.

STATEMENT OF THE HONORABLE WALTER B. JONES, A REPRESENTATIVE IN 
           CONGRESS FROM THE STATE OF NORTH CAROLINA

    Mr. Jones. Thank you, Mr. Chairman.
    We are living in a time when the American people do not 
trust Congress. Since the bailout of Wall Street, the Bernie 
Madoff scandal, and other indiscretions, the American people 
have been frustrated and disappointed in their elected 
officials concerning financial issues.
    ``60 Minutes'' recently escalated speculation and raised 
more questions about those in power not playing by the same 
rules as the American people. According to many experts, those 
at the top of the financial world manipulated information to 
the detriment of the American taxpayer and investors, big and 
small.
    As Members of Congress, it is our job to follow a strong 
honor code and to hold those accountable who are profiting from 
positions of power. The American people should never, ever have 
the slightest perception that we are using our office to pad 
our own pockets. That is why I believe in and I support the 
STOCK Act. It is a proper first step in maintaining the 
integrity of Congress.
    The introduction of H.R. 1148 states its purpose: ``To 
prohibit commodities and securities trading based on nonpublic 
information relating to Congress, to require additional 
reporting by Members and employees of Congress of securities 
transactions, and for other purposes.'' While there may be some 
technicalities to this legislation that need to be addressed, I 
believe that H.R. 1148 is a great starting point for this 
Congress.
    Mr. Chairman, too many people today think that financial 
markets are a rigged casino in which regular investors cannot 
win and where insiders virtually cannot lose. And why shouldn't 
they think that, Mr. Chairman? Here are three headlines from 
the last 2 weeks. Bloomberg: ``Secret Fed Loans Gave Banks $13 
Billion.'' The second Bloomberg report: ``How Henry Paulson 
Gave Hedge Funds Advance Word of 2008 Fannie Mae Rescue.'' Mr. 
Chairman, this is why the American people are so disenchanted 
with Congress. And the third, the Economic Times: ``MF Global 
Proves Enron-Era Accounting Lives On.''
    Three years after the financial crisis, the too-big-to-fail 
banks are even bigger, phony accounting still is being used, 
and back-door bailouts of favorite financial institutions still 
continue. Just yesterday, I was asked by a constituent why the 
banks that received a bailout continue to give millions of 
dollars in bonuses to their employees. It simply makes no 
sense.
    That is why H.R. 1148, the STOCK Act, is so important. This 
legislation proves to the American people that if there is a 
problem, those of us in Congress will fix it. It is of the 
utmost importance that Members of Congress maintain the 
integrity of this institution. We in Congress are given a 
privilege and an opportunity to serve the American people. They 
deserve to trust those whom they elect to represent them in 
Washington.
    And, Mr. Chairman, I hope this committee will use this 
bill, the STOCK Act, as the vehicle to expand and build the 
American people's confidence in this institution, confidence 
which they have totally lost.
    With that, Mr. Chairman, I am pleased and honored to be 
with my colleagues Tim Walz and Louise Slaughter. Ms. Slaughter 
has been fighting for this for the last 3 or 4 years. Mr. Walz 
has picked up the ball and is running. Let's join him and let's 
score a touchdown for the American people.
    Thank you, Mr. Chairman. I yield back.
    Chairman Bachus. Thank you, Mr. Jones.
    Representative Slaughter?

       STATEMENT OF THE HONORABLE LOUISE M. SLAUGHTER, A 
     REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

    Ms. Slaughter. Good morning, everybody. Thank you, Chairman 
Bachus, and Ranking Member Frank, for holding this hearing this 
morning.
    To Ranking Member Frank, I want to thank you for 
acknowledging the need for this legislation. Your leadership 
will certainly be missed when you retire at the end of this 
term, but I look forward to working with you and Chairman 
Bachus to get this bill passed, and another historic financial 
reform will be added to this committee's legacy.
    I thank the committee, as I said, for taking this up.
    The STOCK Act has been around, as you know, for 5 years. It 
never gained more than 14 cosponsors, never had a Senate 
sponsor or anybody to notice. Brian Baird and I introduced it 
after increasing reports that Members of Congress and staff 
were abusing their official status for private gain, and the 
rise of national political intelligence firms--which, to me, is 
one of the most important parts of this bill that never gets 
mentioned, but I want to talk about that a little more later--
using Congressional nonpublic information to gain an advantage 
in the stock market. In addition, the academic field had 
developed a study on whether Members of Congress performed 
better than average in the stock market in the 1980s and the 
1990s.
    The bill was reintroduced in the 110th and again in the 
111th Congresses. I testified in 2009 before this committee's 
Oversight and Investigations Subcommittee at a hearing on this 
topic, but the bill never advanced at all.
    The bill is supported by a broad base of groups: Public 
Citizen; Citizens for Responsibility and Ethics in Washington; 
Common Cause; Democracy 21; the League of Women Voters; the 
Project on Government Oversight; the Sunlight Foundation; and 
U.S. PIRG.
    Leading up to the ``60 Minutes'' report, we only had, as I 
said, nine cosponsors--a typical amount, although we did have 
Walter Jones, for which I am extremely grateful, and I thank 
him for the support that he has given us in this legislation. 
We now have 171 cosponsors and counting. Every day brings four 
or five more. It is truly a bipartisan bill. There are not one 
but two Senate counterparts, as you know, and the Senate has 
already held their hearing.
    Now, to make up for lost time--the Senate held the hearing 
and committed to the markup of this bill before the end of the 
year--I encourage the members of this committee to work in 
concert with the other five House committees of jurisdiction.
    Congressional approval, as we all know, is at 6 percent. 
And it is hinted at that those are only 6 percent of the people 
who know and love us personally. Thousands of people across the 
country have been peacefully protesting to break the intimate 
relationship between Wall Street and Washington.
    Enacting the STOCK Act will prove that Congress is capable 
of reforming its internal operations and will help to ensure 
that Members are held to at least the same standards as 
everyone else when it comes to insider trading. Failing to pass 
it, I am afraid, will send a clear signal to the American 
people that we have no interest in gaining their approval or in 
reforming a broken system.
    Members of Congress, Congressional staff, and Federal 
employees have the unique opportunity and means to make 
profound changes in our economy and the country and the world, 
but that comes with a great obligation that we do not betray 
our principles for private gain.
    I sincerely do believe that a vast number of Members of 
Congress and their staffs serve the best interests only of 
their constituents and the public, and they do not come here, 
obviously, to line their pockets. This bill is not about 
individuals; it is about reforming the institution as a whole. 
By explicitly prohibiting the improper use of sensitive 
information, we will be taking an enormous step in providing 
transparency, while preserving and strengthening the public 
faith in our government and the democratic process.
    I understand some people don't believe this is necessary. 
They might argue that, in theory, the current ethics rules and 
the SEC rules could be applied to cases of trading using 
Congressional material and nonpublic information. However, in 
practice, we have never seen these rules applied to Congress. 
This has made the public rightly question the adequacy of the 
rules that we have today. And that is why the STOCK Act has a 
multi-pronged effort to address Congressional insider trading 
and remove any current ambiguity about the issue.
    The STOCK Act requires the SEC, the Commodity Futures 
Trading Commission, and House Ethics to explicitly ban such 
trading and provides two new enforcement rules. The bill 
requires timely financial disclosures, similar to what is 
required of Wall Street insiders. And I cannot emphasize this 
piece enough: It requires the registration of political 
intelligence firms, similar to what is required by lobbyists.
    And as the author of this bill, I have sincerely regretted 
that this part of this legislation has been totally ignored. 
Let me tell you something about the importance of this bill. 
This is a whole group of people who survive on political 
intelligence.
    Now, throughout this current economic crisis and, indeed, 
since their creation in the 1970s, the so-called political 
intelligence firms have operated quietly in the background 
without any regulation or oversight. Recently, the size of this 
industry has grown considerably, bringing in an estimated $100 
million a year. These firms are not influencing Congress but, 
rather, using Congressional information to influence their 
clients' stock portfolios.
    For example, let me read to you the Web page for one such 
group--this is terribly important to me, so if you will give us 
a second on this one, and open up your ears: ``Providing this 
service for clients who do not want their interest in an issue 
publicly known is an activity that does not need to be reported 
under the Lobbying Disclosure Act, thus providing an additional 
layer of confidentiality for our clients.''
    How can we possibly allow that to continue? When we pass 
the STOCK Act, we will be requiring all such lobbying firms to 
sign up with both the House and the Senate, and for the first 
time since the 1970s, we will have some idea of what it is that 
they are up to. Now, the STOCK Act does not ban political 
intelligence firms but just requires that they be as 
transparent as the rest of the lobbying industry.
    As I said, I deeply regret that part of the bill has gotten 
so little attention because, to me, it is one of the major, if 
not the major, part of it that we need to pass.
    So, again, Chairman Bachus and Ranking Member Frank, I 
thank you for holding this hearing. It is a very important step 
forward. I look forward to working with you and all the people 
of this wonderful committee and any other interested parties to 
enact this critical legislation in a timely fashion.
    Thank you for your time.
    [The prepared statement of Representative Slaughter can be 
found on page 70 of the appendix.]
    Chairman Bachus. Thank you.
    Representative Walz?

STATEMENT OF THE HONORABLE TIMOTHY J. WALZ, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MINNESOTA

    Mr. Walz. Thank you, Chairman Bachus, Ranking Member Frank, 
and members of the committee for having us here on this 
important issue. A special thank you to Congresswoman Slaughter 
and Congressman Jones for being so engaged in this.
    Prior to coming to Congress, I was a high school social 
studies teacher and an enlisted soldier in the Army National 
Guard. And I came to Congress for the same reason all of you 
did: to make a difference, to try and serve our country, and to 
try and make things better, coming and talking about the issues 
that the American public was frustrated about--not just policy, 
but how the system worked. And the rampant cynicism that all of 
us recognize, the idea of a 9 percent approval rating, that is 
a disgrace to not only all of us, it is a disgrace to those who 
have worked so hard to build the democracy. And it is our 
responsibility to restore faith.
    So as I got here and started talking about things like 
disclosing earmarks online, and that became a common practice, 
those types of things, I was approached by Louise Slaughter and 
Brian Baird, and they said, ``We have something you might be 
interested in.'' And they started explaining to me about the 
idea of trading on knowledge.
    I think, like most Americans, I could not believe it. It 
seemed like it would be impossible there would be a loophole 
there. It seemed impossible that anyone would do it. But the 
facts and the studies that were done seem to show that, lo and 
behold, Members of Congress outperformed the stock market by 
about 6 to 10 percent on a regular basis. Now, that may be due 
to the infinite wisdom that resides in these halls or it could 
be something different: luck; smart, savvy trading; or the 
possibility that there was insider knowledge. I don't know.
    My point on this was, the idea of serving in Congress is 
the single greatest honor that your neighbors can bestow upon 
you. And our responsibility back to them is not to have them 
agree with every political decision we make, but to have them 
believe we are doing it in their best interest, everything we 
do. We could be 100 percent wrong in their opinion, but if they 
believe we are doing it for the right reasons and the system is 
not gamed, the faith in the democracy is solid.
    So I got on to this bill and spent countless hours with the 
SEC, with professors of law, with Louise, and with our esteemed 
retired colleague, Brian Baird, talking about ways to make this 
work.
    I do it with no pleasure, because this is about restoring 
faith. It is not about individuals, it is not about singling 
out. I don't know if it has ever been done before, but the 
perception that it was being done is strong. Go home to the 
grocery store, all of you who were at Thanksgiving, tell me how 
that conversation went at the dinner table, and I will tell you 
that they are talking about this because their faith in the 
system is not there.
    So I think trying to restore this and trying to get it 
right, any suggestions are welcome, but I agree with my 
colleague, Ms. Slaughter, that we need to move something. And I 
can tell you, if you think a 9 percent approval rating is bad, 
don't pass anything on this. Drag it out and don't do anything, 
and watch what happens. And that is not about political 
reelections, it is not about ideology; it is about the American 
people becoming so cynical in the greatest system of governance 
in the world that it is putting things at risk.
    So, with that, I encourage you to take a look at this STOCK 
Act. I will be the first to tell you that this is the bare 
minimum. But for those of who you say, take another step, I am 
with you, I agree on this. The problem was, the first step took 
6 years to take that half-step, with seven cosponsors. We need 
to get something done now. We need a mechanism that does it.
    And I agree with Louise, the problem of the tippers and the 
tippees has to be addressed in this also. For those who say 
this is already there, that may hold true in a theoretical 
argument, but in the American public's perception, it is not 
there. Something must be done. If it is transparency, I believe 
the STOCK Act is the most thoughtful, and the unintended 
consequences have been looked at in a greater nature.
    And I will give you just a quote here. This is from former 
SEC Chairman Levitt: ``Our markets are a success precisely 
because they enjoy the world's highest level of confidence. 
Investors put their capital at work and their fortunes at risk 
because they trust that the marketplace is honest. They know 
that our securities laws require free, fair, and open 
transactions.'' I would substitute this for the American 
public's. Our market is a success, our democracy is a success 
because people believe they are open, fair, and transparent. 
And that is what we are asking to do.
    I can tell you that newspapers in my district--the Mankato 
Free Press said, this is a no-brainer. The Minneapolis Star 
Tribune: ``This bill is smart politics and policy and is a dose 
of what is needed to start reversing voters' rapid cynicism.''
    That is what this is about. It is not a witch hunt. It is 
not about trying to get involved too deeply in the SEC's 
responsibility. It is trying to clarify for the American public 
that their public servants are held not just to the same law; I 
would argue we need to hold ourselves to a higher standard. We 
need to make it perfectly clear so that when they hear our 
debates, they may differ with us on the substance of the 
debate, but not on our motives.
    So I am thankful, Mr. Chairman and Mr. Ranking Member, that 
you are taking this up. I look forward to working with each and 
every Member on improving and perfecting this bill. But I can't 
stress enough that we have a Senate counterpart, and I would 
like to thank Senators Gillibrand, Tester, and Brown. They have 
already moved forward; they have promised us a markup. I think 
it is one of those rare occurrences where, as Congresswoman 
Slaughter said, we now are nearly approaching that magic number 
of 218--we should get there hopefully soon--that we have the 
momentum to move this.
    With that, I thank you, and I look forward to any questions 
you may have.
    [The prepared statement of Representative Walz can be found 
on page 73 of the appendix.]
    Chairman Bachus. Thank you. That was a very articulate and 
effective statement. Thank you.
    And I think it expresses a lot of our own views. It is 
absolutely essential that we do restore the public's trust. 
There have been some very serious allegations; I think we all 
are aware of that. I am personally aware of them. And if this 
is the answer, so be it.
    And we will--I can't speak for the committee, but after 
this hearing, I am perfectly willing to schedule a markup.
    Mr. Frank. Mr. Chairman, if you would yield briefly?
    Chairman Bachus. Yes.
    Mr. Frank. In my experience, when it comes to scheduling a 
markup, yes, you can speak for the committee.
    Chairman Bachus. Well, then I will schedule a markup. I 
usually have to consult the ranking member. So you are with me?
    Mr. Frank. Yes.
    Chairman Bachus. Then we will have a markup.
    Ms. Slaughter. Excellent. We are happy to hear that.
    Chairman Bachus. I have no questions. I am going to yield 
to Mr.--do you have questions, Mr. Hensarling? No?
    Mr. Frank?
    Mr. Frank. I just have a couple.
    First, I want to say, Ms. Slaughter, I was one of those 
guilty of not looking sufficiently at the political 
intelligence. And that is a very important thing. Now--
    Ms. Slaughter. Frankly, to me, in writing this bill, that 
was of critical importance.
    Mr. Frank. --one of the questions, I notice this bill will 
be multiply referred. Because, for example, it changes the 
House Ethics rules, and we have no jurisdiction, and that is 
not legislative. The Senate has no jurisdiction over our rules 
and vice versa. And it goes to the Judiciary, which is 
important because there are obviously First Amendment 
considerations here.
    Although I will say for people who are going to 
automatically say there is a First Amendment problem with the 
political intelligence, you don't get any stronger than the 
First Amendment protection for lobbying. It is called in the 
Constitution in the First Amendment the right to petition for 
the redress of grievances. And regulation of that has clearly 
been upheld--not prohibition, but regulation, information has 
been upheld. So I would think that Constitutional doctrine is 
already there to allow appropriate publicity regulation of 
these activities. Because, if anything, it is less than the 
lobbying, although it is an important thing for us to look at.
    I also wanted to note and to comment to my colleague Mr. 
Jones, we obviously differ with some of what was done in the 
past, but I would point out that, as a result of this 
committee's actions, going forward, first of all, the power 
under which the Federal Reserve made some of those loans has 
been abolished. Section 13(3) of the Federal Reserve Act no 
longer exists. I will say that I believe that the Fed acted 
appropriately and that, in fact, the Federal Government will 
make money on those things and I think they were helpful. But, 
going forward, they will have to be done under more constraint 
and reported.
    And, secondly, as a result of the legislation that was 
signed, no transaction, no transaction whatsoever, between the 
Federal Reserve and any private entity will go ultimately 
unreported. Now, there will be a time delay, in some cases, so 
you don't have a market impact. But that is--I think that what 
happened was, on the whole, constructive. But we have severely 
changed it.
    As a matter of fact, you mentioned ``too-big-to-fail.'' 
Current expert opinion is that we went too far in the 
legislation, not total, but there are complaints that it has 
now become too hard in case of a crisis, and indicative of the 
fact that, from the standpoint of many analysts, we are never 
able to do anything right. We are either too much or too 
little. We have gone from being accused of tolerating ``too-
big-to-fail'' to now being ``too-stingy-to-bail.'' That is the 
current--The Economist ran a simulation and was very upset to 
find out that we can't bail people out anymore. We believe 
that, in fact, yes, we knew that, and that is appropriate, and 
that will affect their behavior.
    But let me just ask--the one, I guess--one last point I 
wanted to make, and I appreciate the chance just to make these. 
Because I heard reference as I was coming in, the gentleman 
from Texas talking about the Full Faith and Credit Clause. And 
I want to make a bipartisan criticism of the Congressional 
leaderships going back as far as I can remember. They are 
inclined to overuse the Full Faith and Credit Clause to shelter 
us, including, there have been arguments made by House counsel, 
supported by the leadership of both parties, that even taking 
bribes can, in fact, be sheltered from criminal prosecution if 
the act for which the bribe was taken could be put under the 
Full Faith and Credit Clause.
    So I am telling the Members now--and I have had some 
arguments about this. I will be asking--and I would put our 
leadership on notice. From now on, I think we ought to have a 
full discussion of how much to use the Full Faith and Credit 
Clause.
    Look, the Full Faith and Credit Clause had a very important 
purpose in the late 1500s and early 1600s, and it was to 
prevent Queen Elizabeth and King James from prosecuting members 
of the House of Commons who said things that they didn't want 
them to say. That is also, by the way, why we can't be arrested 
on the way to work, because the rule was that, once you were in 
parliament, they couldn't get you. So they could stop you from 
getting there, and they could prosecute you afterwards.
    Those two provisions of the U.S. Constitution were 
reactions to Tudor excesses. And I think it is time now to say, 
you know what, we are probably pretty safe from Queen 
Elizabeth. The second one may be a problem, but I don't think 
so, but the first one is long gone.
    And I believe there has been an overusage of the Full Faith 
and Credit Clause. And I say that because that is directly 
relevant here, and we will find people trying to hide behind 
Full Faith and Credit.
    So, in addition to what we are doing, I believe it is 
important for the Members to be ready, and I think we probably 
ought to have some kind of session with our leadership. The 
narrower the Full Faith and Credit Clause is used, the better 
it will be. People should not be prosecuted for things they say 
on the Floor, for libel or for other reasons, but the Full 
Faith and Credit Clause should not be a shield here.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mrs. Biggert?
    Mr. Frank. I kept saying ``Full Faith and Credit.'' I meant 
``Speech and Debate.'' But I also want to say--
    Chairman Bachus. We will give you full credit for saying 
``Speech and Debate.''
    Mr. Frank. I appreciate that. And I ask for immunity from 
having made that misstatement.
    Ms. Slaughter. But speaking of the Full Faith and Credit, 
Mr. Frank, I must tell you how much I appreciated your comments 
that we have troops all over the world and that we don't any 
longer have the necessity of protecting Germany from Stalin. 
And, again, like we are doing here, we really need to look at 
things pretty closely to see how much it makes sense.
    Mr. Frank. It is the Speech and Debate Clause, and I don't 
know what got into me. But that has been, unfortunately, by 
both leaderships, they have protected us, and that is part of 
this problem. And I have literally seen invocations of that 
from both parties' leaderships. People have argued that it 
immunized people who took bribes from prosecution, and we 
cannot allow that.
    Ms. Slaughter. No.
    Chairman Bachus. Mrs. Biggert?
    Mrs. Biggert. Thank you, Mr. Chairman.
    I don't have too many questions, but just--I think this is 
an important hearing. I am concerned about the fact that--I 
hope that we don't overreact. We have a tendency to do that 
every time there is a crisis, and we overreact. I think we did 
that in Sarbanes-Oxley, and we did it in a lot of things.
    My concerns are some of the things in the bill that I think 
will come up, and one of them is the reporting requirement of 
within 90 days of the numbers of--for people who would have to 
file, and even with a mutual fund. Within 90 days, people 
wouldn't even have--I don't think they would have the knowledge 
of that within that 90 days.
    So I think there is a lot--we seem to have an awful lot of 
myths about Congress, and I don't want this to be one of them. 
For example, I go back to the district and people say, ``Well, 
you don't have to pay Social Security,'' or ``You get a pension 
after 1 day of service and a full salary.'' They don't 
understand the formulas and how many years it takes. Or with 
health care, we don't have to pay for health care. We do have--
I have Blue Cross Blue Shield.
    So I think that some of these things can be driven by the 
fact that there isn't an understanding of how Congress works, 
how our Ethics Committee works, so that I think we have to be 
careful that we don't overreact.
    I think bringing this to our attention is really good, but 
we have to be very careful that we spell out specifically and 
not just make it that this is Congress and a usual thing, 
because it is not. I think most people come here with very high 
standards, and it just seems like all this takes us down, and 
it really worries me.
    With that, if anybody would like to respond, I would--
    Mr. Walz. I would. Thank you, Ms. Biggert. And I couldn't 
agree more with you. As I say, I certainly take no joy in this.
    My largest, biggest frustration with the ``60 Minutes'' 
story is that I think, if we had passed this thing, we wouldn't 
have had it. I think it would have been clearer. And my goal 
was to make sure we didn't have that, because I take no 
pleasure in seeing colleagues who I know have integrity being 
drawn into something that is very ambiguous, as you are saying.
    And then I think when we overreact, we give the impression 
that everyone here is acting in an improper manner, and that is 
not true. So I very much appreciate your words of, I would 
argue, wisdom.
    I think Mr. Hensarling brought up some very good points in 
understanding wanting to fix this but do this in a measured 
manner that makes sense. Because there is going to be a 
cynicism amongst the public that, ``Oh, look, now they are 
concerned, because it was on TV. Now they are going to do 
something. But is it ever really going to be enforced?'' They 
have to believe that there is a strong desire to make this 
right, to put those things into place that make the 
transparency there.
    We thought long and hard about these things. And, as I 
said, I certainly can't speak for my colleagues; I will let 
them say it. But I am more than willing, if this is the 
vehicle, to make the changes to improve it. That is how the 
best legislation is done, together in a bipartisan manner, to 
make it there, and we are certainly open to those suggestions.
    But I agree with your sentiments wholeheartedly. And I want 
to be very clear about this: It is certainly not about bringing 
a hot light of shame to the Congress; it is bringing a hot 
light of transparency and openness. And I think if you do this 
right, the flip side of that is, look at the vast number of 
Members who are doing it correctly and doing it right, and that 
restores faith.
    So thank you for those comments.
    Mrs. Biggert. I thank you.
    And I yield back.
    Chairman Bachus. Thank you.
    Our three colleagues have graciously agreed to answer 
questions from the committee. In deference to the demands on 
their time and the fact we have two other panels to get to 
today, I am hoping we can exercise some restraint and not keep 
them all morning.
    Ms. Slaughter?
    Ms. Slaughter. I want to thank you for that. I am supposed 
to testify before Transportation in 10 minutes.
    Chairman Bachus. Okay. So, in that spirit, is there anyone 
else who would like to ask questions of this panel?
    Mr. Manzullo?
    Mr. Manzullo. Yes.
    Chairman Bachus. Sure. Go ahead.
    Is there anybody on the--Ms. Waters first, and then we will 
go.
    Ms. Waters. Thank you very much.
    First of all, let me thank Louise Slaughter for initiating 
this legislation a long time ago and absolutely understanding 
that there may be a serious problem here.
    I just picked up a book called, ``Throw Them All Out,'' and 
I am reading the so-called accounts of insider trading by 
Members of Congress.
    Is there something to being able to separate out 
inadvertent actions from a pattern and practice that can be 
identified by a Member?
    That is what concerns me a little bit. I think it is 
important that we know the difference between information that 
may have been picked up that one may not even know the meaning 
of and someone who appears to have access to information who 
consistently trades and earns money.
    Is there a difference? And how does this legislation deal 
with that?
    Ms. Slaughter?
    Ms. Slaughter. Actually, it just says we will not do 
insider trading, both for Members and staff.
    As I pointed out a while ago, Ms. Waters, before you came, 
the most important part of this bill, to me, is what we have 
done to this whole industry called ``political intelligence'' 
that does not have to--they lobby and they give confidentiality 
to their clients because they don't have to report it at all. 
It is worth $100 million a year, and the STOCK Act says simply 
we don't try to do away with them but just that they will be 
forced to sign these lobbyists, register with both the House 
and the Senate.
    But we don't go into deep separation of who does what. I 
think for a lot of people, it may come as a great surprise that 
we are not supposed to do this. I would imagine that a staff 
person on one of the major committees would be a delightful 
dinner companion, if we allowed people to go to dinner 
anymore--thank goodness we don't do that--to tell everything 
that is going on in that committee. No matter how innocently 
they may do it, the fact that other people can make money off 
that information is something that should give us pause.
    Ms. Waters. Thank you very much.
    Mr. Walz. I think, Ms. Waters, if I could add, I think--and 
this is a question I asked the SEC folks and some of these 
witnesses following us that are experts in this, the 34 
Securities and Exchange Acts, 10b-5. There is ambiguity in how 
the law is written in the first place. And some of it is to 
make sure that folks weren't, by--it could be pure chance, it 
could be that you are not putting someone under jeopardy of 
prosecution for something that was not insider trading even 
though it may have looked like it from the outside--and we are 
always very careful of that.
    I think it goes back to Ms. Biggert's point on this. To 
overreact and create a criminal action where there isn't one is 
certainly not the intent of this law. And I think maybe asking 
those questions, it is the ones we have asked of them and they 
have been helpful with us to--and they have assured us the 
STOCK Act has that ability, to separate out those inadvertent 
acts.
    Ms. Waters. Thanks very much, Mr. Chairman. I yield back 
the balance of my time.
    Chairman Bachus. Mr. Manzullo?
    Mr. Manzullo. Thank you.
    Certainly, no one is questioning the intent or motives of 
the legislation, because it is fine with me. The issue is the 
disclosure. What we are essentially doing is, the disclosure 
act that we fill out the compliance with every year lists all 
the stocks and transactions. But who is missing from this panel 
are people who handle things like mutual funds.
    Mr. Chairman, I would hope we would have at least another 
hearing on this. My mutual funds are held at a house. I don't 
choose which funds they put the money into. And then, every 90 
days, I get a report as to what the transactions were that took 
place.
    Ms. Slaughter. But this is not what--this is through 
personal trading, what the Congressperson does or what the 
staff does. All of us have some accounts, I suppose, and mutual 
funds. We are not expected to account for every trade that they 
make.
    Mr. Manzullo. No, I understand that.
    Ms. Slaughter. Unless you have told them that asbestos, for 
example, is not going to be punished; therefore, the price of 
asbestos should go up. And I am assuming you are not doing that 
to--
    Mr. Manzullo. I don't know if there is an asbestos mutual 
fund. I am just saying that--
    Ms. Slaughter. That was one of the cases that really 
prompted--
    Mr. Manzullo. But what most Members of Congress do is they 
put their money into a mutual fund--and I have a house back in 
Rockford--
    Ms. Slaughter. Some do, not all.
    Mr. Manzullo. I don't actively trade. I own one stock that 
is worth about $2,000. The rest is all mutual funds.
    And the issue here is on compliance, because, as you know, 
when we fill out the annual form, we get from our investment 
house the transactions that took place during the course of the 
year. So now, this moves it up to 90 days. I don't have a 
problem with it, but, functionally, you will get the 90-day 
statement after 90 days have run on the beginning of those 
transactions. Are you with me?
    Ms. Slaughter. I am with you.
    Mr. Manzullo. And so that is why, Mr. Chairman, I would--we 
don't have anybody here who runs an investment house. We ought 
to have the mutual fund people here and be able to take an 
ordinary portfolio and say, these are the functional problems 
that can happen with regard to the disclosure. And that is why, 
if you look at--
    Chairman Bachus. Reclaiming the time--
    Mr. Manzullo. Yes?
    Chairman Bachus. --I am going to--Ms. Slaughter has to 
testify before another committee.
    So, at this point, you can be excused, Ms. Slaughter.
    Ms. Slaughter. Thank you so much.
    Chairman Bachus. And would the other two gentlemen be 
willing to stay?
    Mr. Jones, you are on the committee.
    Ms. Slaughter. And I am always hanging around the hall, so 
anybody can reach me anytime. I thank you very much for 
allowing me--
    Chairman Bachus. You will be available to Members?
    Ms. Slaughter. Absolutely.
    Thank all very, very much.
    Chairman Bachus. All right. Mr. Manzullo, go ahead.
    Mr. Manzullo. I guess my question is the people who 
actually handle the transactions, the ones who kick out the 
data have not been on the witness list. It is because you can't 
think of everything in looking at legislation.
    My question to you is, would you be willing to have another 
hearing as to the people who would handle the portfolios just 
to make sure that they would be able to follow this 
legislation? I don't have a problem with the intent or the 
nature of it. It is just the mechanics of it.
    Chairman Bachus. We can have as many hearings as we want 
to.
    Mr. Manzullo. Okay. Thank you.
    Chairman Bachus. We can explore all sorts of different 
things.
    Mr. Scott?
    Mr. Scott. Yes. I think it might be helpful if you could 
comment and get some clarity on the question of the narrowness 
of the application of this legislation. For example, it is 
limited to nonpublic information relating to any pending 
legislation. And there is an omission of tipping by Members of 
Congress or their staffs. If you could kind of give us some 
indication as to how this works, and why there is an omission 
of the concerns of tipping by Members of Congress or their 
staffs, and why it is limited only to nonpublic information 
material on pending legislation. Do we need to strengthen that 
any?
    Mr. Walz. Thank you, Mr. Scott. And again, and back to Mr. 
Manzullo, I think the questions you are bringing up are exactly 
right. That is why we look to the wisdom of this committee, who 
deals with these issues, to craft this and bring something to 
the Floor that works.
    On the issue that Mr. Scott brought up, this narrowness 
issue is one we really struggled with. There are two schools of 
thought. And I think you will hear a very compelling argument, 
one we listened to greatly from Professor Nagy, who will be on 
the second panel. Some of this is the ambiguity of the law as 
it was written in the 1934 law that went into effect in 1942. 
Our take on this was to go back also where Ms. Biggert was, 
instead of having an overarching blanket on this, to be very 
narrow as to the types of behaviors that were deemed to be 
inappropriate. And the belief was, as the ranking member said, 
might be being protected by the Speech or Debate Clause 
wrongfully. So we narrowed in on the very key aspect of what 
does a Member of Congress benefit on here that could be 
translated into trade? And it was that knowledge that the 
public wouldn't get. That becomes a very difficult question. My 
standard for myself is I assume every piece of information I 
get here that I wouldn't have gotten in that classroom in 
Mankato, Minnesota, teaching geography to be knowledge I gained 
from the job.
    Now, it goes back to where Mr. Manzullo is. That is easy 
for me to say, as someone pointed out, you are poor and don't 
trade stocks. But my point on this is not to jam someone up, 
not to make it so that they can't do what they need to do. The 
American public trades stocks. If we are a representation of 
that public, it would make sense that there would be people 
here. The question was, are they doing it in a fair, unbiased 
manner? So there is a great debate that as you narrow it, and I 
don't want to speak for Professor Nagy, that you may cause more 
problems by being overly narrow. And that is something that we 
addressed. I didn't come to that conclusion, but there is 
certainly a school of thought out there on that.
    On the issue of tipping and tippees, this is where the 
political intelligence firms and the information going down, 
this issue of tipping and tippee as is addressed by the SEC in 
many instances, this is where the real problem might lie of 
inadvertently saying something at Thanksgiving dinner that your 
brother-in-law was able to use. And how would that come back to 
it when there was no intention by the Member of Congress to 
profit by it, but the information was passed forward and how 
the SEC views that.
    Mr. Scott. So you are saying, going back to tipping, that 
the omission of the tipping in your view does not limit the 
effectiveness of this bill?
    Mr. Walz. No. And I think it is addressed, Mr. Scott, in 
the political intelligence firms. That is dealing directly with 
the idea of tipping. Now, those are under the impression that 
they are purposely coming to gather that information to go and 
use that information they were paid to gather for someone else. 
That is the tipping that is being gathered by that, and it is 
addressed under that portion of it. But what you are talking 
about is a broader issue, maybe this family member issue, of 
they are not a political intelligence firm, but information was 
passed on. The way we interpret it, and this is where it gets, 
again, whether the law is needed or not discussion, that issue 
of tipping amongst fiduciary responsibility, the idea if I have 
that responsibility, that is already in the law. And the SEC 
will go after you if you tip your brother-in-law off to 
something, whether inadvertently or on purpose. We think that 
this just clarifies and uses the enforcement of existing SEC to 
apply here. If that makes sense.
    Mr. Scott. I think then the tipping, from my understanding, 
is that what you are saying is that cannot be effectively 
enforced with legislation. That is a behavioral--how do you 
police that?
    Mr. Walz. You may be right. The SEC again may be best on 
that. It is something I think they struggle with. And I was 
struck by this whole debate on the ambiguity of the original 
law and how it is still used. Some of the cases, we went back 
and looked at court cases, O'Hagan v. U.S., a clear-cut case of 
a law firm using insider information on stock trade, to some of 
them are far more ambiguous. So it is a difficult one.
    What we are trying to do, and what we think this does is 
set the bar higher for Members of Congress, let the public know 
that it is going to be very difficult to do this. And if it is 
done, there are repercussions for it. It doesn't get into the 
sticky point of how deep down that rabbit hole of insider 
trading can you go.
    Mr. Scott. Thank you very much. I appreciate it.
    Chairman Bachus. Let me read the list on the Republican 
side, because I made a mistake and called on Mr. Manzullo, but 
it is supposed to be in the order that they arrived. And that 
would put Mr. Posey next, followed by Mr. Luetkemeyer, Mr. 
Huizenga, Mr. Duffy, Mr. Dold, Mr. Canseco, Mr. Schweikert, 
Mrs. Capito, Mr. Grimm, Dr. Hayworth, Mr. Neugebauer, Mr. 
Renacci, Mr. Fitzpatrick, Mr. Pearce, Mr. Stivers, and Mr. 
Hurt. So at this time, Mr. Posey is recognized.
    Mr. Posey. No questions.
    Chairman Bachus. Mr. Duffy?
    Mr. Duffy. Thank you, Mr. Chairman. And I appreciate the 
witnesses coming in. Mr. Walz, I appreciate your passion, and I 
appreciate your leadership on this bill as well. I want to kind 
of run through some of the thought processes of what is 
included and maybe what is not included in the legislation. I 
know we have a $1,000 trigger for the reporting. Is that $1,000 
per trade or is that a threshold amount? So if I do two $950 
trades, I obviously would be over $1,000 and then have to 
report? Or could I trade Apple stock, $950 trades, multiple in 
a day and I don't have to report?
    Mr. Walz. It is per trade.
    Mr. Duffy. Per trade. I could actually--
    Mr. Walz. Yes.
    Mr. Duffy. I could trade $50,000 in a stock if I keep every 
trade under $950. Is that right?
    Mr. Walz. Theoretically, that is correct.
    Mr. Duffy. Okay. And that is one of my concerns. Again, I 
commend you. I think the leadership here is fantastic.
    Mr. Walz. This kind of goes back to our reporting 
requirements of those zones, which are silly, but we do them I 
think for ease. Again, so your argument I think is well put.
    Mr. Duffy. And I think to the point I think the American 
people want sunshine. Sunlight disinfects. And I think we 
should let that light shine into every corner. I appreciate 
your willingness to say you know what, it may not be perfect. I 
am open to suggestions for improvement. Is there a reason why 
we picked $1,000 and not if you trade anything, you have to 
report it?
    Mr. Walz. I think it was the same reason we do the zones on 
the reporting requirements, is the ease, some of the things Mr. 
Manzullo is talking about, the paperwork on this. We understand 
this, if we went to the pure 48 hours that CEOs on Wall Street 
have to abide by on their trades, the problem we have is we 
simply don't have the staff to handle that. So part of that was 
that was the threshold level. From a theoretical argument, I am 
certainly with you. One should be the number.
    Mr. Duffy. We might be excluding ourselves in the amount of 
trades that you and I make, but others in the House might be 
making larger.
    Mr. Walz. I think it makes sense.
    Mr. Duffy. And I notice you didn't include a blind trust 
aspect. In the bill that I drafted, I included a blind trust. 
Is there a reason--if you really want to take it out of the 
hands of Members, and Members want to protect themselves, they 
can take their assets and put it in a blind trust. Is there a 
reason why you didn't?
    Mr. Walz. One of the things I will stress again, is this is 
the bare minimum. It took us 6 years to get 7 people, and it 
was as easy as it possibly could be. If we had gone to that 
level, I think we would have probably gotten the same seven. 
But we tried to pass this before it became an issue. We tried 
to pass it and bring it to the committee where it was 
palatable, like most legislation is, leaving openings for 
improvement from the committee. I am certainly for it. I think 
you have to be careful that I don't want to incur a fee on a 
blind trust because I don't need one.
    Mr. Duffy. That is why I include an option you can use a 
blind trust or--
    Mr. Walz. Sure. Then I think that is what this committee 
should do.
    Mr. Duffy. And I think if we are going do it, I think we 
should do it the right way. I think there is a movement in the 
House. There are a lot of ideas that permeate throughout these 
buildings that don't come up for years. But when there is a 
movement to move a bill, I think we should get the best bill 
possible. And my fear is that it sounds good and it feels good, 
but I think the American people, if it doesn't actually 
accomplish the goal, they look back a couple of years from now 
and go, man, people are still getting around the great STOCK 
Act.
    Mr. Walz. I think it would work, but I do think the STOCK 
Act, I think we have thought about this--it wasn't crafted 
overnight. And it was a lot of conversations, it has been 
around for 6 years. But I am certainly willing to improve it.
    Mr. Duffy. And I would throw out that I know we have a 90-
day time period. Listen, things move quickly. In my bill, I 
threw in a 3-day time period. Why can't a Member, if you are 
going to trade stock, within 3 days report it to the House? In 
3 days, say, this is the trade I have made. So if there is big 
news, and you are trading against the big news that is in the 
Wall Street Journal, and you are going in a different 
direction, it is like, were you meeting with someone who gave 
you insider information? I think that kind of transparency--
    Mr. Walz. You are preaching to the choir with me, but you 
might have to ask other Members what they think of that one.
    Mr. Duffy. And quickly, my concern too is we have the House 
and the Senate. The President, I know, oftentimes has a blind 
trust, but I don't think he is required. But also, his staff 
comes into insider information just like our staff. Why isn't 
the Executive Branch included in this bill? And then the 
Judiciary as well? We should include the Judiciary and their 
senior staff as well. If we are going to do this in 
government--
    Chairman Bachus. Mr. Duffy, they already have their rules.
    Mr. Walz. Yes.
    Mr. Duffy. And Judiciary as well?
    Mr. Walz. Yes.
    Mr. Duffy. Is it consistent with what you proposed, the 90-
day disclosure rule, blind trust rule?
    Mr. Walz. Yes.
    Mr. Jones. Mr. Duffy, if I could very quickly interrupt, 
and I will be very quick, Mr. Chairman, that is why this 
hearing today just shows exactly why we have an opportunity. I 
appreciate your bill going in and your resolution going in. And 
if nothing else comes from this but meaningful legislation that 
the Congresses of next year and the year after that, they know 
what is right and what is wrong, then the American people will 
win. So thank you for what you are doing and what you are doing 
as well. And let's come together and make this something that 
we can all join hands on and be proud of because the American 
people can see we care about integrity in the Congress. So 
thank you for what you are trying do.
    Mr. Duffy. Mr. Walz, I appreciate your openness to try to 
find ideas that are going to work. But I would say, let's do 
the right thing. There is a movement right now to get it done. 
Let's do the best bill possible.
    Mr. Walz. We are certainly for being stronger, 170 stronger 
than we were last week. So we are ready.
    Mr. Duffy. I yield back the time I don't have.
    Chairman Bachus. Thank you. Any other questions by Members? 
If not, the panel is excused.
    Mr. Walz. Thank you, Mr. Chairman.
    Mr. Jones. Thank you, Mr. Chairman.
    Chairman Bachus. Our second panel is made up of Robert 
Khuzami, Director, Division of Enforcement, U.S. Securities and 
Exchange Commission. We welcome you and we look forward to your 
opening statement.

STATEMENT OF ROBERT KHUZAMI, DIRECTOR, DIVISION OF ENFORCEMENT, 
         U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)

    Mr. Khuzami. Thank you. Chairman Bachus, members of the 
committee, thank you for the opportunity to provide testimony 
on behalf of the United States Securities and Exchange 
Commission on the subject of the application of insider trading 
prohibitions to Members of Congress.
    Insider trading threatens the integrity of our markets, 
depriving investors of the fundamental fairness that comes with 
markets that are open, transparent, and fair, and all citizens 
of the benefits of economic growth and stability that comes 
with markets that operate on a level playing field. Because 
these goals are so important, prosecution of insider trading 
has been a top priority of the Division of Enforcement. 
Approximately 8 percent of the 650 average annual number of 
enforcement cases filed by the Commission in the past decade 
have been for insider trading. In Fiscal Year 2010, the SEC 
brought 53 insider trading cases against 138 individuals and 
entities, a 43 percent increase in the number of filed cases 
from the previous fiscal year. In this past fiscal year, we 
filed 57 actions against 124 individuals and entities, a nearly 
8 percent increase over the number of filed cases in the 
previous year.
    Now, there is no express statutory definition of insider 
trading. Rather, the SEC prosecutes insider trading under the 
general anti-fraud provisions of the Federal securities laws, 
most commonly Section 10(b) of the Securities Exchange Act of 
1934, and Rule 10b-5, a broad antifraud rule promulgated by the 
SEC under that section. Section 10(b) declares in relevant part 
that it is unlawful ``to use or employ, in connection with the 
purchase and sale of securities, any manipulative or deceptive 
device or contrivance'' in contravention of SEC rules.
    There is no reason why trading by Members of Congress or 
their staff would be considered exempt from the Federal 
securities laws, including the insider trading prohibitions. 
Having said that, the application of these principles to such 
trading, particularly with respect to Members of Congress, is 
without direct precedent and may present some unique issues. 
Just as in any other insider trading inquiry, there are several 
fact-intensive questions that would drive the analysis of 
whether securities trading or tipping by a Member of Congress 
or a staff member, based on information learned in an official 
capacity, violates Section 10(b).
    The first question is whether the trading or communication 
of the information to someone else breached a duty owed by the 
Member or staff. Although there is no direct precedent for 
Congressional staff, there is case law from other contexts 
regarding misappropriation of information gained through an 
employment relationship. This precedent is clear that a 
Congressional staff member as an employee owes a duty of trust 
and confidence to their employer, and that a Congressional 
staff member who trades on the basis of material nonpublic 
information obtained through his or her employment is 
potentially liable for insider trading, just like any 
nongovernmental employee.
    With respect to Members, courts have held in contexts other 
than insider trading that Members have fiduciary or fiduciary-
like duties of public trust by virtue of their position. That 
such duties exist is reinforced by ethics rules applicable to 
Members, which provides that Members should not use information 
obtained in connection with their official duties for personal 
gain or private profit.
    However, this is untested. There is no case law that 
addresses specifically the duty of a Member with respect to 
trading on the basis of information the Member learns in an 
official capacity. And commentators differ on the existence or 
reach of such duties.
    The second question is whether the information on which a 
Member or staff trades or tips is material; that is, is there a 
substantial likelihood that a reasonable investor would 
consider it important in making an investment decision? 
Materiality is a mixed question of law and fact that depends on 
all of the relevant circumstances. In some scenarios, it may be 
relatively clear that upcoming Congressional action would be 
material to a particular issue or a company, while in other 
cases, it may be less clear.
    The third critical question is whether the information on 
which the Member or staff traded or tipped is nonpublic. The 
Commission has stated that: ``Information is nonpublic when it 
has not been disseminated in a manner making it available to 
the general public.'' Whether information is nonpublic would 
likely depend on the circumstances under which the Member or 
staff learned the information and the extent to which the 
information has been disseminated to the public. As with all 
issues of liability with regard to insider trading and other 
claims under Section 10(b), the conduct at issue must be 
intentional or reckless, or put another way, not in good faith. 
Since all of these issues are inherently fact-specific and 
difficult to generalize, it is hard to come to any general 
conclusions about the likely outcome of any particular 
scenario.
    Now, while trading by Members of Congress or their staff is 
not exempt from the insider trading prohibitions, there are 
distinct legal and factual issues that may arise in any 
investigations or prosecutions of such case. For example, 
investigations into potential trading or tipping by Members of 
Congress or their staffs could pose some unique issues, 
including those that may arise under the Constitutional 
privilege provided to Congress under the Speech or Debate 
Clause. That said, in light of existing insider trading legal 
precedent, any statutory changes in this area should be 
carefully calibrated to ensure that they do not narrow current 
law, and thereby make it more difficult to bring future insider 
trading actions against individuals outside of Congress.
    Thank you for the opportunity to testify today, and I would 
be happy to answer any questions.
    [The prepared statement of Director Khuzami can be found on 
page 75 of the appendix.]
    Chairman Bachus. Thank you, Director. On the next panel, we 
are going to hear from Professor Nagy of the Indiana Law 
School. I read her testimony last night. And she states that 
Congress could use this current controversy to diagnose and 
treat the entire malady through the enactment of an express 
statutory definition and prohibition of insider trading for all 
individuals. Do you believe that the Congress should enact such 
an insider trading law?
    Mr. Khuzami. Mr. Chairman, my view is that I think there is 
a simpler and clearer way to get to the same outcome without 
risking some of the dangers that would flow from a general 
statutory prohibition that attempted to cover the entire field 
of insider trading. The single biggest issue is, as I mentioned 
in my opening statement, whether or not there exists a duty, 
either a fiduciary duty or a duty of trust and confidence 
between Members of Congress and others, be it their fellow 
Members, be it the institution, be it the citizenry. And that 
duty is essential in one form or another for there to be the 
ability to bring an insider trading case.
    From a pure enforcement perspective, I think the simplest 
and cleanest way would be simply to declare that such a duty 
exists, that Members have a duty not to use information gained 
in the course of their Congressional service for private gain 
or personal gain. With that duty, insider trading cases could 
then be brought, assuming they met the other requirements that 
I mentioned: scienter, which means intentional conduct, 
materiality, nonpublic, etc.
    But those concepts I think are well developed in the law, 
and don't need to be included in a general statutory 
prohibition, the danger of which would be obvious. You might 
have two sets of standards, one in the statute that Congress 
drafted pertaining to itself, and one for everybody else. It 
could breed litigation or attempts to interpret what Congress 
did as changing existing law in the other areas.
    So from my perspective, I think that is the simplest and 
cleanest way to go.
    Chairman Bachus. Are you available to work with the 
sponsors of this bill to review the legislation and make 
revisions consistent with what you have just testified?
    Mr. Khuzami. Absolutely. Our staff at the SEC have been 
involved in extensive discussions on the details of the 
legislation. We would be happy to continue to do that.
    Chairman Bachus. All right. Thank you. Ms. Waters?
    Ms. Waters. Thank you very much. There appears to be some 
consensus that Members and employees of Congress are subject to 
the same rules on insider trading as others who use or disclose 
material nonpublic information of a company. But many questions 
remain as to application to Congress. If the STOCK Act becomes 
law, would the SEC's existing authority continue to apply to a 
Member or employee of Congress? If not, how would the SEC's new 
authorities differ?
    Mr. Khuzami. The Act, in some cases, I think narrows 
existing law, and in other cases, it expands it. And so while 
we would still retain our authority potentially to bring our 
cases under existing law, the fact that Congress had passed a 
new piece of legislation to cover the field means that it would 
really be the source of our authority to bring cases against 
Members of Congress. And if you compare it to the existing 
authority, there are a couple of instances in the STOCK Act 
where it narrows existing authority. For example, as was just 
previously discussed on the last panel, insider trading is 
limited to--excuse me, material nonpublic information is 
limited to that which deals with pending or prospective 
legislation, meaning that information that a Member of Congress 
might obtain, for example, from a briefing from the Executive 
Branch or a briefing from a regulatory agency, wouldn't be 
covered necessarily because it wouldn't deal with pending or 
prospective legislation. That conceivably is a narrowing of the 
current law.
    The STOCK Act doesn't explicitly address tipping, which was 
discussed in the last panel as well, whereby existing authority 
says if you have a duty to keep information confidential, and 
it is material and nonpublic and you pass it to somebody else, 
you, the tipper, can be liable for doing that, as well as the 
tippee, the person receiving the information for trading. But 
the STOCK Act currently doesn't address that issue directly.
    So I think again, for that reason, in order to have one 
uniform set of standards that apply to everyone, highlighting 
and establishing a duty on behalf of Members of Congress not to 
use the information they gain in their Congressional service 
for personal gain, and declaring that a duty would be the 
simplest way to go.
    Ms. Waters. Thank you. That is all. I yield back the 
balance of my time.
    Mrs. Biggert [presiding]. Thank you. I recognize myself for 
5 minutes. Do you know anything about the ethics procedures 
that we have? I served on the Ethics Committee for 3 terms. 
Fortunately, that is as long as you can stay on it. But I think 
it is a very important part of the Congress. I am just 
wondering if what is in that covers us at all that you would 
know of.
    Mr. Khuzami. Obviously, as an enforcement authority, our 
job is to investigate and file cases based on a violation of 
the law. We can't file cases on the basis of ethics violations, 
obviously.
    Mrs. Biggert. Right.
    Mr. Khuzami. But anything that enhanced the ethical 
obligations of Members of Congress not to use information for 
personal and private gain, which is I believe currently--
    Mrs. Biggert. Which is, yes.
    Mr. Khuzami. --currently what the rules provide, helps us, 
because they help to establish this duty of trust and 
confidence. So if I were to go into court tomorrow with such a 
case, I would point to the ethics rules as a basis to say, yes, 
a duty already exists. But I think the benefit of the 
legislation that is being discussed is that I can't guarantee 
how a particular court might rule on that argument one way or 
another. But if there was a piece of legislation that had been 
passed that made it clear that there was such a duty, a lot of 
that ambiguity and uncertainty would be resolved.
    Mrs. Biggert. Do you think that would be enough, rather 
than having the legislation, if the ethics was clearer?
    Mr. Khuzami. I don't think it would be because, again, if 
there is a law that says such a duty exists, that is pretty 
clear and unambiguous. And I think it would reduce the 
uncertainty that a court might not find such a duty.
    Mrs. Biggert. You certainly made it very clear that Members 
are not exempt from the insider trading laws. But there seems 
to be a swell from some people that reports to the contrary, 
that because Congress is not a corporation or a company or an 
entity as such like that, that they are not subject to the law. 
How do we get--put that all together?
    Mr. Khuzami. I think hearings such as today's and last 
week's should make it pretty clear that there is no such 
exemption, and that you are subject to the same laws as 
everyone else, leaving aside things like the Speech or Debate 
Clause.
    Mrs. Biggert. Thank you. I yield back and recognize the 
gentlelady from New York, Mrs. Maloney, for 5 minutes.
    Mrs. Maloney. Thank you for your testimony. And I just want 
to go over what you were saying that you think it should be 
expanded to cover tipping and other meetings with other 
agencies. Would you also include the SEC no-action letters and 
other actions like that? And do you think that would be broad 
enough if that was all included?
    Mr. Khuzami. The no-action letters, along with some other 
means, are designed for a way to carve out certain safe 
harbors, or to give individual Members or individual persons 
comfort that what they are about to do won't violate the law. 
So if we pass such a law that proclaims such a duty, Members 
could take advantage of no-action letters, get advice from 
their own counsel, and take other steps to make sure that they 
didn't do something that inadvertently violated the law. So I 
think that would be an important part of any overall regulation 
in this area. And that option exists already, frankly.
    Mrs. Maloney. And if we do have a fiduciary duty with the 
citizens, and an ethics responsibility, how would the SEC 
investigate in those categories? How would they change what you 
are doing now, or would it change what you are doing now?
    Mr. Khuzami. First, let me just be clear, I am not sure I 
would necessarily characterize it as a fiduciary duty, because 
the law also recognizes what would be a fiduciary-like duty, if 
you will, of a duty of trust and confidence that kind of has 
its origins in fiduciary duty, but is kind of a different 
creature. And my view would be it should be added as one of the 
examples of a duty of trust and confidence that would be owed. 
Because there are potential consequences that the academics and 
others on the following panel probably are better versed to 
discuss than I am. But there could be consequences to 
proclaiming a fiduciary duty that wouldn't necessarily be 
intended or couldn't be foreseen.
    But that would be my personal view as to the best way to 
approach it. How would it affect our investigations? Frankly, 
it wouldn't. It would clear up the law, which means there would 
be less of a risk that a particular court would decide that 
such a duty didn't exist based on current circumstances.
    The other thing that could be done, frankly, that I think 
is a critically important part of the STOCK Act, is the 
disclosure portion. Without disclosure of trading on a timely 
basis, it is difficult to get notification of circumstances 
that might justify investigation. We get tips and referrals on 
insider trading cases by all sorts of persons, from the 
exchanges, and from other sources. And we get that often on a 
real time or near real time basis. And that is critically 
important to conduct an investigation, to get the information 
fresh. Memories are still sharp. Steps haven't been taken to 
cover up or conceal activity. So prompt disclosure, preferably 
electronic, and preferably searchable, would be probably the 
single most important thing that could be done for our 
investigations.
    Mrs. Maloney. Are there other legislative approaches out 
there that you are aware of in this area?
    Mr. Khuzami. They tend to break down in between, the narrow 
approach, like simply establishing the duty and leaving it to 
existing law to address the other elements, or a statutory 
prohibition that attempts to define all the terms, such as 
scienter, and materiality, and nonpublic. And that I think is 
difficult to do. It was tried in the 1980s I think in general, 
and I think people gave up because it is very difficult to 
write a law that covers all the possible facts and 
circumstances to make sure that no one who should be captured 
is left to the side. But then you end up not providing the kind 
of specificity and guidance that you might like because it is 
so general and broad. And also, you don't want to kind of 
provide a roadmap for people to understand exactly what line 
they have to tack against in order to avoid liability. So that 
is kind of another reason why we prefer the narrower approach.
    Mrs. Maloney. Okay. Thank you. My time has expired. Thank 
you.
    Mrs. Biggert. The gentlelady yields back. The gentleman 
from Missouri, Mr. Luetkemeyer, is recognized for 5 minutes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman. Director, I 
am just kind of curious, one of the things that concerns me is 
we can promulgate a lot of rules and regulations and new laws, 
but if we don't enforce them, we have just wasted all our time. 
And I guess my concern is, we have the MF Global situation 
here, and people, when I was home over the weekend, were 
talking about that, and what are you going to do about it? What 
are you going to do about it? I said, well, they broke the law, 
apparently. And if that is the case, they need to suffer some 
punishment, go to jail, whatever. And the rules are already in 
place.
    So I guess my question to you is, the rules that are in 
place right now, is there an enforcement mechanism in place to 
enforce those rules?
    Mr. Khuzami. Yes. There is an Enforcement Division.
    Mr. Luetkemeyer. If we pass this bill, is there an 
enforcement mechanism in place in this bill?
    Mr. Khuzami. By enforcement mechanism, you mean just the 
ability to--
    Mr. Luetkemeyer. Right. You will be able to enforce this 
law. Is that correct?
    Mr. Khuzami. Yes.
    Mr. Luetkemeyer. Okay. Is there going to be a difference 
between your ability to enforce the law and the penalties 
versus the rules that are in place right now?
    Mr. Khuzami. Yes, in at least one sense. It reduces the 
risk that comes with the lack of clarity in the law as to 
whether or not such a duty exists between Members of Congress 
or the citizens or others. There is a risk currently that no 
court has decided that issue. If we were to bring a case, a 
certain judge might look at it and say that no such duty 
exists. Whereas, if we had the legislation, that risk would be 
eliminated.
    Mr. Luetkemeyer. Okay. Have there been enforcements of the 
rules in the past, or the laws in the past? Have there been 
cases brought?
    Mr. Khuzami. Insider trading cases in general?
    Mr. Luetkemeyer. Yes.
    Mr. Khuzami. Yes.
    Mr. Luetkemeyer. Have they been referred to you by the 
Ethics Committee, or are they referred to you by other outside 
groups, or how do you become aware of them?
    Mr. Khuzami. They come from all sources. They come from the 
exchanges, they come from letters, and emails, and cooperating 
witnesses, and things we read in the newspaper, and a dozen 
other sources.
    Mr. Luetkemeyer. You made the comment a couple times 
already with regards to some things that could either broaden 
or narrow your ability to do your job here. And I certainly 
hope that the authors of the bill will work with you to make 
sure that happens. My only comment I guess is from the 
standpoint that while the American people are outraged about 
things that happen here, and the things that they perceive may 
be inconceivable or incongruous of what we should be doing, the 
enforcement of existing rules and laws I think is critical from 
the standpoint that if somebody does something wrong, there has 
to be a punishment of some kind. Just a waving of the wand of 
forgiveness over everybody is not necessarily the way it should 
work. And I am just kind of curious as to your perception of 
how you see this all happening, your ability to enforce this 
and work with everybody.
    I appreciate your views this morning. Thank you very much, 
and I yield back the balance of my time.
    Mrs. Biggert. The gentleman yields back. The gentlelady 
from New York, Mrs. McCarthy, is recognized for 5 minutes.
    Mrs. McCarthy of New York. Thank you, Madam Chairwoman. And 
thank you for giving your testimony. In your testimony you note 
that right now we have statutory changes needed to be carefully 
crafted to ensure that they do not narrow current law, and you 
talked about that a little bit in your opening statement, 
making it more difficult to pursue future violations of insider 
trading. The legislation requires your agency and the CFTC to 
adopt rules to help. How do you envision the agencies working 
together, as well as ensuring that the rules do not have an 
adverse effect on enforcement of inside trading? And I guess, 
how do you pick somebody up who has done inside trading? What 
are those signals? How do you look for those?
    Mr. Khuzami. How do you detect the violations? They come 
from a number of different sources. First, the exchanges have 
analytics and software in which aberrational trading kind of 
pops out of the system. So if they see a spike in options 
trading 10 days or fewer before an announcement of a takeover, 
that will jump out of the system. And then an investigation 
will be done to trace back to see who is trading in those 
accounts. And then you look to see whether or not those 
persons, assuming you can identify them, have connections to 
the source of inside information that you would expect to see 
in such a circumstance, such as the bankers or the lawyers or 
the insiders at the company. Do they have a neighbor who 
happened to work for the investment bank that had the mandate 
on the deal? And so, it is a painstaking process of tracing and 
sort of layering together trading and events leading up to a 
corporate event or other event. And then, the telephone calls 
and the meetings and the emails, and you put it all together, 
and you hope--you put together a circumstantial case, because 
invariably it is circumstantial, where you can then reach a 
reasonable conclusion and hopefully convince a jury this person 
had access to the information. They had a conversation. And 
look what they did, they had never owned anything other than a 
mutual fund before, and all of a sudden, they bought $20,000 
worth of deep in the money options the day before the 
announcement. And that is the kind of circumstances that give 
rise to the inference that they acted wrongfully.
    Now, on other occasions, as we did in the Galleon cases, 
with Raj Rajaratnam and others, we are up on wiretaps--we are 
not up on wiretaps, the criminal authorities are, but we are 
working closely with them, where you can actually detect 
conversations in real time where you actually capture the 
inside information being passed. We have cooperating witnesses 
who will--maybe they are in trouble somewhere else, and they 
come to us and they say, ``you know what, I happen to know 
about some insider trading that occurred.'' We have a 
whistleblower program now under the Dodd-Frank Act which may 
give us additional leads as well. So it comes from all sources, 
but inevitably it is a piece by piece building of a case.
    Mrs. McCarthy of New York. So basically, also just to 
follow up on that, if someone is calling their broker to make 
these trades, then you actually have two people who would be 
dealing with inside trading?
    Mr. Khuzami. Potentially, if the client making the call to 
the broker has material nonpublic information that they are 
trading on in breach of a duty, they will have violated the 
insider trading laws. The broker, the tippee to be liable, has 
to know that the information is coming in breach of a duty. So 
if all the person said was buy 100 shares of IBM, it probably 
wouldn't do it. If they said buy me 10,000 deep in the money 
options and I need it done before noon because I just heard 
something from my friend who works on the board at IBM, that is 
a different story. He might be liable if he then traded 
himself.
    Mrs. McCarthy of New York. Just to follow up, because I 
don't know, how do you see your agency and the CFTC working 
together to do this? I think it is kind of confusing for many 
of us. I am sure almost every Member here puts in the same kind 
of hours I do, whether we are here or meeting with constituents 
or anything else like that. That is why you have a broker to do 
what they are supposed to be doing. My concern is that we do 
our compliance once a year. That is usually right after tax 
season. And if they want to do a thousand dollar trade, we 
would have to report that. Wouldn't it be easier to report it 
like every 3 months in groups, instead of having--I have no 
idea if he trades at a thousand dollars, or what the bunches 
are, or anything like that. I guess we get statements once a 
month at the end of the month. So that means I would have to go 
through every trade to look?
    Mr. Khuzami. It depends on where you set the threshold. 
Look, in the corporate world, corporate insiders have to file 
within two business days of the transaction. That is standard 
practice under those circumstances. In many situations, the 
disclosure is done electronically. So in some sense, there is 
no greater burden to file the $100 trade than there is the 
$5,000 trade. You can just file electronically with your 
brokerage statements just getting sent directly to whoever is 
maintaining the database.
    Look, I recognize there are burdens associated with it. 
Speaking selfishly from an enforcement point of view, I want as 
much information as soon as I can.
    Mrs. McCarthy of New York. Would that add a cost onto the 
brokerages, a service charge, or yourself or--
    Mr. Khuzami. No, if it came to whoever maintains--whether 
or not it is Ethics or the Clerk of the House or whoever it 
might be who maintains it, they would have to have the capacity 
to do that. It wouldn't cost any more money for the brokerage, 
because that would typically just mean hitting a button and 
sending account statements. And generally, we wouldn't get it 
directly, so it wouldn't increase our costs.
    Mrs. McCarthy of New York. I do hope that you will be able 
to work with the Members, because obviously, most likely we are 
going to do something, but hopefully we are going to do 
something that is correct. My personal belief is that this 
becomes a witch hunt, and the majority of Members here are not 
out to make a quick buck. But thank you for your testimony. I 
yield back.
    Chairman Bachus. Mr. Canseco?
    Mr. Canseco. Thank you, Mr. Chairman. And thank you, Mr. 
Khuzami, for coming here and answering questions on this very 
important issue. I personally am particularly concerned about 
Section 3 of the STOCK Act, which seems to contradict the 
Speech or Debate Clause. And as you mentioned in your 
testimony, in the case of Gravel v. United States, the Supreme 
Court stated that the Speech or Debate Clause was designed to 
assure a coequal branch of governmentwide freedom of speech, 
debate, and deliberation without intimidation or threat from 
the Executive Branch. So as Members of Congress go before CNN 
or MSNBC or CNBC and other networks, at all times Section 3 of 
the STOCK Act could essentially bar them from publicly saying 
anything that may or may not move markets or stocks, which 
really gags them from commenting on very important legislation 
for the American people.
    Do you feel that Section 3 violates the Speech or Debate 
Clause?
    Mr. Khuzami. The Speech or Debate Clause is for me a 
separate matter that is going to exist irrespective of what is 
done with respect to establishing a duty or passing legislation 
that prohibits insider trading. And it is something that we in 
the enforcement authorities have to navigate through and both 
respect--I am probably not the best person to opine on that. I 
am happy to consider that and get back to you with a response. 
There are some areas where the Speech or Debate Clause's 
application is clear, and there are other areas where it is 
less so. So I guess I would ask for the opportunity to get back 
to you on that and give it a little more thought.
    Mr. Canseco. Thank you.
    Mr. Khuzami. The only thing I would say is that all the 
insider trading laws require scienter and intent. So that is 
the single biggest thing that protects the unwary from being 
trapped in a violation that inadvertently occurred. You have to 
be acting with corrupt intent, knowledge, or recklessness. If 
you act in good faith, you are not going to be guilty.
    Mr. Canseco. Which is the definition of scienter.
    Mr. Khuzami. Yes.
    Mr. Canseco. Does the SEC have an opinion on how they could 
determine exactly which public companies could have their 
trading affected by Members' comments? And how would you 
determine this?
    Mr. Khuzami. In a typical insider trading case that really 
speaks to the issue of materiality. Was the information as it 
is defined in the current law--
    Mr. Canseco. Let me interrupt you.
    Mr. Khuzami. Sure.
    Mr. Canseco. This would be with regards to Section 3 of the 
STOCK Act, which is if I go out there in front of the 
microphone and TV and tell them what bill I am contemplating to 
push through the Floor of the House.
    Mr. Khuzami. If that is all you did as part of your 
Congressional duties, and acted in good faith, I think that 
would be a difficult case to make from an insider trading point 
of view, particularly if you disseminated the information 
broadly to a wide audience.
    Mr. Canseco. Let me clarify this. Section 3 states that a 
Member or employee shall not disclose material, nonpublic 
information relating to any pending or prospective legislation, 
action, relating to any publicly traded company if that Member 
or employee has reason to believe that the information will be 
used to buy or sell. And that would include any kind of 
comments with regards to bills that are coming before the 
Congress of the United States or that you are contemplating 
using under Section 3 of the STOCK Act. So aside from the fact 
that if I know--assuming that I don't, but I do--if I know 
something that is happening with some bill, and I go back into 
my office and call my broker and say buy, or sell, or short, or 
go long, that would obviously be apart from Section 3. I am 
speaking specifically about speaking in public about a bill 
that could move a market.
    Mr. Khuzami. That is one of the reasons why I think that if 
there was a clearly defined duty with respect to that 
information, that would clarify the law in this area and make 
it clear what kind of conduct stepped over the line and what 
kind of conduct did not.
    Mr. Canseco. With respect to Section 3 of the STOCK Act, 
which is the getting out in public and talking about a bill or 
legislation that is coming on there, do you think that it is 
the duty of the SEC to go out there and police 535 Members of 
Congress?
    Mr. Khuzami. No. We are just looking for people who violate 
the law.
    Mr. Canseco. All right, sir. And is it workable within the 
SEC's enforcement operations to go out there and oversee 535 
people of Congress as to what they say publicly that may or may 
not move markets?
    Mr. Khuzami. No. Our job would be to either identify or 
have brought to our attention trading that looks suspicious, 
and then to determine whether or not all the elements of the 
offense have been satisfied.
    Mr. Canseco. But I am speaking under the STOCK Act, 
assuming that the STOCK Act is passed and made into law.
    Mr. Khuzami. I don't think we would be generally conducting 
a policing operation of what 535 Members of Congress were 
doing.
    Mr. Canseco. Thank you very much, Mr. Khuzami. I see that 
my time has expired.
    Chairman Bachus. Mr. Scott?
    Mr. Scott. Thank you, Mr. Chairman. Dealing with the stock 
market, trading on the New York Stock Exchange is sort of like 
the cornerstone of our entire economic system. And it is 
basically based upon seeing pertinent information. When you are 
trading in stocks, it is sort of like just trying to be in the 
right area listening to the right gossip about what is going on 
at the right time. And so the question becomes, how do you 
enforce this? How will we really enforce this? Give me an 
example of what is nonpublic material. That is the core of 
this. Where would I go wrong? Give me an example, as a Member 
of Congress, give me some examples of what I would be doing 
which would be in violation of this Act.
    Mr. Khuzami. In general, if as a Member of Congress you 
became aware of a company, say, that was going to be--you learn 
that it was going to be subject to a piece of legislation that 
would have a significant impact on their business, and as a 
result of that information which was not public in the sense 
that it was only known to a small group of people and not 
shared generally with the public--
    Mr. Scott. Could you give me an example of what that 
information would be?
    Mr. Khuzami. Let's say if you learned about a contract that 
was to be awarded to a certain company, if you were to learn 
about legislation that might greatly restrict the business 
opportunities of a certain company, if you were going to do 
something to the FDA drug approval process that might make it 
harder for companies to--specific companies to have drugs 
approved, those things can all have a significant impact on the 
price of a company's stock. If you took that, and then while it 
was nonpublic went and traded on that information, you could 
have violated the insider trading prohibitions.
    Mr. Scott. And under this legislation, what would happen to 
me? What would be the penalty? What is the real axe in this 
legislation if I did that?
    Mr. Khuzami. The penalties from the SEC's perspective are 
well established, which means you could be subject to, 
obviously, an enforcement action filed against you, and you 
could be required to disgorge all your ill-gotten gains or your 
profits. In addition, you could be assessed a penalty of up to 
3 times of the amount of that disgorgement. So if you made 
$100, you have to give the $100 back, and you could be 
penalized $300.
    Mr. Scott. So in other words, there is no criminal 
sanction, there is no misdemeanor, there is no felony record. 
You don't go that far with the law.
    Mr. Khuzami. We don't because we don't have criminal 
authority. However, the Department of Justice prosecutes 
insider trading cases on the exact same statutes. So they too 
could charge a person under those circumstances, in which case 
jail time, and restitution, and other remedies could be 
available. Now, the criminal authorities have a higher standard 
of proof of course. They have to prove guilt beyond a 
reasonable doubt. We at the SEC, as a civil authority, have a 
lower standard of simply proving by a preponderance of the 
evidence.
    Mr. Scott. This bill opens up another area which we haven't 
touched upon or explained, and that is this concept of 
political intelligence. What is that?
    Mr. Khuzami. My understanding is that these are firms sort 
of in the business of signing up clients who pay for their 
intelligence, which they in turn gather from mining various 
sources they have about what is going on with respect to 
pending legislation and other developments in Congress and in 
the Federal Government.
    Mr. Scott. And at what point would a Member of Congress 
know that what he may be saying or responding to a constituent 
or anybody, which we do, he is engaging in political 
intelligence?
    Mr. Khuzami. If you were having a conversation with such a 
firm and just talking about what is going on, you wouldn't have 
any insider trading exposure if you were acting in good faith 
and you didn't purchase or sell securities on your own. So I 
don't necessarily think it would have a chilling effect on bona 
fide, legitimate conversations that you might otherwise have.
    Mr. Scott. One final point, Mr. Chairman? These political 
agencies may just want to call a Member of Congress. They could 
set him up, and then pass on and say to someone, I just got 
this bit here from--unbeknownst to the Member of Congress, he 
has been used. What protects that Member of Congress? He thinks 
he is doing a job of responding to a constituent.
    Mr. Khuzami. Again, like I said, under those facts you 
generally wouldn't have liability for insider trading. You may 
have passed some nonpublic information, and that may have other 
repercussions not from an enforcement perspective, there may be 
ethical or other issues, I am not familiar with them, but from 
a pure insider trading perspective that would not render you 
exposed to insider trading liability.
    Mr. Scott. Thank you, sir.
    Chairman Bachus. Thank you. Mr. Renacci?
    Mr. Renacci. Thank you, Mr. Chairman. And thank you, Mr. 
Khuzami, for being here. If I understand it correctly, and I 
try to be a good listener, today, currently, Congress and their 
staff are not exempt from the Federal securities laws, 
including insider trading prohibitions, and this is from your 
testimony, through the application of these principles to such 
trading. So today as it stands Congress is not exempt and their 
staff is not exempt from any insider trading rules?
    Mr. Khuzami. Correct.
    Mr. Renacci. Okay. With that being said, this bill that we 
are talking about really, and I heard you say this earlier, 
just clarifies that.
    Mr. Khuzami. No. I think what I was saying is the approach 
that I personally might prefer would be a narrower bill that 
simply declares that there is such a duty by Members of 
Congress to keep information that they obtain in the course of 
their Congressional service confidential, and not use it for 
private gain. That is the simpler approach that I think 
accomplishes the same end. The STOCK Act attempts a broader 
proscription to try and define all of the elements or many of 
the elements of insider trading. And I think in some cases, it 
may be at odds with existing law. In some cases, it may be 
underinclusive, and in some cases, it may be overinclusive. And 
I think there is just some danger in having that law exist as 
well as the law as currently developed. So that is what I was 
saying, that would clarify it.
    Mr. Renacci. So we could almost clarify this whole bill in 
another sentence that you just stated that would narrow it into 
a simple focus and--
    Mr. Khuzami. Or maybe replace it.
    Mr. Renacci. Okay. Now, the other thing this bill does is 
it requires quarterly reporting of transactions of $1,000 or 
more. But every Member of this Congress today is required to 
report every stock transaction of $1,000 or more already on an 
annual report. So they are already reporting that. So the 
question I would have is where is that going? If every Member 
is reporting it and they have been reporting it for the last 
whatever, 20 years, 30 years, what are you doing with that 
information? Are you looking at it? Because it gets back to 
some of my colleagues. We can report everything we want to 
report, but if there is never any enforcement--So what are the 
enforcement mechanisms when a Member of Congress reports every 
transaction that he or she has had for the last year?
    Mr. Khuzami. I think the disclosure would be greatly 
beneficial from a pure enforcement perspective if it was made 
on a timely basis, and was made electronically, and is 
searchable. It just creates ease with which we can identify 
trading and determine whether or not any investigation is 
warranted. If it is not reported, it is just--there is a long 
passage of time before you might have access to the 
information. Memories go stale.
    Mr. Renacci. Excuse me, though. I don't mean to interrupt, 
but it is reported every year.
    Mr. Khuzami. Yes.
    Mr. Renacci. And every transaction you can pull up off the 
Internet. So those transactions of every Congressperson are 
already reportable, and on the Internet, and can be picked up 
and looked at.
    Mr. Khuzami. But a year or however long after the events in 
question.
    Mr. Renacci. So what is normal with insider trading? You 
could still pick up insider trading if somebody filed a report 
in April and you did something with it, that report, you looked 
at all the Members and you saw some unusual transactions in 
April of last year or June of last year, you could say, let's 
do an investigation on that. Is there anything being done in 
that regard?
    Mr. Khuzami. You could. It's just, investigations that take 
place as close in time to the events in question are just, as a 
general matter, more effective. Memories are sharper, 
information is easier to obtain, and there are fewer 
opportunities for concealing what took place. So--
    Mr. Renacci. But if you are not looking at the 535 reports 
that are done today on an annual basis, are you going to look 
at the 535-times-4 reports that are done? That is what I am 
trying to get at. If you already have those reports and you are 
not doing anything with them, what would 4 more reports times 
535 people do for you?
    Mr. Khuzami. Some of the trading would still potentially be 
referred to us, if they took place on exchanges, still referred 
to us through the normal referral process that we get from the 
exchanges where the trades occur. But the problem is, if they 
are not--if they are not reported over that long a period of 
time, it is more difficult.
    And frankly, in addition, if you are trying to, for 
example, sort of track the progress of a particular piece of 
legislation and understand when people knew certain things, it 
is just much harder to do with the passage of time. And, yes, 
it would be more burdensome to do it four times rather than 
once, and for us as well, but it is potentially more effective.
    Mr. Renacci. Again, more effective, but if you are not--it 
gets back to what a number of my colleagues have said. If there 
are no enforcement procedures in place today, maybe what we 
need to do is get the enforcement procedures in place and use 
the information we are getting already.
    So that is all I am getting at. If we give you 4 times the 
information, and you still don't have any procedures to really 
do checks and balances, it is no better than giving it to you 
one time.
    I am okay with the way this Act reads, if we clarify it 
more. I am just not sure if throwing more information at you 
that you are already not using is appropriate. That is the 
question I was trying to ask, but I know I have run out of 
time.
    Thank you.
    Chairman Bachus. Thank you, Mr. Renacci.
    Mr. Green?
    Mr. Green. Thank you, Mr. Chairman.
    I thank the witness for appearing today.
    You seem to be indicating, sir, that a single sentence can 
replace the bill. Is this correct?
    Mr. Khuzami. I wasn't necessarily suggesting a single 
sentence, but a briefer statute that defines and identifies the 
duty.
    Mr. Green. The duty of, may I use the phrase, 
confidentiality?
    Mr. Khuzami. Probably more technically a duty not to use 
information obtained in the course of Congressional service for 
personal gain or private profit, or words to that effect.
    Mr. Green. And as you have been performing your duties, 
have you assumed that such a duty exists? Or have you been 
performing your investigations predicated upon a lack of such a 
duty?
    Mr. Khuzami. I think, we assume that one exists, and in the 
appropriate--we wouldn't not file the appropriate case simply 
because there is some ambiguity in the current law as to 
whether or not such a duty exists. But we also have to 
recognize that because it is untested and a little uncertain, a 
court may not agree with us, and that is why there is some risk 
associated with such a theory.
    Mr. Green. Let me restate my question. Have you, prior to 
this moment in time, performed your duties, assuming that such 
a duty exists? The question simply is, is there an 
investigation that you would not have pursued because you were 
not sure that a duty existed?
    Mr. Khuzami. No.
    Mr. Green. So, as you have performed your duties, you have 
assumed that the duty for Congressional Representatives exists 
not to disclose this type of information, true?
    Mr. Khuzami. That is correct.
    Mr. Green. If this is true, is it fair to assume that you 
would not perform investigations in the future to any greater 
extent than you do currently because you currently assume that 
the duty exists?
    Mr. Khuzami. I think the answer to that would be yes, 
although, like I said, the disclosure aspects of this may, in 
fact, encourage more investigations, but--
    Mr. Green. I understand.
    Mr. Khuzami. --aside from that, yes.
    Mr. Green. But the gravamen of your testimony appears to be 
the duty. There are other things; the tipping is important and 
other things. But the gravamen appears to be the duty. And if 
you have been proceeding assuming that the duty exists, I am 
just trying to ascertain whether or not there would be some 
difference in the behavior of your investigations in terms of 
how they are triggered, for example.
    You have indicated that your investigations are triggered 
by a trade, generally speaking. Is that a fair statement?
    Mr. Khuzami. Correct.
    Mr. Green. And once you have a trade, then what you try to 
do is ascertain--a trade, by the way, not just any trade, but 
one that sort of stands out. Once you have this trade, then 
what you try to do is ascertain whether or not the person who 
made the trade had some sort of insider information or 
communicated with someone who communicated insider information. 
True?
    Mr. Khuzami. Correct.
    Mr. Green. Now, would any of this change if we codified the 
duty?
    Mr. Khuzami. No, you would still take the same general 
investigative approach when you are talking about inquiring 
into the facts of what happened.
    Mr. Green. Before my time expires, I need to say this for 
edification purposes. I believe that no one should be above the 
law by virtue of your station in life. I believe that no one 
should be beneath the law by virtue of your station in life. I 
think the law should apply to all equally.
    What I am trying to find out, however, is whether or not 
there would be some change in the way you conduct your 
investigations once this duty is established. And I think I am 
hearing you say, not likely. I will give you some wiggle room.
    Mr. Khuzami. Thank you.
    Mr. Green. A final comment or perhaps a question. When you 
perform these investigations--and this was triggered by 
something you said, my question--you indicated that you check 
with neighbors, you check phone records, you check emails.
    Do you do this with the person that you have focused on 
having knowledge of what you are doing? Do you do this with a 
warrant? How do you perfect these searches such that you can 
acquire the intelligence necessary to prosecute properly?
    Mr. Khuzami. Unfortunately, as a civil authority, we do not 
have the legal ability to engage in certain undercover or 
surreptitious activities. So we can't do search warrants, we 
can't do wiretaps and other things like that.
    We partner with the Department of Justice frequently, as we 
did in the Rajaratnam case, where wiretaps were used, where 
often we will work jointly and they will engage in those kinds 
of activities, and we get the benefits of some of those 
investigative things.
    But for us, our investigations, although we are trying to 
change this as much as we can, are often overt, which means we 
have to question witnesses with our target knowing that we are 
doing that.
    Mr. Green. But you use civil litigation?
    Mr. Khuzami. Yes.
    Mr. Green. And subpoena duces tecum?
    Mr. Khuzami. Yes.
    Mr. Green. Thank you, Mr. Chairman. I yield back.
    Chairman Bachus. Thank you, Mr. Green.
    Mr. Pearce?
    Mr. Pearce. One of the questions that I have about the 
legislation is, is there anything in the legislation that is 
not against the law right now? In other words, are we just 
restating things that are--it is not legal for Members of 
Congress to do insider trading, is it?
    Mr. Khuzami. No, not in our view.
    Mr. Pearce. So is there anything in the bill that is new, 
that does not already exist in law as a prohibition?
    Mr. Khuzami. It changes some of the--it narrows in some 
cases and expands in some other cases terms that are currently 
in use as the insider trading laws are applied.
    Mr. Pearce. Could you tell me exactly what you are saying 
there?
    Mr. Khuzami. Yes, sure. So, for example, it is limited to 
material nonpublic information dealing with pending or 
prospective legislation. There isn't really such a restriction 
in the law in general. And so, in the case of Members of 
Congress, if you got information from the Executive Branch or a 
regulatory agency, it wouldn't be covered by this legislation.
    It is limited to securities or the swaps of certain 
issuers, which means it doesn't cover options, it doesn't cover 
exchange-traded funds, or it doesn't cover mutual funds. Those 
things would generally be covered in insider trading law as it 
currently exists. The tipping, there is no explicit provision--
    Mr. Pearce. Is there a reason for this piece of 
legislation?
    Mr. Khuzami. Again--
    Mr. Pearce. Would you take this legislation and go to work 
on Members of Congress who have been getting by with things? 
Would this open the door to you to undergo things that right 
now you won't take on because you don't have enough powers?
    Mr. Khuzami. No. I don't think that is the case.
    Mr. Pearce. Okay.
    One of my suggestions is that the White House and the 
Administration are completely not mentioned in here, and, as I 
look at the numbers of regulations, they have far more impact--
in other words, the BART rule, Best Available Replacement 
Technology on coal-fired turbines, Mac boilers--those things 
have far more effect on the price of stocks than much of what 
we do.
    Is there something in law like this that prevents members 
of the Administration or members of the Cabinet from doing the 
same thing? Because the regulations have greater immediate 
impact on stock prices than 90 percent of the stuff that passes 
through this body.
    Mr. Khuzami. I don't know if there is anything on the 
ethical rules or other aspects that cover the Executive Branch 
or others, but we have brought cases. We just brought a case 
against an FDA chemist, for example, who was trading ahead of 
FDA drug approval announcements. And that was based primarily 
on his agreeing to ethical rules, where he agreed not to use--
    Mr. Pearce. But do you think that we should have something 
that specifically prohibits this? In other words, if we are 
going to highlight possible actions by people in the Congress 
and their employees, we should take in all of Washington. 
Because, frankly, the people at home don't identify the 
Congress and Senate as being the problem; they say Washington 
is the problem. They see us all rolled up.
    And so, yes? No? You think so? Maybe?
    Mr. Khuzami. Certainly, our current approach is we don't 
draw any distinctions.
    Mr. Pearce. All right.
    Now, when I consider abuses, I look back at Global 
Crossing. Did you all ever do anything? There were a lot of 
people on the--a lot of people made a lot of money. About $700 
million appeared to evacuate out of the price of that stock. 
And that wasn't necessarily just Members of Congress, but there 
were people who were associated with Members of Congress, 
people in the party structure.
    Have you all ever taken a formal look at that?
    Mr. Khuzami. Congressman, I have only been with the 
Commission since March of 2009--
    Mr. Pearce. Could you get me an answer on that?
    Mr. Khuzami. I could certainly get back to you, sure.
    Mr. Pearce. And this was probably now 5 to 7 years ago.
    Mr. Khuzami. Sure.
    Mr. Pearce. And, also, I had asked when you all were here 
previously--I appreciate what we are trying to do to get 
transparency here. I am still wondering about the big fish. Are 
we still doing anything on Madoff? Are we investigating him? 
Have we put him in jail? Is he gone?
    Mr. Khuzami. The criminal authorities put Mr. Madoff in 
jail, and he is serving a very lengthy prison term. In 
addition, we, as well as the criminal authorities, have 
continued to charge civilly and criminally a number of 
individuals associated with him.
    Mr. Pearce. Yes. My question, though, was, inside the 
agency, a lot of people were looking the other way. And so I 
know that we got Mr. Madoff. Have we done anything inside the 
agency? And that is what I have never been able to--I see my 
time has elapsed, but if you could get with my office, we have 
asked this question before. What has happened internally?
    Mr. Khuzami. Sure.
    Mr. Pearce. Because he was existing for a long time. And I 
know we got him. What about us, part of the agency?
    Thank you very much. I yield back.
    Mrs. Biggert [presiding]. The gentleman's time has expired.
    The gentleman from Missouri, Mr. Cleaver, is recognized for 
5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    Mr. Khuzami, thank you for being here.
    This body and Washington always overreacts to everything. 
And the way this system is designed is, when someone introduces 
a bill like this, even if it is bad, people vote for it because 
they don't want to be accused the next morning of being 
unethical and ``slimebaggish.'' That is my word. And so what 
happens is we do things that create this never-moving cloud 
that hangs over Washington.
    Not long ago, a member of this committee held a fundraiser 
and a bank appeared before our committee, which also attended 
the fundraiser, so then somebody filed an ethics charge against 
him. Now, he actually ended up voting against the measure. You 
mentioned earlier, you said it is a difficult case--you were 
responding to a Member--you said it is a difficult case to 
make.
    That is irrelevant in this situation, because all that is 
needed is for somebody to make an allegation. We are in 
Congress. If somebody makes an allegation, it is in the 
newspapers. It is irrelevant about whether or not it is a 
difficult case to make; it is the allegation that does the 
damage, and it ends up in the newspapers. And so, political 
enemies use it to talk about how horrible Washington is. Now, 
it doesn't matter that they will spend several million dollars 
trying to join Washington.
    And we have another Member who got into trouble because his 
staff did something and the committee said that he should have 
known.
    So I sit in this committee, I get some information, I am 
talking to Congressman John Doe, just sitting around talking, 
and I tell him what just happened in the committee, and he 
tells somebody, and they end up taking advantage of some 
information. So then, somebody is in trouble, right? Somebody 
goes and takes advantage of the information, and now they are 
in trouble. Am I right?
    Mr. Khuzami. You mean you, as the source of the 
information, would you be in trouble under those circumstances? 
Is that what you are saying?
    Mr. Cleaver. Yes.
    Mr. Khuzami. Legally, no. Again, because you have to have 
acted with sort of, corrupt intent and knowledge.
    Mr. Cleaver. Not if you are in Congress.
    Mr. Khuzami. Well--
    Mr. Cleaver. Not if you are in Congress. All you have to do 
is be in Congress.
    Mr. Khuzami. I can't speak to the court of public opinion. 
I can only speak to the legal court. But I understand your 
concern. That is one of the reasons why, look, we are careful. 
Our investigations are confidential. We don't make accusations 
before we have done a full investigation. We are very--
    Mr. Cleaver. But you would--I am sorry. That is impolite. 
Go ahead, I am sorry.
    Mr. Khuzami. We recognize the impact that allegations can 
have, and that is why we are very careful about the 
confidentiality of our investigations.
    Mr. Cleaver. Is there another way for Congress to deal with 
this issue without passing a law that, in my opinion, is flawed 
and is going to create problems? Look, when it comes to the 
Floor, everybody is going to vote for it, because that is what 
we do. We vote for things that probably the majority realizes 
are bad. And the media is going to say it is good, anytime you 
can do anything that holds people more accountable.
    I am just afraid that this is one additional deal we are 
piling on ourselves that is flawed. And everybody knows it, and 
few are willing to say it. It is flawed.
    And I hope there is another way of doing this. If we are 
going to do this and--I don't know if a blind trust is the deal 
that we have to do, I don't know, an SEC no-action letter, 
something. I think it would be helpful if you could suggest 
something other than something that I think and others believe 
to be terribly, terribly flawed. It will create problems for 
the image of Congress because there is no way that we can end 
up not talking about this issue among ourselves.
    Thank you, Madam Chairwoman.
    Mrs. Biggert. The gentleman's time has expired.
    The gentleman from Ohio, Mr. Stivers, is recognized for 5 
minutes.
    Mr. Stivers. Thank you, Mr. Khuzami. I appreciate your 
testimony. And I think we all take this issue very seriously, 
and I think it is important that we address it in the proper 
manner.
    I want to follow up on some statements and questions that 
Mr. Luetkemeyer, Mr. Canseco, and Mr. Renacci had, as well as, 
I guess, Mr. Pearce. Can you just state one more time for the 
record whether Members of Congress are exempt from insider 
trading laws?
    Mr. Khuzami. They are not.
    Mr. Stivers. Thank you.
    I think we need to keep any fix here as simple as we can. I 
do have a concern for the Constitutionality of Section 3 of the 
STOCK Act with regard to the Speech and Debate Clause. And I 
think enforcement is really important.
    So my first question revolves around, you have given us a 
solution earlier in your testimony and in your questions by 
just creating a duty that says that Members of Congress--and I 
hope the Administration would be included in that, as well--
cannot use information gained for either personal gain or 
private profit. Do you think a duty like that would conflict 
with the Speech and Debate Clause? Because I don't think it 
sounds like it does.
    Mr. Khuzami. Again, I am not an expert, but I wouldn't 
believe so.
    Mr. Stivers. And then with regard to tipping, because I 
think that is the other piece that might be worth addressing 
here, wouldn't it be pretty easy to add to that duty some 
responsibility not to tip others who have the purpose of 
personal gain or private profit?
    Mr. Khuzami. You could easily draft language like that, but 
that kind of--the tipper/tippee liability is already well 
established in the law. And so, again, in order to avoid a 
potential conflict between what already exists and what might 
be in the bill, I think my view would be, you have the 
legislation and you basically include in it what would be 
called a savings clause or language that would say, this is not 
intended to affect other law.
    Mr. Stivers. Okay. So a simple legislative change that 
would create that duty, and then make sure that we enforce the 
laws that are on the books--and I want to get to enforcement in 
a second--would not change or conflict with the insider trading 
laws that are on the books today, correct?
    Mr. Khuzami. I think that is right.
    Mr. Stivers. And isn't there some risk of creating dual 
standards that then nobody knows how to enforce or what applies 
to whom?
    Mr. Khuzami. I think there is some risk of that.
    Mr. Stivers. So, let's get to enforcement for a second. Do 
you think that you have enough--you talked in the beginning of 
your testimony about some of the statistics of your enforcement 
and how it is going up and you are--obviously, the SEC is doing 
a little more of it.
    Do you have the resources you need to do the enforcement 
that is necessary to clean up insider trading, whether it is by 
a Member of Congress or somebody else?
    Mr. Khuzami. We don't have the resources to do the job 
across-the-board of enforcing the securities laws that we need.
    We have made great strides in the last few years, both in 
terms of the number of cases, quality of cases, particularly 
the credit crisis cases, that we brought cases against over 80 
individuals and entities, 40 CEOs, CFOs, and senior executives 
across-the-board. We are doing a lot of great things, but it is 
a significant challenge, given the additional Dodd-Frank 
burdens and just the numbers.
    We have 1,300 people across the Nation in the Enforcement 
Division, and we are responsible for 35,000 regulated 
entities--broker-dealers, investment advisors, transfer agents, 
and others, as well as any citizen who might choose to violate 
the law.
    So, resources are a real challenge for us. And if we put 
more into insider trading, we are doing less somewhere else. It 
is a zero-sum game.
    Mr. Stivers. Let me ask you about--can you tell the members 
of this committee what happens to the ill-gotten gains that you 
are able to get back through the process of insider trading? 
And is there a way to help use those, the way we do drug 
profits, to go back into enforcement?
    Mr. Khuzami. It does not--as a general matter in securities 
cases, we often take disgorgement or the ill-gotten gains and 
penalties and return it to the harmed investors. We have 
returned, I think, $3.6 billion in the last 2 years to harmed 
investors.
    In insider trading cases, it is a little harder, because 
identifying the victim or if it was just somebody on the other 
side of a trade who didn't have the information--and because 
the amounts are so small, those numbers often end up going to 
Treasury, rather than being distributed to people on the other 
side of the trade.
    Mr. Stivers. I only have 15 seconds left here, but what do 
you think about the idea of insider trading, maybe using some 
of those gains to help you with your enforcement costs?
    Mr. Khuzami. I would love to be able to have--we attempted 
to get self-funding; it didn't happen. We have some additional 
means now. But, our budget doesn't come at the expense of other 
government agencies because it is funded by fees, transaction 
fees and other fees by Wall Street, and I think that is 
appropriate. I wouldn't want to see us funded directly from 
penalties or sanctions. I think that probably sets up a bad 
incentive.
    Mr. Stivers. Okay.
    Mrs. Biggert. The gentleman's time has expired.
    The gentleman from Minnesota, Mr. Ellison, is recognized 
for 5 minutes.
    Mr. Ellison. Thank you, Mr. Khuzami, for being here.
    There was the big story on ``60 Minutes,'' a lot of people 
were, I think, probably given more attention than they wanted 
and a type of attention they didn't want, and we come up with a 
bill, and here we are. Of course, the bill existed long before, 
and I don't want to imply it didn't.
    But I was intrigued by the idea that you think it is--this 
is an already--Members of Congress already cannot use inside, 
nonpublic information in order to enrich themselves. Could you 
expand on that?
    Mr. Khuzami. Yes. I think the point is that law currently 
prohibits insider trading, and there is no special exemption or 
special carveout for Members of Congress.
    Mr. Ellison. Right.
    Mr. Khuzami. And I think the point that I was trying to 
make is that, while that is true, there is some legal 
uncertainty about how those principles that currently exist 
would be applied to the special situation of Members of 
Congress. And that is why establishing this explicit duty I 
think would be very helpful.
    Mr. Ellison. And, in that same vein, as Members of 
Congress, we have a--as you and others make the point, we have 
a public duty, and our responsibility is to pursue the public 
interest. Now, if we are doing something to pursue our private, 
narrow interests at the very same time, that puts both of those 
interests at odds, you know.
    And this ``60 Minutes'' piece--of course, I don't want to 
attribute that to being absolutely accurate. It is media, it is 
actually entertainment too. Part of what they were saying is 
that one Member was supposed to be trying to stabilize the 
economy at the same time they were purchasing equities or 
options that could enrich them if the economy went down.
    That seems to me, if--and, again, if--and this is a two-
letter word that means a whole lot--if that is to be believed 
or proved, I think there is already ample stuff to say that you 
cannot do that. Specifying it may be a great advantage. That is 
why I am a coauthor on the STOCK Act. But I just wanted to make 
it clear that I already think that the things that this news 
broadcast brought out you can't do already.
    Let me ask this: How do the varying designations of the 
term ``confidential information'' among Member offices and 
committees affect the determination of when material, nonpublic 
information has been disclosed? Do you understand my question?
    Mr. Khuzami. How do the various definitions--
    Mr. Ellison. Yes. How do the varying designations of 
``confidential,'' the term ``confidential information'' among 
Member offices and committees affect the determination when 
material, nonpublic information has been disclosed?
    Mr. Khuzami. If there is an explicit agreement that the 
information is confidential, then that generally establishes a 
kind of duty of trust and confidence between the two parties 
who made that agreement. And if one of the parties who had that 
information then turns around and uses that information for 
private gain, they have violated that duty of trust and 
confidence.
    Mr. Ellison. And, do you think there is any problem with 
the perhaps multiple understandings of how this term might be 
applied in various circumstances? Do you think the rule--or do 
you think one of the things we need to focus on is how we can 
come up with perhaps a standard understanding?
    Mr. Khuzami. The more standardization, the better. It may 
not always be possible, but certainly that is correct.
    Mr. Ellison. Yes.
    What kind of information would be regarded as relating to 
commodity and futures contracts within the context of Members 
of Congress? What kind of information would be considered as 
related? Do you understand my question?
    Mr. Khuzami. What kind of insider trading might--
    Mr. Ellison. Yes.
    Mr. Khuzami. If you are talking about certain commodities, 
any legislation that might impact companies involved in the 
commodities business would certainly fit that definition.
    Mr. Ellison. Okay.
    And under what circumstances would a Member or an employee 
of Congress be considered to have reason to know that a person 
requesting information would use the information obtained to 
trade securities or futures contracts?
    Mr. Khuzami. If that were the law, you could look at the 
circumstances. If you had a friend who was a day trader and you 
secretly whispered to them some information that you learned 
about some nonpublic legislation, you would have a pretty good 
basis to say you either knew or should have known that this 
person was going to take that information and trade on it. 
Other cases would be less clear.
    Mr. Ellison. Yes.
    At what point do prognostications as to the prospects of 
legislation become political intelligence?
    Mr. Khuzami. I am not sure I--that would be a difficult 
question to answer without knowing the facts and circumstances 
of a particular situation.
    Mr. Ellison. It is a very fact-based question.
    Mrs. Biggert. The gentleman's time--
    Mr. Ellison. I am out of time. Thank you for your 
cooperation, sir.
    Mrs. Biggert. Thank you.
    The gentleman from Michigan, Mr. Huizenga, is recognized 
for 5 minutes.
    Mr. Huizenga. Thank you, Madam Chairwoman. I appreciate it.
    And, actually, we are running out of time from my colleague 
across the way here, but I would like you to--maybe we can 
pursue that a little bit. As I was hearing that interchange, 
something struck me, and it is called the farm bill. All right? 
We are going to be reauthorizing this thing soon, and whether 
it has to do with ethanol or direct or indirect subsidies or 
payments or any of those things, it seems to me that this may 
cause some huge headaches for not just Members but a number of 
others who are involved and engaged in the legislative process 
dealing with a major portion of our economy. This isn't just 
Wall Street; this is Main Street and grain elevators out in 
Michigan and Nebraska and wherever else.
    And so I am just curious, maybe we can keep, kind of, 
unpacking that a little bit, along with the whole notion of 
this political intelligence information. And, is it really just 
a judgment call what is or isn't on your part? Or explain that 
a little bit, if you would.
    Mr. Khuzami. When something, whether it is farm bill 
legislation or a corporate takeover, at what point it crosses 
the line from being just very preliminary or tentative and at 
what point it crosses the line to being material, which means 
it is kind of an important matter to a reasonable investor in 
an investment decision, is at the end of the day a 
determination based on all the facts and circumstances of what 
happened.
    And that is why in the course of our investigations, we 
spend a great deal of time trying to tease out every fact and 
every event to make sure we understand what had occurred and 
make our professional judgment as to whether or not that factor 
has been satisfied, and thus everything else was as well, 
whether or not it was a case that we would file.
    The same is true for scienter or intent. You can't look 
into somebody's mind, so you have to look at the circumstances 
under which they may have passed the information. Did they put 
down a taped telephone line, instead pick up their cell phone 
and ask someone to call them back on an untaped line and speak 
cryptically or take some steps to conceal what they had done? 
You look at all these things to figure out whether or not 
people have acted with bad intent, whether or not it is 
material, in order to decide whether or not you have the 
sufficient basis to file a case.
    Mr. Huizenga. Do you see any problems with what we are 
trying to do here? Because I do think that this is a good idea, 
but I, like myself and a number of my other colleagues, have 
had previous lives that follow us here. My family happens to be 
involved in construction back in Michigan, in real estate. I 
own a gravel company; I have three employees. But if I vote on 
a highway bill which means we are going to be using more 
concrete, and suddenly sand and stone is more expensive, and I 
somehow benefit from that, is there a pitfall here that would 
be--I am assuming that would be an unintended consequence to 
something like that.
    But I see that with the farm bill and a number of these 
other things that are, sort of, regular order and regular 
business here that may cause some problems. And I know there 
had been one proposal out, that when you got elected to 
Congress, you had 90 days to liquidate everything, and the only 
thing that you were allowed to hold would be a government 
treasury bill. And I can tell you, that is not something I 
would be interested in doing, especially in this real estate 
market.
    How do we strike this balance? Because I think there is a 
real need here to make sure that we have transparency and that 
we aren't unduly using information that is coming to us.
    Mr. Khuzami. Right. There are a number of protections. 
Proposed legislation is discussed openly, it becomes public. 
And, therefore, if you were to discuss it, it is not nonpublic 
and therefore wouldn't give rise to any sort of liability.
    Again, you have to act with knowledge and bad intent. You 
have to purchase or sell securities. The information has to be 
material. You have to meet all those elements. If you were to 
simply discuss proposed legislation with a group of people and 
they went off and traded, and you were doing it consistent with 
your duties and obligations as a Member of Congress, it would 
be hard to see how that would give rise to a case.
    Mr. Huizenga. So me talking at the local rotary isn't going 
to get somebody in trouble when suddenly that is viewed as 
insider--okay. I appreciate it.
    Thank you, Madam Chairwoman.
    Mrs. Biggert. Thank you.
    The gentleman from Colorado, Mr. Perlmutter, is recognized 
for 5 minutes.
    Mr. Perlmutter. Thanks, Madam Chairwoman.
    And, Mr. Khuzami, thanks for sitting through this for so 
long.
    I am generally supportive of the legislation as it has been 
proposed. I guess I bring the same concerns to the table that 
you do, that in trying to define this, you end up exaggerating 
one piece and forgetting another.
    And, you focused primarily on legislative activities of the 
Congress. So, in the legislative arena, we have two parts. We 
make policy, and we either fund it or we don't. Okay? We have 
oversight of your organization and every other organization of 
the Federal Government, in which case either in a public forum, 
as today, you provide us with information and in certain 
instances we have maybe private briefings, a Secretary comes to 
somebody's office or whatever.
    So we have legislative, we have oversight, and then we have 
constituent relations, which is what Mr. Huizinga was talking 
about. Speaking to the rotary or somebody comes to my office 
and says, you know what, they are thinking about, well, like 
last week, fracking, okay? Fracking in my neighborhood. 
Shouldn't there be some legislation about disclosing what is in 
those fluids? And I know the SEC is having to deal with 
subjects like that. And we have every subject under the sun, 
from farming to foreign policy, etc.
    So I do fear that, in trying to define all this, we forget 
the breadth of the activities that we face here in Congress. So 
can you comment on that?
    Mr. Khuzami. I think I would probably give somewhat of the 
same answer I gave previously, which is I think that there are 
a lot of protections that are inherent in the insider trading 
law that prevents it from becoming a trap for the unwary 
because of the various legal requirements that have to be 
satisfied.
    And it may be that that is not sufficient, that you need 
some sort of carveout through a no-action letter that would 
give you some comfort going forward that a certain type of 
activity, if you met the requirements, would protect you from 
any sort of liability.
    I realize it can be a challenge. It is, frankly, a 
challenge on the corporate side, as well, where you have 
corporate officers who are responsible for all sorts of 
communications and outreach to their shareholders and others. 
And so I don't mean to underestimate the challenge, but I am 
hopeful that conscientious people can come together and figure 
out a solution.
    Mr. Perlmutter. I think of the day when we had TARP on the 
Floor of the House of Representatives. And there was--that was 
one where, are you going to pass it or not? Now, under this 
bill, that would be public, because it was as public as 
possible, that everybody who was transacting business on the 
markets, could see as we--were we going to pass it, were we not 
going to pass it.
    What would the agency do--let's say a Member is counting up 
votes, and he realizes that it isn't going to pass. Now, I 
don't know that any of this would happen, but he counts up 
votes, and he realizes this is not going to pass, and he goes 
and sells whatever. What happens then?
    Mr. Khuzami. I wouldn't want to speculate about particular 
circumstances.
    Mr. Perlmutter. I know you wouldn't, but that is--we are in 
the legislative arena, so you have to. That is what we have 
to--we have to look forward like this.
    Mr. Khuzami. Right.
    Mr. Perlmutter. And that is why this is the legislature as 
opposed to the Judiciary. We have to look at the broad expanse.
    Mr. Khuzami. Right. No, that is right, that is right. That 
set of circumstances could conceivably give rise to a case, 
because it certainly was material to investors, and if the vote 
was that close or there was uncertainty about it, it certainly 
would be nonpublic, and to trade on that, if a court were to 
find that a duty existed, that could, in fact, be a violation.
    Mr. Perlmutter. Okay. No, I could see that one as being, 
wow, what do we now? It is right here in front of everybody all 
at the same time, but this guy counted the vote an hour ago.
    Mr. Khuzami. Right. Now, it could also raise Speech or 
Debate Clause issues, as well.
    Mr. Perlmutter. Okay.
    Mr. Khuzami. It occurred on the Floor, and there would be, 
in all likelihood, a challenge on those grounds.
    Mr. Perlmutter. All right. And just to close, you are going 
to work with the sponsors of this bill to try to tighten it up 
as best we can?
    Mr. Khuzami. Yes.
    Mr. Perlmutter. Okay. Thank you. That would make me more 
comfortable.
    Thanks.
    Mrs. Biggert. The gentleman yields back.
    The gentleman from Delaware, Mr. Carney, is recognized for 
5 minutes.
    Mr. Carney. Thank you, Madam Chairwoman.
    And thank you, Mr. Khuzami. There aren't many questions 
that haven't been asked, but I have a few. And I appreciate 
your forbearance through this long hearing.
    I am just trying to understand your testimony. You said 
earlier that you would prefer--I am a supporter of the bill and 
a cosponsor. I was surprised to learn that Members of Congress 
may not be covered by the rules for insider trading. You say 
that you assume that they are, that we have some duty. I accept 
that and make the same assumption.
    I also believe that Members of Congress ought to be held to 
a higher standard. And my hope, frankly, in this legislation or 
what ultimately passes will set up a system that does hold us 
to a little bit of a higher standard, just because we have a 
special trust with the public in the duties that we do.
    So do you think a narrower bill with a simpler approach is 
a better approach?
    Mr. Khuzami. I do, because I think it accomplishes 
everything that needs to be accomplished to make it clear and 
to eliminate uncertainty as to whether or not such a duty 
exists, but at the same time avoids--
    Mr. Carney. So, for you, the big question is to eliminate 
that uncertainty.
    Mr. Khuzami. Correct.
    Mr. Carney. And you had a back-and-forth with Mr. Green 
about whether it would change anything you do, or you would do 
the same. Have you prosecuted any of these cases? Have you 
actually taken them to a court and had prosecutions to find out 
what might happen currently?
    Mr. Khuzami. No. In my time at the SEC, there has not been 
a filed case against a Member of Congress for insider trading. 
There have been cases against members of the Executive Branch, 
FBI agents, and others, but not Members of Congress.
    Mr. Carney. So, given the attention that this issue has 
gotten right now--which, for me, is a bad thing because it 
besmirches the reputation further of this institution which 
really should be the people's House and they should have trust 
in it--it is an opportunity to do something to improve that. 
How would you do that? How would you improve it? And I 
appreciate the fact that you are going to work with the 
sponsors to do that.
    Mr. Khuzami. In a couple of ways. One is this process, 
obviously, to work on the legislation to clear up these issues. 
And the second is, when any sort of suspicious trading or other 
activity is brought to our attention in insider trading or in 
any aspect of the Federal securities laws, we take a look at 
that and we conduct our inquiries and determine whether or not 
there is a basis for a violation of law.
    Mr. Carney. So I think some of that, as I understood your 
testimony, comes through disclosure practices, right? And this 
would require a 90-day disclosure compared to the 1-year, the 
annual disclosure that we do now. And you mentioned, I think, 
in reference to corporate directors or something, an obligation 
of 2 or 3 days or something.
    What is an appropriate--and what kind of trade would you be 
talking about for that kind of disclosure?
    Mr. Khuzami. I am sorry, what kind of what? Trade?
    Mr. Carney. Trade or activity.
    Mr. Khuzami. I think, in general, our preference from an 
enforcement view would be, we would like to see the shortest 
period of time between the trade and the disclosure so that we 
have a better chance of getting the information, and to have it 
done in a searchable and electronic format.
    As it is now, we do look at trading by Members and anybody 
else if we have reason to conduct an investigation, but what 
you can't do is you can't search a database in general without 
kind of a tip or a complaint, just search it in order to 
determine whether or not there is something suspicious. And you 
can't bring into the analysis other information you may have, 
because if it is in a paper format, it is just too unworkable. 
So electronic filing would really have the ability to 
manipulate the data and analyze it and combine it with other 
information just to make your inquiries much more thorough.
    Mr. Carney. Right. So you mentioned earlier, too, some 
things that were not included under this legislation. Could you 
elaborate on that again? I don't see them in my notes here.
    Mr. Khuzami. What is not included is I think it is a--
because it speaks of material, nonpublic information in terms 
of pending or prospective legislation, it wouldn't cover other 
information that Members receive that might be material and 
nonpublic, including--
    Mr. Carney. But it includes all kinds of transactions. I 
thought you mentioned certain transactions that wouldn't--
    Mr. Khuzami. Oh, I am sorry, types of securities.
    Mr. Carney. Yes, I am sorry, types.
    Mr. Khuzami. Yes, yes. It is limited to securities and 
swaps of issuers. So it wouldn't include options, which are not 
a security of an issuer; an option is bought and sold by an 
exchange. It wouldn't include an ETF, which is put together and 
traded by and sold by a dealer on an exchange. It wouldn't 
include mutual funds because mutual funds in general are 
diversified. There are lots of different issuers in a fund, so 
it is not really--and it is issued by investment advisors or 
investment companies. So those would all be exempt.
    Now, there are not many insider trading cases in mutual 
funds. Because they are diversified, it is harder to move the 
market. But options are typically the insider trader's first 
choice because they offer a great leveraged opportunity.
    Mr. Carney. So I see my time has run out, but you will work 
with the sponsors on those, as well?
    Mr. Khuzami. We will.
    Mr. Carney. Thank you, and thanks for your testimony today.
    Mrs. Biggert. The gentleman's time has expired.
    The Chair notes that some Members may have additional 
questions for this witness which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to this 
witness and to place his responses in the record.
    Thank you so much, Mr. Khuzami, and thank you for giving us 
the time and the expertise that you have.
    Mr. Khuzami. Thank you.
    Mrs. Biggert. With that, I will call up the next panel.
    Without objection, your written statements will be made a 
part of the record, and you will each be recognized for a 5-
minute summary of your testimony.
    We will hear from: Mr. Jack Maskell, legislative attorney, 
Congressional Research Service; Professor Donna Nagy, Indiana 
University Maurer School of Law; and Mr. Robert Walker, of 
counsel with Wiley Rein LLP.
    Thank you all, and thank you for your patience. You will 
each be recognized for 5 minutes.
    Mr. Maskell, we will begin with you.

 STATEMENT OF JACK MASKELL, LEGISLATIVE ATTORNEY, AMERICAN LAW 
         DIVISION, CONGRESSIONAL RESEARCH SERVICE (CRS)

    Mr. Maskell. Thank you very much, Madam Chairwoman.
    Good morning, and thank you to the chairman and the members 
of the committee for inviting me here today. The committee has 
a copy of a legal memorandum that I previously prepared 
addressing in a little more detail what I will be discussing 
today.
    One of the areas of law that I have covered for CRS since 
1973 is governmental ethics and conflicts-of-interest law. And 
when questions have come in to CRS from time to time over the 
years about Members of Congress using nonpublic information for 
their own personal benefit, we approach the issue generally as 
a matter of Congressional ethics. Our advice over the years has 
consistently been that such conduct may be a violation of 
specific House and Senate ethics rules as well as contrary to 
recognized and accepted ethical guidelines and norms in 
Congress. A recent advisory opinion from the House Ethics 
Committee released last week has generally confirmed this kind 
of approach.
    Because of the allegations that we have all been talking 
about, the issue of insider trading has now come to the fore. 
And as I mentioned and as was mentioned earlier, I think it is 
fairly clear now to everyone following the issue that Congress 
did not exempt itself from the insider trading laws. So, to cut 
through some of what I wanted to say and which would be fairly 
redundant, let me speak to really two points I would like to 
make today.
    The first point is that CRS considers that the 
characterization made by some critics of Congress that the 
position of a Member of Congress is one which does not involve 
the public trust or a general duty of entrustment is wrong as a 
matter of both law and ethics.
    I am certainly not the first to say that the office of the 
Member of Congress involves a public trust. Even before the 
adoption of the Constitution, James Madison noted in the 
Federalist Papers the importance of measures to keep Members 
``virtuous whilst they continue to hold their public trust.'' 
The phrase ``public office as a public trust'' is recognized 
explicitly in both the House and the Senate, and that phrase is 
more than merely an aphorism, because it denotes that Members 
of Congress wield public power, and have a fiduciary-like 
responsibility to use that power in the interests of the 
general public, who are supposed to be the beneficiaries of 
that trust.
    The Senate, in its standing orders, has stated it this way: 
``Public office as a public trust signifies that the officer 
has been entrusted with public power by the people, that the 
officer holds this power and trust to be used only for their 
benefit and never for the benefit of himself or a few.'' And 
that is in the standing orders for the Senate, and the House 
has similarly recognized that standard.
    This fiduciary duty of Members toward the public is one 
which has been also expressly recognized by Federal courts. In 
1978, the United States Court of Appeals for the Second 
Circuit--and it is interesting that it is from the Second 
Circuit, which covers New York and Wall Street--applied the 
fiduciary theory of public trust owed by a Member in a case in 
which the government moved to have the proceeds from an illegal 
transaction between a Member of the House and a private party 
recovered by the government under a theory of a constructive 
trust. The court agreed with the lower court decision to 
``impose a constructive trust on moneys the Member received in 
breach of his fiduciary duty as a United States Congressman.''
    There are also specific House and Senate ethics rules that 
have been interpreted to mean that Members may not use their 
official positions for personal gain. Significantly, the House 
of Representatives has expressly recognized the continued 
application to the House of the ethical guidelines and 
standards adopted in the Code of Ethics for Government Service, 
which provides expressly that any Federal official, including a 
Member of Congress ``may never use information coming to him 
confidentially in the performance of governmental duties as a 
means for making private profit.''
    We think these factors create this public trust and this 
duty of trust of Members to the general public, including the 
investing public.
    And I would point out that the ethics rules in the 
Executive Branch of government on using information for private 
gain are similar to these Legislative Branch ethics rules. And, 
of course, you are probably familiar with and the last witness 
spoke about the guilty plea to insider trading charges this 
summer by a Federal employee who worked as a chemist for the 
FDA. They are under similar ethical guidelines, that they can't 
use inside information for their own use.
    The second point I want to make today is about potential 
issues with enforcement of any measure that you propose. The 
express authorization and duty for Congress to discipline its 
own Members under Article I, Section 5, is there in part 
because there is the Speech or Debate privilege in Article I, 
Section 6, that says Members can't be questioned in any other 
place for their legislative conduct.
    And so I also want to point out that Section 3, which some 
Members questioned and brought up, would be a House rule and 
would be interpreted internally by the House and by the House 
Ethics Committee. So there may not be a problem at all with 
Speech or Debate with the House interpreting the rule because 
they are being questioned in this place and not some other 
place.
    But if you expect that the Securities and Exchange 
Commission or any outside entity is going to come in and 
regulate legislative conduct and look at information that 
Congress may receive because of a hearing or a deposition that 
a Member takes or something, you may run into evidentiary 
issues concerning the Speech or Debate privilege that are 
certainly going to be practical considerations that anyone 
prosecuting that kind of provision would run into. I am not 
saying don't enact the law, but just be aware that privilege is 
there and that could interfere with some of the enforcement 
opportunities.
    Thanks for the opportunity to be here. I will be available 
to answer any questions you may have relative to my testimony.
    [The prepared statement of Mr. Maskell can be found on page 
83 of the appendix.]
    Chairman Bachus. Thank you.
    Professor?

  STATEMENT OF DONNA M. NAGY, C. BEN DUTTON PROFESSOR OF LAW, 
            INDIANA UNIVERSITY MAURER SCHOOL OF LAW

    Ms. Nagy. Thank you, Chairman Bachus, and members of the 
committee. I am honored by the invitation to testify.
    I have researched and taught in areas including securities 
litigation and insider trading for over 17 years. Last spring, 
I published an article on Congressional insider trading. The 
article sought to debunk what at the time was bordering on 
urban myth: that Congress had exempted itself or was somehow 
immune from the existing law that prohibits insider trading. My 
article concluded that Congressional insider trading is already 
illegal under existing law because it violates the broad 
antifraud provisions in Rule 10b-5 and the Federal mail and 
wire fraud statutes.
    I acknowledge that many distinguished securities law 
scholars see gray areas in existing law, and some believe a 
court would likely rule the other way in a prosecution.
    The controversy surrounding the application of existing law 
to Congress stems from the fact that Congress has never enacted 
a Federal securities statute that explicitly prohibits anyone 
from insider trading. The STOCK Act addresses one manifestation 
of this much larger problem, but an explicit statutory 
definition and prohibition of insider trading that would apply 
equally to everyone, Congress included, would be the most 
equitable and appropriate solution.
    In the absence of a statutory prohibition, insider trading 
is generally illegal only insofar as it is fraudulent. To be 
sure, the vast majority of insider trading prosecutions involve 
quintessential fiduciary-like relationships where the trader is 
an employee or agent alleged to have defrauded his employer or 
principal. But the Supreme Court has never implied, let alone 
stated, that a relationship has to be strictly a fiduciary one 
for a duty of disclosure to attach under Rule 10b-5's 
misappropriation theory. Rather, the Supreme Court uses the 
term ``fiduciary duty'' interchangeably with a ``duty of trust 
and confidence.''
    The SEC and the Justice Department have cast a tremendously 
wide net in Rule 10b-5 investigations premised on the 
misappropriation theory. Dozens of those caught have been 
family members, friends, or business associates who 
misappropriated material, nonpublic information that was 
entrusted to them. In all of these cases, the Securities and 
Exchange Commission and the Justice Department have proven 
themselves quite adept at convincing courts to find the type of 
feigning fidelity that is essential to liability under the 
misappropriation theory.
    In view of these precedents, I very much doubt that a 
Federal Court would have the temerity to conclude that a Member 
of Congress lacks a duty of trust and confidence for purposes 
of the existing misappropriation theory. The Constitution 
refers repeatedly to public offices being of trust. Members 
also take an oath of office to faithfully discharge their 
duties. So there should be little doubt that a Member's 
undisclosed, self-serving use of Congressional knowledge 
constitutes a misappropriation that would defraud the United 
States and the general public, among others.
    I recognize that a Member of Congress has never been 
prosecuted for insider trading based on nonpublic Congressional 
knowledge, but the Justice Department has used the Federal mail 
and wire fraud statutes to successfully prosecute Congressional 
officials for defrauding the United States and the public 
through the undisclosed misappropriation of Congressional funds 
and tangible property. And the Supreme Court has dictated that 
material, nonpublic information constitutes intangible 
property.
    My final point relates to one possible consequence of the 
STOCK 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, the 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 trading scenarios that would 
almost certainly fall within the existing law.
    I would be honored to work with the committee and its staff 
to remedy this concern and to clarify some of the other 
drafting issues relating in large part to the Act's 
underinclusiveness, and in some respects overinclusiveness.
    Thank you very much for giving me this opportunity to share 
my thoughts.
    [The prepared statement of Professor Nagy can be found on 
page 86 of the appendix.]
    Chairman Bachus. Thank you. Mr. Walker, I welcome you.

   STATEMENT OF ROBERT L. WALKER, OF COUNSEL, WILEY REIN LLP

    Mr. Walker. Thank you. And good afternoon, Mr. Chairman, 
and thank you, members of the committee, for this opportunity 
to discuss the Stop Insider Trading on Congressional Knowledge 
Act with you. As a former Chief Counsel of the House and Senate 
Ethics Committees, and as a former Federal prosecutor, I will 
add my voice to the chorus: Current Federal insider trading 
prohibitions do apply fully to Members and employees of 
Congress under the misappropriation theory of insider trading.
    I understand the view of many that notwithstanding the fact 
that insider trading prohibitions are enforceable against 
Congressional Members and staff, passage of the STOCK Act would 
give more specific and explicit authority, maybe even direction 
to the SEC and the Department of Justice to prosecute such 
cases if they arise. However, at least with regard to the 
provisions of the Act addressing so-called tippee liability for 
information coming from within Congress, and I do read the Act 
as addressing such instances, I believe that caution is 
advisable to make sure that the provisions do not chill the 
legitimate and necessary exchange of information between 
Congressional Members and staff, and individuals and entities 
outside of Congress.
    Proof of insider trading cases under the misappropriation 
theory is not easy in any context, whether inside or outside of 
Congress. There is, of course, a unique complicating factor for 
enforcement by the DOJ or the SEC of insider trading 
prohibitions against Members of Congress. The Speech or Debate 
Clause, as you know, provides that certain, but not all, 
actions and activities of Members of the House and Senate may 
not be cited or used in proof in prosecutions or legal actions 
against Congressional Members. But this provision may limit 
available and admissible evidence in outside proceedings 
involving allegations of any sort, not just proceedings 
involving insider trading.
    The important point to keep in mind here, however, with 
respect to Speech or Debate privilege is that no matter how 
carefully the STOCK Act is drafted, it cannot trump this 
Constitutional privilege where it applies. The privilege does 
not, of course, apply in investigations or proceedings of the 
Congressional Ethics Committees or offices. In such 
proceedings, for example, paragraph 8 of the Code of Ethics for 
Government Service could apply to capture and sanction insider 
trading by a Member or employee of the House or the Senate. 
This provision 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. Securities trading by a Member 
or employee based on confidential Congressional information 
would be a clear violation of this provision.
    Having said this, however, proof of whether the 
Congressional information at issue in any given instance was in 
fact confidential under applicable House, Senate, or committee 
rules could be problematic. Allegations of insider trading in 
Congress may also be addressed under the overarching 
Congressional standard of conduct which enjoins Members and 
staff never to engage in conduct which may reflect discredit on 
the House or the Senate. In the House, this standard is set 
forth in paragraph one of House Rule 23, the Code of Official 
Conduct. If a specific credible allegation of securities 
trading by a Member or employee based on material, nonpublic 
information were to come before the Ethics Committees of the 
House or Senate, or before the House Office of Congressional 
Ethics, such an allegation would be investigated fully by those 
offices as constituting potentially conduct reflecting 
discredit on the institution.
    Turning to the provisions of the STOCK Act that would 
require public disclosure of securities transactions within 90 
days, rather than as currently on an annual basis, these 
provisions are consistent with, and would extend, the general 
approach to policing conflicts of interest in the Legislative 
Branch. That is an approach in which public disclosure is 
emphasized and recusal or divestment are disfavored.
    Finally, three brief points on the section of the STOCK Act 
that would amend the Lobbying Disclosure Act, the LDA, to apply 
the Act's registration, reporting, and other requirements to a 
newly defined class of individuals and entities; that is, to 
so-called political intelligence consultants and firms. First, 
as has been acknowledged, these provisions would raise First 
Amendment concerns, and so there must be a compelling interest 
to impose this regulatory scheme. Second, the Act imposes a 
hair trigger threshold for registration and reporting. One, 
just one political intelligence contact, and registration and 
reporting requirements would kick in. And third, the definition 
of political intelligence contact in the Act is very broad, and 
would seem to capture communications that would have nothing to 
do with securities trades.
    Thank you very much for the opportunity to speak with you 
today, and I look forward to answering your questions.
    [The prepared statement of Mr. Walker can be found on page 
99 of the appendix.]
    Chairman Bachus. Thank you. Normally, the committee has 
both Republican and Democratic witnesses. And this is an 
extreme compliment to each of you panelists. In this case, the 
committee agreed that you were probably the most knowledgeable 
expert witnesses, and we invited the three of you unanimously. 
So I want to thank you, and 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 really some indefensible acts had they taken place. And so, 
I think it has created a public perception. As a result of 
that, the number one misconception is that insider trading laws 
do not apply to Members of Congress. However, I do believe that 
we can clarify that and make it clearer to restore public 
trust. Because when an accusation is made, it has an effect, 
even if it is a false allegation. Even if it is totally false.
    Let me ask Mr. Walker, in your view would requiring all 
Members of Congress to place our assets in a blind trust 
eliminate the concerns that they are somehow violating the 
public trust by trading stocks or options or futures? Would 
that be a good idea?
    Mr. Walker. The short answer to whether it would eliminate 
allegations that the Members themselves were trading stocks on 
inside information, the short answer to that is yes, it would. 
There are other concerns that would enter into whether it was a 
good approach to take, at least from a practical point of view. 
In listening to your fellow committee members discuss some of 
their proposals today, I understand that proposals in this area 
would either require Members to place their assets in a blind 
trust or to disclose within a very brief window of time 
securities transactions. With that latter part added on, some 
of the practical concerns that I initially had with respect to 
a requirement that everyone put their assets in a blind trust 
would be eliminated. Because in fact, a blind trust is an 
option for people who have a considerable number of assets and 
level of assets to begin with. There are administrative costs 
that go on in connection with it. And it is just not practical 
for a Member who may be here for a 2-year term to upend their 
financial lives, put it in a blind trust, and then they are 
``one and done,'' so to speak, in terms of their election to 
Congress. And it would not--and if you had that requirement, 
simply, Members who had relatively few assets would be in a 
position of not being able to trade at all unless you had that 
additional provision where they could opt for disclosure of 
trades within a very brief window of time.
    Chairman Bachus. Thank you. Professor Nagy, you stated in 
your testimony that Congress should use this current 
controversy to diagnose and treat the entire malady through the 
enactment of an express statutory definition and prohibition of 
insider trading for all individuals. Given that the SEC 
testified this morning that any statutory changes in this area 
should be carefully calibrated to ensure they do not narrow the 
current law, and thereby make it more difficult to bring future 
insider trader actions against any such persons, how would you 
suggest that we go about drafting an insider trading law?
    Ms. Nagy. Mr. Chairman, I think there are a number of 
approaches that Congress could take. As I mentioned at the 
start of my testimony, Congress has never enacted a Federal 
securities statute that explicitly prohibits anyone from 
insider trading. Congress would not be starting on a blank 
slate if it chose to undertake that mission today. In 1987, 
there was a proposal that came relatively close to enactment: 
the Insider Trading Proscriptions Act of 1987. That proposed 
Act would have prohibited the wrongful use of material 
nonpublic information and the use of information that has been 
wrongfully obtained. The legislation sought to bring existing 
law under an express statutory prohibition. The advantage was 
that a statutory definition would not limit insider trading to 
fraud. It would include fraud, so it wouldn't have displaced 
the anti-fraud view of insider trading. But it would build on 
top of that fraud-based prohibition.
    So for instance, someone who misappropriates material 
nonpublic information and uses that information to trade 
securities, but doesn't breach any fiduciary-like duty of trust 
and confidence, poses a prosecutorial challenge for the 
Securities and Exchange Commission or the Justice Department. 
Government prosecutors are incredibly creative, and I think 
they should be applauded for advancing new legal theories. 
There is a case involving a computer hacker where computer 
hacking is deemed to be deceptive. But we can all imagine, and 
I realize I risk sounding like a law professor here, but we can 
all imagine situations where misappropriated information is not 
obtained in any deceptive manner. So a broad statutory 
prohibition like the Insider Trading Proscriptions Act would be 
a place to start. However, we don't need to end right there. An 
alternative short of that would be bringing Congress and 
Congressional officials and Federal employees explicitly within 
existing law and making it explicitly clear that there is a 
duty of trust and confidence.
    I could talk some more about that in answer to other 
questions.
    Chairman Bachus. Thank you. Mr. Maskell, I appreciate the 
work that you do, and the Congressional Research Service.
    Mr. Maskell. Thank you.
    Chairman Bachus. They are a highly professional group, and 
of great assistance to us. Please explain the fiduciary duty 
that you say Members of Congress owe to the American public. 
And do you believe that the breach of that duty can give rise 
to action under Section 10b-5 in certain circumstances?
    Mr. Maskell. Yes, I do believe that in certain 
circumstances, that duty can give rise to a violation of 
insider trading law. This is a concept that has been around as 
long as the Nation has been around, that Members of Congress, 
public officials particularly, but especially Members of 
Congress who pass legislation and make laws, wield this public 
power for the benefit of the general public. And the general 
public are the beneficiaries of the trust that Members have. I 
explained in this one case, United States v. Podell, which 
arose out of the Second Circuit, that the court actually went 
back in, there was a transaction in which a Member had received 
money to help an airline industry get a route to Florida, a 
very lucrative route from New York to Florida, and the Justice 
Department came in and said since you have a fiduciary 
relationship to the public and a public trust, we consider that 
the money you took was not yours, but really belonged to the 
people, to the government. And the court agreed with them and 
allowed them to come in and recover that $50,000 on behalf of 
the United States Government because of this fiduciary 
relationship that the court, the fiduciary duty that the court 
recognized in that case.
    So I think it could be strong enough. I agree almost 
unanimously with everyone that it could be clarified. And 
certainly, this legislation would make it more explicit. And 
any legislation that does make that duty more explicit could be 
useful.
    Chairman Bachus. Thank you. I would just conclude by 
asking, on behalf of the committee, that the three of you make 
yourselves available--and you have made yourself available--to 
the sponsors of this bill and to the committee staff as we work 
to do just that, to clarify and make certain that the public is 
certain that these laws apply to us, and that our trading is 
measured by that standard.
    Thank you. Ms. Waters?
    Ms. Waters. Thank you very much, Mr. Chairman. I would like 
to thank our panelists for their patience, and for staying here 
to share with us their expert knowledge about this very, very 
complicated subject. I have listened very carefully to all of 
our presenters here today. I think one thing that there is a 
consensus on is that legislators, Members of Congress, are not 
exempted from insider trading. I think that is very, very clear 
based on everybody's testimony. And I think it is important for 
that word to go out among the Members of Congress, because I do 
believe that there was a belief by Members of Congress that 
there was an exemption, that somehow based on the work that we 
do, we do have access to information that may or may not be 
privileged or public, but somehow you would not be held 
accountable for discussing that or sharing it in some way. And 
I understand that. And that is accepted.
    What is not clear to me is how the details of this 
legislation will be worked out, and who will have oversight 
responsibility, what role will the SEC play, what role will the 
Ethics Committee play, and even the Justice Department as we 
look at all of this. So that really does have to be ferreted 
out. That has to be thought through. Now, having said all of 
that, I have been trying to think about all of the 
circumstances that Members of Congress could be involved in 
that could be either/or. And I am focusing on the discussions 
that go on between staffs. For example, if members of 
Democratic staff and members of Republican staff get together, 
they are trying to work out problems with legislation, and 
perhaps even in what they are doing there are lobbyists 
involved as they are trying to work through how to resolve 
differences. In doing this, some facts began to emerge, or 
thoughts that may not be facts, that as these members look at 
what they are dealing with they could see how certain actions 
could either advantage or disadvantage a company or companies. 
And based on the information that they are concluding, or one 
person may be concluding, even though there are no facts to 
support it, that they could go out and they could say to a 
neighbor or a friend or a group at a party, ``We are working on 
this legislation and these companies are involved. And I just 
kind of believe that if we go this way, this company is going 
to lose a lot of money. And if we go this way, these companies 
are going to gain a lot of money. I have just been working on 
this, I have been thinking it through, and that is really what 
I believe.
    Now, the staff member does not act upon that information 
and go out and start trading, but do they become a tipster 
because somebody they are talking to, say, that person is very 
smart, and I have always listened to what this person had to 
say on so many levels and I think if they think that perhaps 
this is going to lead to this company making a lot of money, I 
am going to invest. I am going to trade. I am going to invest 
in that.
    What is that? Is that tipping? Is that undermining the 
fiduciary responsibility? How would one calculate that? 
Professor?
    Ms. Nagy. Right now under Rule 10b-5, whether it is the 
Securities and Exchange Commission or the Justice Department 
bringing an action, the government would have to show that the 
person who communicated the information breached a duty of 
trust and confidence in doing so. The Supreme Court has 
interpreted the requisite breach to mean essentially that the 
tipper, the communicator needs to have made that communication 
for a personal benefit. Without the personal benefit, there is 
no improper motivation. And if there is no improper motivation, 
under current law there is no liability for either the tipper 
or the tippee. So the type of well-intentioned communication of 
information from a knowledgeable source to another would not be 
illegal insider trading under Rule 10b-5. And I would encourage 
Congress not to reach beyond that established precedent. I 
think that works reasonably well. So under Rule 10b-5 it is the 
motivation of the person communicating the information that is 
going to be the linchpin for liability.
    Ms. Waters. Let me complicate this a little bit more. The 
tipper, who is not a conscious tipper who would receive benefit 
in any way from the tipping, has communicated this general 
information and thoughts to someone who could be a relative in 
that crowd where you are talking. And that relative could be 
someone who in some way shares profits with, or would lend 
money to, or would designate that person in some way to be a 
part of their business. Does that mean that the would-be tipper 
then has violated some law? Because in a protracted way, they 
could be the beneficiary of the gain of the person who actually 
made the investment without even knowing at that time that they 
would be a beneficiary. How is that viewed? How is that dealt 
with?
    Ms. Nagy. Congresswoman, in the example you give, without 
the intention to assist the friend or relative, the 
communicator of the information would not have liability 
because the communicator would not be breaching a duty of trust 
and confidence. And in the tippee-tipper type scenarios we are 
talking about, the tippee's liability is derivative of the 
tipper's. But current law would reach the type of scenario you 
are talking about not so much as a tipper-tippee situation, but 
as a misappropriation situation. I mentioned before that the 
government casts a very wide net vis-a-vis its application of 
the misappropriation theory.
    Your hypothetical involves a situation where a 
knowledgeable source was sitting at the dinner table, sharing 
information with family members. The Supreme Court would not 
view the knowledgeable source--or a current court, I should 
say, would not view the knowledgeable source as a tipper. 
Rather, current case law would view the knowledgeable source as 
a person defrauded. That is, the recipients of that information 
sitting around the dinner table would be viewed as owing a duty 
of trust and confidence to the person sharing that information. 
So if Aunt Tilly, for instance, used that information in her 
own personal securities trading, the government could bring an 
action against Aunt Tilly for defrauding the person who told 
her that information, assuming the government could show a 
relationship of trust and confidence.
    Now, there is a rule that the Securities and Exchange 
Commission promulgated that establishes three nonexclusive 
circumstances for finding a duty of trust and confidence. And 
the third category in that rule is one that pertains to family 
members. But it defines family members as parent, child, 
spouse, and sibling. So Aunt Tilly wouldn't be covered under 
that section of the rule. But she would potentially be covered 
under a second section which specifies that anyone who has a 
history, pattern, or practice of exchanging confidential 
information can be deemed to have a duty of trust and 
confidence. And so, if this family's history, pattern, and 
practice was to respect each other's confidentiality, then 
current law under the misappropriation theory could cover that 
as a fraud on the communicator.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Chairman Bachus. Any of the panelists, if the tippee or 
tipper were Tipper Gore or Tip O'Neill, would it change your 
answer to the question? Never mind. Mrs. Biggert?
    Mrs. Biggert. A quick question. It seems like with all of 
the financial disclosure that we have now, and if this is in 
the forefront, there is going to be a lot more scrutiny of our 
financial disclosures for good or bad. What I was wondering is, 
when we file the financial disclosures, we include spouses and 
dependent children, I guess is what their stocks are. Would 
this be something that could be, with all of the whatever our 
spouses trade or anything, would this be included under a STOCK 
Act for Members? Maybe Mr. Walker, you could--
    Mr. Walker. I had been assuming that the answer to that is 
yes, to the same extent that the financial disclosure 
requirements currently apply to interests of spouses or 
dependent children. I think it would, although I don't believe 
the legislation addresses that specifically.
    Mrs. Biggert. Okay. Does anybody else have any comments on 
that?
    Mr. Maskell. I agree with Rob. The legislation amends, 
though, Section 103 of the Ethics in Government Act of 1978. As 
Rob said, spouses and dependent children are covered. And you 
have to disclose transactions by spouses and dependent children 
because it tries to close an obvious loophole that you could 
just put money in your spouse's name or child's name.
    Mrs. Biggert. It is just that with that further scrutiny, I 
always go back to maybe, Mr. Walker, you were in Ethics at that 
time, but I remember filing one of the first financial 
disclosures, and I had put in there ``covered hopper.'' So I 
got a call, what is a covered hopper? I said, I don't know. You 
don't have time to always look at these things. A covered 
hopper is a railroad car. But I had to go and ask what it was. 
And I think that sometimes we don't really pay as much 
attention because we have somebody to do this. So it is going 
to make it hard for us sometimes on this. I think we have to be 
very careful.
    My other question is really on the Speech or Debate Clause. 
I am not really sure what you meant, Mr. Maskell, when you were 
talking about the Speech or Debate, we might have a problem 
with solving how this is going to work. If you could explain 
that a little bit more.
    Mr. Maskell. When you have something going on like an 
inside trade, you substantially have two parts. You have a 
Member or other individual who is covered by the statute making 
a transaction, telling this broker, whomever, to buy or sell 
stock. And then on the other hand, there is this--it is based 
on certain information that the person received within their 
government employment, their Congressional employment. The 
first part of that is there is not going to be a problem with 
Speech or Debate. To be able to go in and prove that a Member 
of Congress made an order, bought stock, sold stock, all of 
that is outside of the legislative sphere and outside of the 
legislative process.
    However, it is that second part, where the Member got that 
information, where you may have a practical issue with outside 
enforcement. Someone to come in and say, a Member sits on this 
committee, and they took a deposition of a witness, and that 
Member traded on that. That may run into problems with Speech 
or Debate privilege if a Member can say, wait, you cannot--I 
claim my privilege. You cannot introduce that into evidence 
because that speaks to a legislative activity that is covered 
under the Speech or Debate Clause. It is not a complete bar to 
a prosecution. You just look back in the very recent history, 
and Members of Congress can be prosecuted for things that are 
based on official acts, for bribery and all, because they have 
gotten evidence in other ways and they have been able to bring 
that in. But if it is strictly on where someone got 
information, there could be an issue.
    Let me tell you about one case, United States v. Swindall, 
which concerned at that time a Member of Congress who was at 
that time from Georgia. He was indicted on 10 counts of perjury 
related to money laundering. He was convicted on nine counts. 
The U.S. Court of Appeals and the Eleventh Circuit threw out 
three of the convictions because the Justice Department argued 
that the Member of Congress had ``unique and specific 
knowledge'' of these kinds of transactions because he sat on 
the committee that dealt with these. And the court said, you 
can't introduce the fact that he sits on this committee and 
that he has dealt with that information. That is protected by 
Speech or Debate privilege. So this case went up, and cert was 
denied by the Supreme Court.
    So I am just saying when you enact something and you expect 
an outside group to enforce it, there could be evidentiary 
issues that they run into, which would not be a problem if the 
Ethics Committee says, you violated the statutory provision 
that we enacted. And even though the SEC might have problems, 
we don't have any problems with this because we are this place, 
we are the House Ethics Committee or the Senate Ethics 
Committee for Senators, and we can certainly enforce this under 
the standard that Rob mentioned, which is that you have caused 
the reputation of the institution to be denigrated, and 
therefore because you violated the statutory provision, we have 
authority over it.
    Mrs. Biggert. Okay. Thank you. I yield back.
    Chairman Bachus. Mr. Sherman?
    Mr. Sherman. Somebody who engages in transactions might do 
100 transactions, just on a hunch, and 99 times, they lose 
money. Once they make a fortune, society looks at that and 
says, aha, he must have had insider knowledge. If Members of 
Congress should be subject to these rules, and we should, and I 
believe we are, and I believe we should clarify that, the 
question is what steps should Members of Congress take so that 
we don't bring this institution into further disrepute?
    Now, in the private sector, you are an officer of one 
corporation, you know you have to get legal advice to trade in 
the stock of that one corporation. I have colleagues who invest 
in hundreds of different companies. They are buying and selling 
every day. So the corporate executive is trading in his own 
company stock once every few months, or according to a 
preexisting plan, getting careful advice, and I have colleagues 
trading from their iPads on the Floor--or maybe. Does it make 
sense for Members of Congress to own shares of individual stock 
knowing that every one of those companies is affected by 
Congressional action or inaction? You could go to a caucus 
meeting and find out that everybody is talking about X, Y, and 
Z, so they are not talking about A, B, and C, so companies in 
that industry are safe.
    Have any of you advised those with insider knowledge how to 
avoid violating these rules? And have you ever had to advise 
somebody where their insider knowledge didn't relate to just 
one company, but they had insider knowledge of facts affecting 
everything on the board and in the pink sheets? Can anybody 
reflect their personal experience on this?
    Ms. Nagy. The SEC has promulgated a rule, Rule 10b5-1, that 
provides a safe harbor, so to speak, for preexisting trading 
plans.
    Mr. Sherman. And you can have a preexisting trading plan 
with one company. You may own 20 percent of it, you are going 
to retire, and you are going to sell 2 percent of your shares 
every month or whatever. But I don't know anybody who has a 
preexisting trading plan with regard to a portfolio of 50 
stocks that they are in and out of every day.
    Ms. Nagy. Potentially, one could have a preexisting trading 
plan for mutual fund investments where purchases are pre-
arranged. Now, as long as the person who sets up the plan is 
not communicating with the portfolio manager of the mutual fund 
and sharing information, the portfolio manager can purchase and 
sell individual securities in that mutual fund portfolio, and 
there would be nothing wrong with that.
    Mr. Sherman. You are almost arguing for what I am arguing 
for, and that is to let Members invest in mutual funds, but not 
in individual stocks. I would like, for the record, for you to 
provide--each witness who wants to, to provide us with the 
answers to two questions. First, what steps do we have to take 
with regard to the bill we are considering to make sure that it 
makes things tougher and clearer rather than serves to allow 
Members of Congress to do that which is pretty clearly illegal? 
And then second, what prophylactic policies should be imposed 
on Members, or recommended--I would say imposed, to make sure 
not only that they are not trading on inside information, 
because if one of my colleagues makes $10,000 that they 
shouldn't, that worries me. But what worries me more is we are 
down to 9 percent. And if every one of my colleagues just plays 
their hunches, then out of every hundred trades, there is going 
to be one that you folks out there can say is another reason to 
hate Congress, or to distrust Congress. So should we have a 
policy that says don't--put all your money only into mutual 
funds and U.S. and State bonds. If you are in mutual funds, 
don't buy or sell more than 5 percent of that fund in any 
month? What would be the rules that you would suggest not to 
give us the maximum investment flexibility, but to give us the 
minimum likelihood of further opening up Congress to attack? 
Many of those attacks are unfair. But Congress' position, and 
the trust of the American people in Congress is a scarce and 
valuable commodity that can be degraded by both true and false 
charges.
    Mr. Walker, you were trying to say something?
    Mr. Walker. Yes. Certainly, the measures that you have 
suggested, and the potential of requiring blind trusts or more 
prompt disclosure would be prophylactic measures, including 
ones you have talked about about having a policy of investing 
in mutual funds. I think it may be an unattainable goal to 
avoid ever raising public concern about potential conflicts of 
interest. I am not sure you are going to protect against that 
completely if someone is of a mind to raise an issue.
    With respect to other provisions of the Act that would 
tighten up the approach to these things, I do think that the 
approach of disclosure that is currently in the Act, as I have 
said, is consistent with the current framework for addressing 
conflicts, and would have beneficial effects.
    Mr. Sherman. Yes, Professor?
    Ms. Nagy. Congressman, I would be very happy to provide a 
list of steps that could be taken to eliminate the 
underinclusiveness, and to some extent the overinclusiveness as 
well. The one point that I would like to make now is that the 
STOCK Act should make unmistakably clear that it builds on 
existing law, and that nothing in the STOCK Act should be read 
to displace existing law. This way, Rule 10b-5 and the Federal 
mail and wire fraud statutes will be there as a baseline, and 
the STOCK Act can be read as legislation that makes 
unmistakably clear how current law applies in the context of 
Congress.
    Mr. Sherman. Thank you.
    Chairman Bachus. Thank you. Mr. Huizenga?
    Mr. Huizenga. Thanks, Mr. Chairman. I don't want to put 
words in your mouth, but I want to make sure I am understanding 
as I was hearing you. Description of the fiduciary with people, 
with the public, is this legislation really necessary? And I am 
kind of hearing that it may not be necessary, that the 
legislation may not be necessary. I think, Professor Nagy, you 
talked about it being a little too explicit at some points. But 
is it just sort of belt and suspenders legislation? And is that 
your point, and why you want to make sure that it is not 
supplanting or that it rather is building on current case law?
    Ms. Nagy. Yes, Congressman. When I wrote my article last 
spring, I wrote it in response to questions that had been 
raised as to whether Members of Congress owed a duty of trust 
and confidence for purposes of the misappropriation theory of 
insider trading. To be candid, I was surprised to hear that 
there was some difference of opinion on this issue. It would 
strike me that since the Constitution refers to a public office 
being ``of trust'', that should settle the matter. And when I 
think of the many cases the Securities and Exchange Commission 
and the Justice Department bring that involve relationships 
that are by no means ordinary fiduciary ones, or fiduciary-like 
ones, this is an issue that shouldn't generate much debate. But 
that doesn't appear to be the case. Securities professors whom 
I tremendously respect see this as a gray issue. And some go 
even further. So I am now at a point where I see that much use 
and much clarity can come from a declaration that Members of 
Congress owe a duty of trust and confidence for purposes of 
existing misappropriation theory law.
    So yes, I would see this as a belt and suspenders 
legislation. My concern would be that the STOCK Act's 
suspenders are not viewed as somehow loosening or eliminating 
Rule 10b-5 and Federal mail and wire fraud statutes as the 
belt. Because then, I think we would have taken a step 
backwards. But as long as it is clear that this is belt and 
suspenders, we can make a good attempt at getting the 
suspenders as tight as they can be.
    Mr. Huizenga. So let me ask this. My colleague right in 
front of me here, Mr. Canseco, has a resolution. It is not 
legislative, but it is a resolution that goes in, and in the 
brief description that I have heard, might be that belt and 
suspenders. It doesn't change or move anything else; it keeps 
it internal. He was talking about that dealing with ethics. Is 
a resolution actually a better direction to go? Maybe Mr. 
Maskell, you would have an opinion on that. Is a resolution a 
better direction to go than a legislative proscriptive?
    Mr. Maskell. I wouldn't say it is a better way to go. It is 
an alternative way to go that could make the same kind of 
points about the duty of trust and confidentiality of 
information, not to use it for your own personal benefit. You 
could have more specificity in the House rules. That would be 
one way to go. I have never said that the STOCK Act is 
unnecessary. I personally wouldn't say that. I know CRS would 
never say that, because I don't want to usurp your position.
    Mr. Huizenga. I wasn't implying that you were saying that. 
But I was hearing that in the context that it may not, because 
of Rule 10b-5 and the Constitutional notion of trust, that we 
already have established in law the fact that we have a 
fiduciary responsibility to the public.
    Mr. Maskell. And that is a fair statement. Absolutely we 
do, yes.
    Mr. Huizenga. The other quick thing I wanted to address, 
and Mr. Walker, you were starting to talk a little bit about 
this, is political intel and the political intelligence. In 
your experience here on the Hill, is this a problem? And is 
this a major problem or a small problem? Is it something that 
we need to tackle and address as well?
    Mr. Walker. It is interesting. The question is what is the 
problem? You mean a problem in political intelligence--
    Mr. Huizenga. Or maybe is there a problem, the fact that we 
have people--
    Mr. Walker. I am certainly not going to say that instances 
of abuse of the gleaning of information--I am not going to say 
that has never occurred. I would say, however, that to the 
extent that a Member or staffer was involved, and knowingly 
involved, and it was brought to the attention of the Ethics 
Committees appropriately, either through a complaint, or a 
letter, or a news article, it would have been addressed in that 
fashion. And without meaning to be unduly critical of any 
portion of the legislation, I do think that the last portion of 
the legislation relating to amending the Lobbying Disclosure 
Act, it in a way stands separate from the other provisions of 
the STOCK Act. And I do have the concerns I have raised as to 
the breadth of some of the terms and the potential First 
Amendment issues that would be raised.
    Mr. Huizenga. Earlier today, we heard the authors of the 
bill, at least one of them, argue vigorously for that 
provision, that this is a major problem on the Hill, and that 
amendment needs to happen. So in your opinion, it is not 
necessary, or do you think if it is a direction we need to go 
we need to be very cautious about how that would be dealt with?
    Mr. Walker. I don't want to offer a conclusion as to 
whether or not, again, it is necessary. To the extent that you 
are asking my opinion, it seems to me that it could be 
addressed separately. And again, without saying whether or not 
it merits being addressed, I think it does stand apart from the 
other provisions of the STOCK Act, and may be more prudent to 
address that in a kind of separate approach.
    Mr. Huizenga. I appreciate it. Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. This concludes the third panel. 
We appreciate your testimony, and we do ask that you work with 
us over the next few days as we approach a markup. And so, you 
are dismissed.
    The Chair notes that some Members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    This hearing is adjourned.
    [Whereupon, at 1:45 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            December 6, 2011


[GRAPHIC] [TIFF OMITTED] T2631.001

[GRAPHIC] [TIFF OMITTED] T2631.002

[GRAPHIC] [TIFF OMITTED] T2631.003

[GRAPHIC] [TIFF OMITTED] T2631.004

[GRAPHIC] [TIFF OMITTED] T2631.005

[GRAPHIC] [TIFF OMITTED] T2631.006

[GRAPHIC] [TIFF OMITTED] T2631.007

[GRAPHIC] [TIFF OMITTED] T2631.008

[GRAPHIC] [TIFF OMITTED] T2631.009

[GRAPHIC] [TIFF OMITTED] T2631.010

[GRAPHIC] [TIFF OMITTED] T2631.011

[GRAPHIC] [TIFF OMITTED] T2631.012

[GRAPHIC] [TIFF OMITTED] T2631.013

[GRAPHIC] [TIFF OMITTED] T2631.014

[GRAPHIC] [TIFF OMITTED] T2631.015

[GRAPHIC] [TIFF OMITTED] T2631.016

[GRAPHIC] [TIFF OMITTED] T2631.017

[GRAPHIC] [TIFF OMITTED] T2631.018

[GRAPHIC] [TIFF OMITTED] T2631.019

[GRAPHIC] [TIFF OMITTED] T2631.020

[GRAPHIC] [TIFF OMITTED] T2631.021

[GRAPHIC] [TIFF OMITTED] T2631.022

[GRAPHIC] [TIFF OMITTED] T2631.023

[GRAPHIC] [TIFF OMITTED] T2631.024

[GRAPHIC] [TIFF OMITTED] T2631.025

[GRAPHIC] [TIFF OMITTED] T2631.026

[GRAPHIC] [TIFF OMITTED] T2631.027

[GRAPHIC] [TIFF OMITTED] T2631.028

[GRAPHIC] [TIFF OMITTED] T2631.029

[GRAPHIC] [TIFF OMITTED] T2631.030

[GRAPHIC] [TIFF OMITTED] T2631.031

[GRAPHIC] [TIFF OMITTED] T2631.032

[GRAPHIC] [TIFF OMITTED] T2631.033

[GRAPHIC] [TIFF OMITTED] T2631.034

[GRAPHIC] [TIFF OMITTED] T2631.035

[GRAPHIC] [TIFF OMITTED] T2631.036

[GRAPHIC] [TIFF OMITTED] T2631.037

[GRAPHIC] [TIFF OMITTED] T2631.038

[GRAPHIC] [TIFF OMITTED] T2631.039

[GRAPHIC] [TIFF OMITTED] T2631.040

[GRAPHIC] [TIFF OMITTED] T2631.041

