[Congressional Record Volume 158, Number 14 (Monday, January 30, 2012)]
[Senate]
[Pages S142-S149]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
STOP TRADING ON CONGRESSIONAL KNOWLEDGE ACT--MOTION TO PROCEED
The ACTING PRESIDENT pro tempore. Under the previous order, the
Senate will resume consideration of the motion to proceed to S. 2038,
which the clerk will report.
The legislative clerk read as follows:
Motion to proceed to the consideration of S. 2038, a bill
to prohibit Members of Congress and employees of Congress
from using nonpublic information derived from their official
positions for personal benefit, and for other purposes.
The ACTING PRESIDENT pro tempore. Under the previous order, the time
until 5:30 p.m. will be equally divided and controlled between the two
leaders or their designees.
The Senator from Connecticut.
Mr. LIEBERMAN. I thank the Chair. Mr. President, I want to begin
debate, and I do so with gratitude that the distinguished ranking
member Senator Collins is here, as well as Senator Brown of
Massachusetts, whose original legislation, along with Senator
Gillibrand, forms the basis of this proposal that comes out of our
committee.
I want to go back to the beginning, to President Washington, whose
Farewell Address seems to take on more relevance as time goes by,
although it is obviously more than 200 years old now. Washington said
in his Farewell Address that ``virtue or morality is a necessary spring
of popular government'' and that we cannot ``look with indifference''
at anything that shakes that foundation or, continuing his metaphor,
dries the spring.
I think we have to say in the long proud course of American history
since then there have been very few times where the springs of trust in
popular government have been more dry than they are in our time.
I am grateful my colleague Senator McCain is not on the Senate floor
now because when we get to this subject, he usually says: When you look
at the public opinion polls on Congress, the numbers of people who have
a favorable impression of this body are so low we are down to close
relatives and paid staff. Usually, when I am with him, I add: I'm not
so sure about all the paid staff.
But, in any case, we have an opportunity with this piece of
legislation to take a small step forward toward rebuilding public trust
in Congress and to restoring those necessary springs of popular
government--the trust of the people in us. This goes back just to last
fall and early winter. A book appeared by an author named Peter
Schweizer who was then interviewed on ``60 Minutes.'' He made
allegations that some Members of Congress and their staffs have used
information gained on their jobs to enrich themselves with timely
investments, particularly in the stock market. Those allegations, as
Washington might have said, certainly dried the springs of trust that
we should have with the American people, even more than they already
are.
So today I am proud to rise to bring before the Senate the STOCK Act,
which stands for Stop Trading on Congressional Knowledge Act of 2012.
This piece of legislation puts into law language and reporting
requirements that will make it clear to the American people we
understand being a Member of Congress means we have a responsibility to
the public, a public trust, and any Member of Congress or staff member
here who violates that trust will be punished.
This bill was reported as an original bill out of the Committee on
Homeland Security and Governmental Affairs on December 14 with a
bipartisan vote of 7 to 2. In advancing this bill, as I have said,
Senator Collins and I worked closely with Senators Gillibrand and Brown
of Massachusetts, both of whom sponsored versions of the STOCK Act.
Senator Levin, who has just spoken, worked closely with us on the
substitute amendment that will be filed, and I thank them all for their
contributions on this piece of legislation. I also thank the Senate
majority leader, Senator Reid, for deciding this important piece of
legislation would be one of the first items we take up in Congress this
year.
The specific rules making insider trading illegal are found in a
large body of Securities and Exchange Commission regulatory activities
pursuant to section 10(b) of the Securities Exchange Act of 1934 and
court decisions interpreting those activities. Our Committee on
Homeland Security and Governmental Affairs held a hearing on this topic
in December, and the Securities and Exchange Commission actually filed
a statement with us for the record declaring its belief that currently
there is authority in the law to investigate and prosecute
congressional insider trading cases. The chief enforcement officer of
the SEC said:
Trading by congressional members or their staffs is not
exempt from the Federal securities laws, including the
insider trading prohibitions.
But other witnesses at that hearing, including Georgetown University
Law Professor Donald Langevoort and Columbia Law School Professor John
Coffee told us that while the SEC might be technically right, in their
opinion there was ambiguity in the law and they couldn't be sure how a
court would rule if there was a challenge to the SEC's authority to
bring an insider trading case against a Member of Congress or a staff
member.
That is because, as the professors explained, a person may be found
to have violated insider trading laws only if he or she breaks a
fiduciary duty, a duty of trust and confidence owed to somebody--
typically to the shareholders of a company or to the source of the
nonpublic information. They argued it is possible a judge might decide
that Members of Congress do not have a fiduciary duty--in the way in
which it has normally been interpreted--to anyone with respect to the
nonpublic information that we receive while carrying out our duties.
Now, I must say that I find it hard to see it that way. It seems to
me self-evident that a public office is a public trust and that Members
of Congress have a duty to the institution of Congress, of course to
the government as a whole, and ultimately, most importantly, to the
American people not to use information gained during their time in
Congress--and unavailable to the public--to make investments for
personal benefit. But the fact is there
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are some very experienced and intelligent legal experts who told our
committee they couldn't certify a judge would see it exactly that way.
That is the first purpose of this act, the STOCK Act: to clarify the
ambiguity of securities law by explicitly stating that Members of
Congress and our staffs have a duty of trust to the institution of
Congress, to the United States Government, and to the American people--
a duty that Members of Congress violate if we trade on nonpublic
information we gain by virtue of our public position.
The bill also requires the ethics committees of both Houses of
Congress to issue guidance to clarify that Members and staff may not
use nonpublic information derived from their positions in Congress to
make a private profit.
Besides these changes--and this is different and important--our
committee decided the STOCK Act should require Members of Congress and
their staffs to file public reports on our purchases or sale of stocks,
bonds, commodities, futures, or other financial transactions exceeding
$1,000 in value within 30 days of the transaction. Right now, as the
Acting President of the Senate knows, these trades are reported once a
year in our annual disclosure statements. This proposal would change
that to within 30 days of the trade.
More timely reporting of this kind will allow not just the SEC but
the public to assess whether there is anything suspicious or wrong
about the timing of the trade and conduct in the Senate. That kind of
real transparency will be an additional deterrent to unethical or
illegal behavior.
The bill also contains another important provision offered in
committee by Senators Jon Tester and Mark Begich that will require the
financial disclosure forms filed by Members and staff to be filed
electronically and perhaps even more significantly, therefore, be
available online for public review. The fact is, our reports are now
available for public review. But people have to go to the Office of the
Secretary of the Senate and ask for copies of them. There is no
sensible reason to make someone physically come to the House or Senate
to see a copy of one of our financial disclosure forms. They are public
records and they ought to be easily available to the public online, and
this proposal will make sure that happens.
Those are the three major provisions of the proposal, as I see it: to
affirm a clear fiduciary duty under the insider trading law so it is
clear Members of Congress and our staffs are covered by them; secondly,
to require disclosure of trades in excess of $1,000 within 30 days;
and, third, that those trades and our annual financial report will be
electronically filed and, therefore, be available online.
May I say, as we begin the second session of the 112th session of
Congress, we begin with so much distrust of our Federal Government that
I think passing the STOCK Act could have a positive effect on how we
are being perceived, and particularly if, as I hope, we pass it on a
bipartisan basis. The STOCK Act was passed out of our committee in
exactly that way. I believe it has the support of Members and leaders
of both parties in the House and Senate, and President Obama has
promised to sign it as soon as it comes to his desk.
So let me end by quoting again from our first President, this time
from his Inaugural Address, where he set the ideals for the new
government that our country would have. He said:
The foundations of our national policy will be laid in the
pure and immutable principles of private morality . . . and
the preeminence of free government [will] be exemplified by
all the attributes which can win the affections of its
citizens and command the respect of the world.
Enacting this proposal into law will say to our disappointed, our
skeptical, our troubled constituents that we understand and accept
Washington's wisdom.
I thank the Chair, and at this time I yield to my dear friend, the
distinguished ranking member of our committee, Senator Collins.
The ACTING PRESIDENT pro tempore. The Senator from Maine.
Ms. COLLINS. Mr. President, I am pleased to join today the chairman
of our committee, Senator Lieberman, and the sponsor of this bill,
Senator Scott Brown, in urging our colleagues to begin consideration of
what is known as the STOCK Act.
This legislation is based on a bill that was first introduced in the
Senate by Senator Scott Brown and a similar one introduced by Senator
Gillibrand. Put simply, the STOCK Act is intended to ensure that
Members of Congress do not profit from trading on insider information.
As a cosponsor of Senator Brown's bill, I wish to commend him for his
leadership in this area. I also wish to recognize Chairman Lieberman
for moving this important bill forward in such an expeditious manner.
Press reports on ``60 Minutes'' and elsewhere have raised questions
about whether lawmakers have been exempt, either legally or
practically, from the reach of our laws prohibiting insider trading. At
a time when polls show record low public confidence in Congress, there
is a strong desire on our part to address the concerns that underpin
the public's skepticism and assure the American people that we are
putting their interests ahead of our own.
The STOCK Act is intended to affirm that Members of Congress are not
exempt from our laws prohibiting insider trading. While several of the
witnesses who appeared before our committee's hearing on this bill
testified that there is no legal exemption for Members of Congress,
confusion and uncertainty nevertheless persists. For example, on the
eve of our markup, the Wall Street Journal published an op-ed by a Yale
law professor who wrote that ``the Securities and Exchange Commission
has determined that insider trading laws do not apply to Members of
Congress or their staff.''
This, however, is directly contradicted by the statement for the
record submitted to the committee by the SEC's Enforcement Director who
said: ``There is no reason why trading by Members of Congress or their
staff members should be considered exempt from the Federal securities
laws, including trading prohibitions.''
I ask unanimous consent to have printed in the Record the SEC
statement at the conclusion of my comments.
The ACTING PRESIDENT pro tempore. Without objection, it is so
ordered.
(See exhibit 1.)
Ms. COLLINS. Mr. President, to me, this illustrates the confusion
over this issue. So I am pleased the committee not only reported
Senator Brown's bill but unanimously adopted an amendment I offered
with Chairman Lieberman that states clearly that Members and their
staff are not exempt from insider trading laws.
The need for this unambiguous statement can likely be traced back to
the nature of the insider trading laws. As our committee has learned,
our Nation's insider trading laws are not, generally speaking, based on
statutes passed by Congress but rather on court precedents. As one of
our witnesses, law professor Donna Nagy from Indiana University,
pointed out during our hearing:
Congress has never enacted a Federal securities statute
that explicitly prohibits anyone from insider trading. . . .
The explicit statutory ban on insider trading . . . is
entirely absent in U.S. securities law.
Rather, the SEC pursues insider trading cases under the general
antifraud provisions of the Federal securities laws, most commonly
section 10B of the Securities Exchange Act of 1934 and rule 10b5, a
broad antifraud rule promulgated by the Commission. Therefore, what
constitutes insider trading has largely been determined by the courts,
including the Supreme Court, on a case-by-case basis.
Under the case law, two different types or theories of insider
trading violations have developed; one where the defendant is a classic
corporate insider using nonpublic information to trade on the company's
stock and a second where the defendant has misappropriated inside
information in violation of a duty owed to the source of the
information, such as a lawyer who trades on advanced notice of a
business transaction. Both types of cases, however, share common
elements:
There must be a breach of a duty, such as a traditional fiduciary
duty or a duty of trust and confidence; the breach must involve
material information, which is the type of information a reasonable
investor would consider important in making a decision to buy or
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sell stock; the information must be nonpublic; and the defendant must
receive a personal benefit, which the Supreme Court has said may
include not only financial gain but also reputational benefits.
As the Supreme Court has held, under section 10B, the chargeable
conduct must involve a deceptive device or contrivance used in
connection with the purchase or sale of securities. In criminal
prosecutions for insider trading, under rule 10b5, the government must
prove that a person willfully violated the provision with culpable
intent.
Although the witnesses who came before the committee generally agreed
that Congress enjoys no exemption from insider trading laws, they also
stressed the need to clarify the relevant duty that applies to Members.
The bill reported by the committee, in language refined by Senator
Levin, addressed this issue by affirming a duty arising from the
relationship of trust and confidence already owed by Members and their
staff to the Congress, the U.S. Government, and the citizens we serve.
At our markup, we clarified that this does not create a new fiduciary
duty, in the traditional sense, but rather recognizes or affirms our
existing duty.
As reported, the bill would also have amended the Congressional
Accountability Act to prohibit Members and staff from using nonpublic
information gained through the performance of their official duties for
personal benefit. This proposed prohibition, however, was not limited
to the trading context or otherwise tethered to financial transactions.
Because it was not anchored in financial transactions, I expressed some
concerns about the potential breadth of this term and the potential for
unintended consequences.
These concerns were echoed by several members of the committee during
our consideration of the bill. Therefore, following the markup, we
continued to refine the bill while adhering to the fundamental
principle that Members of Congress should be subject to the same
insider trading laws as other Americans. I believe we have come up with
a solution that addresses the potential problem that troubles all of
us; that is, public officials using public office for private gain. We
need, however, to make sure that in doing so, we do not inhibit our
ability to gather information so we can serve our constituents to the
best of our ability.
The proposed substitute offered by Senator Reid, Senator Brown, and
Senator Lieberman reflects the work of our committee members as well as
other bill sponsors. It would require the Senate Ethics Committee and
the House Committee on Standards of Official Conduct to issue guidance
on the relevant rules of each Chamber, clarifying that Members and
staff may not use nonpublic information derived from their positions in
Congress to make a personal profit. This would cover insider trading
matters, as well as land deals and other financial transactions where
nonpublic information could be wrongly converted into a private gain.
Similar to the reported bill, the substitute includes a
straightforward statement making clear that Members and their staff are
not exempt from insider trading prohibitions arising from the
securities laws.
In keeping with an amendment that Senator Paul successfully offered
at our markup, the substitute applies the same framework--clarification
of the prohibition against using nonpublic information for private
profit and the affirmation of existing duty that we have--to the
employees of the executive and judicial branches, as well as the
legislative branch. Similar to the reported bill, the substitute
includes earlier deadlines for financial reporting requirements and
greater transparency for financial disclosure statements, as the
chairman mentioned, by requiring that they be available online and in a
searchable format.
I believe we need to reassure a skeptical public that we understand
that elective office is a place for public service, not private gain;
that it is an honor and a trust we have been given by the people we
represent. Underscoring that important message is clearly the intent of
this bill, and that is why I support it.
I urge my colleagues to vote yes to vote to invoke cloture on the
motion to proceed.
Exhibit 1
[From U.S. Securities and Exchange Commission, Dec. 1, 2011]
Statement on the Application of Insider Trading Law to Trading by
Members of Congress and Their Staffs, Before the United States Senate
Committee on Homeland Security and Governmental Affairs
(By Robert Khuzami)
Chairman Lieberman, Ranking Member Collins, and Members of
the Committee:
Thank you for the opportunity to provide a statement for
the record on behalf of the U.S. Securities and Exchange
Commission on the subject of insider trading.
Insider trading threatens the integrity of our markets,
depriving investors of the fundamental fairness of a level
playing field. To deter this conduct and to hold accountable
those who fail to play by the rules, the detection and
prosecution of those who engage in insider trading remains
one of the Division of Enforcement's highest priorities.
My statement provides a summary of the Division of
Enforcement's recent work in the area of insider trading, an
overview of the law of insider trading as developed through
our enforcement program and judicial precedent, and a
description of how the current law of insider trading applies
to securities trading by Members of Congress and their
staffs.
Enforcement's Insider Trading Program
Insider trading has long been a high priority for the
Commission. Approximately eight percent of the 650 average
annual number of enforcement cases filed by the Commission in
the past decade have been for insider trading violations. In
the past two years, the Commission has been particularly
active in this area. 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
prior fiscal year. This past fiscal year, the Commission
filed 57 actions against 124 individuals and entities, a
nearly 8 percent increase over the number of filed cases in
fiscal year 2010.
The increased number of insider trading cases has been
matched by an increase in the quality and significance of our
recent cases. In fiscal year 2011 and the early part of
fiscal year 2012, the SEC obtained judgments in 18 actions
arising out of its investigation of Galleon hedge fund
founder Raj Rajaratnam, including a record $92.8 million
civil penalty against Rajaratnam personally. The SEC also
discovered and developed information that ultimately led to
criminal convictions of Rajaratnam and others, including
corporate executives and hedge fund managers, for rampant
insider trading. In addition, we recently filed an insider
trading action against Rajat Gupta, a former director of both
Goldman Sachs and Procter & Gamble, whom we allege provided
confidential Board information about both companies'
quarterly earnings and about an impending $5 billion
Berkshire Hathaway investment in Goldman Sachs to Rajaratnam,
who traded on that information.
Among others charged in SEC insider trading cases in the
past fiscal year were various hedge fund managers and traders
involved in a $30 million expert networking trading scheme, a
former Nasdaq Managing Director, a former Major League
Baseball player, a Food and Drug Administration chemist, and
a former corporate attorney and a Wall Street trader who
traded in advance of mergers involving clients of the
attorney's law firm. The SEC also brought insider trading
cases charging a Goldman Sachs employee and his father with
trading on confidential information learned by the employee
on the firm's ETF desk, and charging a corporate board member
of a major energy company and his son for trading on
confidential information about the impending takeover of the
company.
The Division also has targeted non-traditional cases
involving the misuse or mishandling of material, non-public
information. This past fiscal year, the Commission charged
Merrill Lynch, Pierce, Fenner & Smith with fraud for
improperly accessing and misusing customer order information
for the firm's own benefit. The Commission also censured
broker-dealer Janney Montgomery Scott LLC for failing to
enforce its own policies and procedures designed to prevent
the misuse of material, nonpublic information. Charles Schwab
Investment Management was charged for failing to have
appropriate information barriers for nonpublic and
potentially material information concerning an ultra-short
bond fund that suffered significant declines during the
financial crises. This deficiency gave other Schwab-related
funds an unfair advantage over other investors by allowing
the funds to redeem their own investments in the ultra short-
bond fund during its decline. The Commission also charged
Office Depot, Inc. and two of its executives for violating
Regulation FD by selectively disclosing to certain analysts
and institutional investors that the company would not meet
its earnings.
To respond to emerging risks, the Enforcement Division has
developed several new initiatives targeted at ferreting out
insider trading, which have enhanced our effectiveness in
this area. During our recent reorganization, the Division
established a Market Abuse Unit, with an emphasis on various
abusive market strategies and practices, including complex
insider trading schemes.
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The Market Abuse Unit has spearheaded the Division's
Automated Bluesheet Analysis Project, an innovative
investigative tool that utilizes the ``bluesheet'' database
of more than one billion electronic equities and options
trading records obtained by the Commission in the course of
insider trading investigations over the past 20 years. Using
newly developed templates, Enforcement staff are able to
search across this database to recognize suspicious trading
patterns and identify relationships and connections among
multiple traders and across multiple securities, generating
significant enforcement leads and investigative entry points.
While still in its early stages of development, this new data
analytic approach already has led to significant insider
trading enforcement actions that were not the subject of an
SRO referral, informant tip, investor complaint, media
report, or other external source.
As part of the reorganization, the Division also
established a cooperation program to encourage key fact
witnesses to provide valuable information. Insider trading
investigations are extremely fact-intensive. Enforcement
staff undertake the often painstaking work of collecting and
analyzing trading data across equity and options markets,
analyzing communications (email, telephone calls and instant
messages, among others) and analyzing market-moving events
(e.g., announcements of corporate earnings, product
development, and acquisitions and mergers) to identify
persons who may have engaged in insider trading or who may
have information about such activity. Our new cooperation
program is a valuable tool that can help us break open an
insider trading investigation earlier in the process, thereby
preserving resources. We are already seeing the effectiveness
of the cooperation program in our insider trading cases and
expect this trend to continue as more cooperators come
forward in our investigations.
With an aggressive investigative approach that includes
early coordination with the FBI, Department of Justice, and
other law enforcement agencies, we have been able to identify
potential cooperators who may assist criminal authorities
with their covert investigative techniques, helping amass
critical evidence in numerous insider trading investigations.
Our work with certain SROs has provided valuable early tips,
helping us mitigate the harm from insider trading schemes by
freezing the illicit proceeds before funds are moved to
offshore jurisdictions.
Law of Insider Trading
There is no express statutory definition of the offense of
insider trading in securities. The SEC prosecutes insider
trading under the general antifraud provisions of the Federal
securities laws, most commonly Section 10(b) of the
Securities Exchange Act of 1934 (``Exchange Act'') and Rule
10b-5, a broad anti-fraud rule promulgated by the SEC under
Section 10(b). Section 10(b) declares it unlawful ``[t]o use
or employ, in connection with the purchase or sale of any
security . . . any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as
the Commission may prescribe as necessary or appropriate in
the public interest or for the protection of investors.''
Rule 10b-5 broadly prohibits fraud and deception in
connection with the purchase and sale of securities. As the
Supreme Court has stated, ``Section 10(b) and Rule 10b-5
prohibit all fraudulent schemes in connection with the
purchase or sale of securities, whether the artifices
employed involve a garden type variety of fraud, or present a
unique form of deception,'' because ``[n]ovel or atypical
methods should not provide immunity from the securities
laws.''
There are two principal theories under which the SEC
prosecutes insider trading cases under Section 10(b) and Rule
10b-5. The ``classical theory'' applies to corporate
insiders--officers, directors, and employees of a
corporation, as well as ``temporary'' insiders, such as
attorneys, accountants, and consultants to the corporation.
Under the ``classical theory'' of insider trading liability,
a corporate insider violates Section 10(b) and Rule 10b-5
when he or she trades in the securities of the corporation on
the basis of material, nonpublic information. Trading on such
information qualifies as a ``deceptive device'' under Section
10(b), because ``a relationship of trust and confidence
[exists] between the shareholders of a corporation and those
insiders who have obtained confidential information by reason
of their position with that corporation.'' That relationship
``gives rise to a duty to disclose [or to abstain from
trading] because of the `necessity of preventing a corporate
insider from . . . tak[ing] unfair advantage of . . .
uninformed . . . stockholders.' ''
The Supreme Court has recognized that corporate
``outsiders'' can also be liable for insider trading under
the ``misappropriation theory.'' Under this theory, a person
commits fraud ``in connection with'' a securities
transaction, and thereby violates Section 10(b) and Rule 10b-
5, when he or she misappropriates confidential and material
information for securities trading purposes, in breach of a
duty owed to the source of the information. This is because
``a fiduciary's undisclosed, self-serving use of a
principal's information to purchase or sell securities, in
breach of a duty of loyalty and confidentiality, defrauds the
principal of the exclusive use of that information.'' The
misappropriation theory thus ``premises liability on a
fiduciary-turned-trader's deception of those who entrusted
him with access to confidential information.'' Under either
the classical or misappropriation theory, a person can also
be held liable for ``tipping'' material, nonpublic
information to others who trade, and a ``tippee'' can be held
liable for trading on such information.
A common law principle is that employees owe a fiduciary
duty of loyalty and confidence to their employers. In
addition, employees often take on contractual duties of trust
or confidence as a condition of their employment or by
agreeing to comply with a corporate policy. Accordingly,
employees have frequently been held liable under the
misappropriation theory for trading or tipping on the basis
of material non-public information obtained during the course
of their employment. This includes prosecution of federal
employees who, in breach of a duty to their employer, the
federal government, trade or tip on the basis of information
they obtained in the course of their employment. For example,
the SEC recently brought insider trading charges against a
Food and Drug Administration employee alleging that he
violated a duty of trust and confidence owed to the federal
government under certain governmental rules of conduct when
he traded in advance of confidential FDA drug approval
announcements.
In light of existing precedent regarding the liability of
employees--including federal employees--for insider trading,
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 any such persons.
Application of Insider Trading Law to Trading by Members of Congress
and Their Staff
The general legal principles described above apply to all
trading within the scope of Section 10(b) and Rule 10b-5.
There is no reason why trading by Members of Congress or
their staff members would be considered ``exempt'' from the
federal securities laws, including the insider trading
prohibitions, though the application of these principles to
such trading, particularly in the case of 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--including the existence and
nature of the duty being breached and both the materiality
and nonpublic nature of the information--that would drive the
analysis of whether securities trading (or tipping) by a
Member of Congress or staff member based on information
learned in an official capacity violates Section 10(b) and
Rule 10b-5.
The first question is whether the trading, or communicating
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 employment
contexts regarding misappropriation of information gained
through an employment relationship. This precedent is
consistent with a claim that Congressional staff, as
employees, owe a duty of trust and confidence to their
employer and that a Congressional staff member who trades on
the basis of material non-public information obtained through
his or her employment is potentially liable for insider
trading under the misappropriation theory, like any other
non-governmental employee.
The question of duty is more novel for Members of Congress.
There does not appear to be any case law that addresses the
duty of a Member with respect to trading on the basis of
information the Member learns in an official capacity.
However, in a variety of other contexts, courts have held
that ``[a] public official stands in a fiduciary relationship
with the United States, through those by whom he is appointed
or elected.'' Commenters have differed on whether securities
trading by a Member based on information learned in his or
her capacity as a Member of Congress violates the fiduciary
duty he or she owes to the United States and its citizens, or
to the Federal Government as his or her employer.
Existing Congressional ethics rules also may be relevant to
the analysis of duty for both Members and their staff. For
example, Paragraph 8 of the Code of Ethics for Government
Service provides that ``Any person in Government service
should . . . [n]ever use any information coming to him
confidentially in the performance of governmental duties as a
means for making private profit.''
The second question is whether the information on which the
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 fact and law
that depends on all the relevant circumstances. In some
scenarios, it may be relatively clear that an upcoming
Congressional action would be material to a particular issuer
or group of issuers, while in others it may be more
challenging to establish that.
The third critical question is whether the information on
which the Member or staff traded (or tipped) is
``nonpublic.'' The Commission has stated that ``[i]nformation
is nonpublic when it has not been disseminated in a manner
making it available to investors generally.'' 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 had been
disseminated to the public.
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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. Since all of these
issues are inherently fact-specific, it is difficult to
generalize about the likely outcome of any particular
scenario. However, trading by Congressional Members or their
staffs is not exempt from the federal securities laws,
including the insider trading prohibitions.
Application of Tipper and Tippee Liability Theories to Members of
Congress and Their Staff
Communication of nonpublic information to others who either
trade on the information themselves or share it with others
for securities trading purposes, could be analyzed under the
case law relating to tipper and tippee liability and also
would turn on the specific facts of the case.
A person can be liable as a tipper where he or she
discloses information in breach of a fiduciary duty or other
similar duty of trust or confidence and the tippee trades on
the basis of that information. The same duty requirement
described above is applicable in the tipper context, as are
the requirements that the tipped information be nonpublic and
material. In addition, a court may require a showing that the
Member of Congress or staff member personally benefited from
providing the tip.
A person who trades on the basis of material, nonpublic
information conveyed by a Member or staff member in breach of
a duty also could be liable for illegal insider trading as a
tippee. An additional element of liability is that the tippee
knew or should have known of the tipper's breach of duty in
disclosing the information.
Investigations into potential trading or tipping by Members
of Congress or their staff could pose some unique issues,
including those that may arise from the Constitutional
privilege provided to Congress under the Speech or Debate
Clause, U.S. Const. art. I, Sec. 6, cl.1. The Supreme Court
has stated that ``[t]he Speech or Debate Clause was designed
to assure a co-equal branch of the government wide freedom of
speech, debate, and deliberation without intimidation or
threats from the Executive Branch.'' The Clause ``protects
Members against prosecutions that directly impinge or
threaten the legislative process.'' While the ``heart'' of
the privilege is speech or debate in Congress, courts have
extended the privilege to matters beyond pure speech and
debate in certain circumstances. There may be circumstances
in which communication of nonpublic information regarding
legislative activity to a third party falls ``within the
`sphere of legitimate legislative activity,' '' and thus may
be protected by the privilege.
Conclusion
The SEC's continued focus on insider trading and innovative
investigative techniques demonstrates our commitment to
pursuing potentially suspicious trading in a variety of
contexts. While recent innovations in the Division of
Enforcement are enhancing our ability to obtain that
evidence, to establish liability we must satisfy each of the
elements of an insider trading violation, including the
materiality of the information, the nonpublic nature of the
information, the presence of scienter, and a fiduciary or
other duty of trust and confidence that was violated by the
trading or tipping. While trading by Members of Congress or
their staff is not exempt from the federal securities laws,
including the insider trading prohibitions, there are
distinct legal and factual issues that may arise in any
investigations or prosecutions of such cases. 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.
Ms. COLLINS. I now yield the floor to the sponsor of the bill,
Senator Brown.
The ACTING PRESIDENT pro tempore. The Senator from Massachusetts.
Mr. BROWN of Massachusetts. Mr. President, I wish to thank Ranking
Member Collins and Chairman Lieberman for doing something very unusual
around here, which is to get something out in a very short period of
time, having it not only come up and being filed by Senator
Gillibrand--her bill and even my bill--and then you both working
together to move it forward for a hearing. That hearing going very well
and coming out so quickly is unheard of, and I wish to thank you for
that.
I also wish to thank Leader Reid for bringing this bill to the floor
today as well as, as I said, Chairman Lieberman, Ranking Member
Collins, and Senator Gillibrand. We have worked together to draft a
bipartisan version of the STOCK Act, an act that passed out of
committee by an overwhelming margin. That is appropriate because this
isn't a partisan or ideological issue. It is about cleaning up
Washington.
Abraham Lincoln spoke at Gettysburg of fighting to preserve
``government of the people, by the people, and for the people.'' I
think that if the approval ratings are any indication, the American
people have lost faith that we are living up to Lincoln's ideal, and we
need to do it better. They have lost faith that Congress works for
them. They believe too many Members of Congress have come to Washington
to make themselves rich or to do other things instead of taking care of
the people's business and that Congress only steps in to bail out the
people with the most money or the most lobbying power, and that is not
right.
With the bill before us today, we can take a small step to
reestablishing the trust between the American people and Congress. If
we can pass the STOCK Act this week, it will send a very strong and
unified message to the American people that Congress does not consider
itself to be above the law. We can start to finally address that
deficit of trust that the President referenced in his State of the
Union Address. Members of Congress must live by the same rules that
govern every other American citizen.
As you may recall from a ``60 Minutes'' investigation only 2 months
ago, we learned that Members of Congress, their staff, as well as other
Federal employees, may be using material nonpublic information for
their personal gain, either through stock trades, real estate deals or
other financial activity. Everyone agrees this should be illegal or it
already is, as referenced by the ranking member and her very thorough
explanation of the law and the problems with it. But somehow, despite
all the evidence, there has never been a single Member of Congress or
congressional staffer charged with insider trading.
I have to admit, similar to you and many others, I was shocked by
this report. I think we all were. As a result, I filed my version of
the STOCK Act, which would prohibit Members and employees of Congress
from using material nonpublic information for their personal benefit.
When Homeland Security and Governmental Affairs Committee held a
hearing on the state of insider trading law as it applies to Congress,
one thing was very clear. Although, as Ranking Member Collins said, the
SEC theoretically has the ability to prosecute Members, there has been
no precedent for it, and the state of law at this point is very
unsettled. To remove any and all doubt, we need to act, and we need to
act now. In addition to clarifying that insider trading is indeed a
criminal offense, we are increasing the transparency of Members'
trading activity to make sure our investment decisions are out there
for everyone to see as plain as day. As President Ronald Reagan liked
to say: Trust but verify.
In conclusion, I wish to say that Senator Coburn has a phrase that I
think is very accurate in this context. He talks about all the earmarks
and contracts and Washington spending that end up in the hands of those
people he calls well-heeled and well-connected. In my opinion, no one
is more well-connected, with more access to a wide range of privileged,
nonpublic information, than Members of Congress, their friends,
employees or family members.
At a time when our economy is struggling and the average American
family has to make hard economic choices, congressional Members and
staff should not be lining their pockets on insider information.
Serving our country is a privilege, one I cherish very much. I believe
we must level the playing field and show the American people that the
people in Congress do not consider themselves to be above the laws we
expect everyone else across the country to obey.
I believe it is time to listen to our constituents and remember that
every seat in this room is the people's seat.
I yield the floor.
The PRESIDING OFFICER (Mr. Blumenthal). The Senator from New York.
Mrs. GILLIBRAND. I thank my colleague from Massachusetts for his
strong advocacy on such an important issue. I would like to recognize
Chairman Lieberman and Ranking Member Collins for their leadership and
advocacy and their work on getting this out of the committee so
quickly.
I urge my colleagues to vote yes on cloture tonight on this
bipartisan bill to ensure clearly and unambiguously that all Members of
Congress, their staffs, and Federal employees play by the exact same
rules as all the American people. The American people deserve the right
to know their lawmaker's only interest is what is best
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for the country, not their own financial interests. Members of Congress
and their families and staff should not be able to gain personal profit
from information to which they have access that everyday middle-class
Americans do not. It is simply not right. Nobody should be above the
rules. I introduced a bipartisan bill in the Senate with 28 of our
colleagues from both sides of the aisle to close this loophole.
The STOCK Act legislation is very similar to the legislation
introduced by my friends in the House of Representatives, Congresswoman
Louise Slaughter and Congressman Tim Walz. I thank them for their
longstanding advocacy and dedication to this important cause. I again
thank Chairman Lieberman, Ranking Member Collins, and all the committee
members for their work in acting swiftly to move this bipartisan,
commonsense bill to the floor for a vote. I also thank Leader Reid for
his leadership in moving this body forward to this important debate and
an up-or-down vote that the American people deserve.
Our bill, which has received the support of at least seven good-
government groups, covers two important principles:
First, Members of Congress, their families, and their staff should be
barred from buying or selling securities on the basis of knowledge
gained through their congressional service or from using the knowledge
to tip off anyone else. The SEC and the CFTC must be empowered to
investigate these cases. To provide additional teeth, such acts should
also be in violation of Congress's own rules, to make it clear that the
activity is inappropriate.
Second, Members should be required to disclose transactions within 30
days, to make this information available online for their constituents
to see, providing dramatically improved oversight and accountability
from the current annual hard copy reporting.
I am pleased that the final product that passed with bipartisan
support out of the committee is a strong bill with teeth and includes
measures such as ensuring that Members of Congress cannot tip off
others with nonpublic information gained through their duties and
ensuring that trading with this information would be a violation of
Congress's own ethics rules.
Some critics have said this bill is unnecessary and is already
covered under current statutes. I have spoken with experts tasked in
the past with investigations of this nature, and they strongly
disagree. We must make it unambiguous that this kind of behavior is
illegal.
My home State newspaper, the Buffalo News, noted:
. . . the STOCK Act would ensure that it is the people's
business being attended to.
President Obama said in his State of the Union--send him the bill and
he will sign it right away.
We should not delay. It is time to act. I urge my colleagues to vote
yes tonight for cloture so we can pass this bill without delay. Let's
take this step to begin rebuilding the trust necessary in Congress.
The PRESIDING OFFICER. The Senator from Montana.
Mr. TESTER. Mr. President, today the Senate will be given the
opportunity to ban insider trading by Members of Congress and their
staff. Insider trading is illegal for everyone in America, and there is
no doubt about that. But when it comes to the information that folks in
Congress learn before the general public learns it, there are no clear-
cut rules, and that is unacceptable. Folks in Congress clearly have
advanced knowledge of which bills and issues Congress will consider.
They know how those bills will affect basic goods and services, and
often the legislation we pass impacts how well a company does on the
stock market.
Good men and women work for Congress, and I have the deepest respect
for my colleagues. I would say all come to the Senate with good
intentions and carry out their daily responsibilities without thinking
about using information they learn for personal financial gain. That is
why banning insider trading should be an easy lift. The fact that
Members of Congress and their staffs are allowed to buy and sell stocks
based on privileged information is incredible to me.
Congress has historically low approval ratings from the American
people. They believe many in Congress do not represent them and have
forgotten what it means to be a normal American. Most folks would
assume Congressmen and Senators already cannot trade stocks based on
information they get in their jobs, but it turns out this may not be
true. That is just one more example of why the American people have
lost faith in this institution.
As elected officials, it is our duty to regain the trust of the
American people. We have an obligation to be as transparent and as
accountable as possible. That is why I was the first Member of Congress
to post my public schedule online for everybody to see. My constituents
can look at my schedule every day to see with whom I meet and which
hearings I attend.
Now we have the opportunity to help regain trust in this body by
bringing our own rules in line with the rest of America. By adding
transparency and accountability, the American people will know we are
working on their behalf without considering personal financial gains.
This bill contains a provision Senator Begich and I sponsored to
ensure that the annual financial disclosure forms filed by Members of
Congress are available electronically. As with most transparency, full
transparency means the public has the right and the ability to see our
records. In the 21st century, there is no reason we can't do it right
away. Letting those disclosures sit in a filing cabinet somewhere in
the Capitol Complex is not transparency; putting the files online in a
searchable format is.
At a time of hyperpartisanship, this is an opportunity for both sides
to work together on a bill we sorely need. There is not a Democratic or
Republican angle to this. Every elected official should want to make
sure the rules we are held to are consistent and transparent and in
line with the rest of the Nation. In fact, this is as nonpartisan a
bill as can be, with ideas from Senator Gillibrand and Senator Scott
Brown but carried by Senator Lieberman. This bill covers each section
of the political spectrum. It is a straightforward bill that is long
overdue. The STOCK Act will be a step toward ensuring that when people
run for Congress or come to work for Congress, they are doing so
because they want to work on behalf of the American people and not for
their own personal benefit.
I call on my colleagues on both sides of the aisle to vote yes on
this act so we can restore faith in Congress.
I yield the floor.
The PRESIDING OFFICER. The Senator from Massachusetts.
Mr. BROWN of Massachusetts. Mr. President, I failed to reference--I
was hopeful I could have Nathaniel Hoopes participate in the
legislative process and participate on the floor in this debate.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. LIEBERMAN. I was going to reserve the right to object to Mr.
Brown's motion on behalf of Mr. Hoopes because I was about to that say
the above-mentioned Mr. Hoopes got his start in my office and I was
looking for an opportunity to say that.
We have about 20 minutes until the vote on the motion occurs.
Obviously, we are all here together--Senator Collins, Senator Brown,
Senator Gillibrand, Senator Tester, and I--to urge Members to vote for
cloture, to take up this measure. It would be a ray of light--warm
light--if we pass this measure, this cloture vote, overwhelmingly. Then
we could go on to debate it.
Some people may have amendments--obviously, I presume they will--they
want to offer. I hope that in considering amendments, our colleagues
will focus on the problem that stimulated this legislation, that led
Senator Brown and Senator Gillibrand to introduce it and led our
committee to pass it out on a bipartisan vote, which was the concern
that Members of the Congress and our staffs are not covered by insider
trading laws. This legislation makes clear that we are covered by
insider trading laws and therefore can be investigated and prosecuted
for violation of those laws, both by the SEC and the Justice
Department, but we have also asked the ethics committees of both Houses
of Congress to issue interpretive guidance, making clear that insider
trading is also a violation of the ethics rules of both Chambers.
[[Page S148]]
I am sure there are a lot of different aspects that Members of
Congress, including ourselves on our committee who worked on this bill,
might have in mind to also correct problems that exist, perhaps to also
try to help rebuild public confidence in the institution of Congress,
but I really appeal to our colleagues not to do so in a way that will
make it more difficult or at worst impossible to fix the wrong, the
problem that motivated this legislation, which is fear that Members of
Congress and our staffs are not covered by insider trading laws.
I have talked to Senator Collins about this. Members have other
ideas. Please introduce them as legislation. To the extent they are
forwarded to our committee, we will give them hearings and due
consideration and try to approach them thoughtfully and then follow the
will of the majority of members of our committee. In other words, let's
try to not make this measure so sweet or so good that it cannot pass.
I say to my colleagues, I just had a very unusual metaphor come to
mind. I go to Dr. Seuss, one my favorite Dr. Seuss books I have not
read in a while, ``Thidwick the Big-Hearted Moose.'' I don't know if
you remember Thidwick, but he was a very good-natured moose. One by one
through the pages of the book as Dr. Seuss records it, other animals in
the forest want to lodge in his enormous antlers. He welcomes them
until finally there is too much there and his antlers fall off and they
all fall to the ground. We don't want this wonderful bill, which really
does accomplish some very important things, to be so loaded that it
falls to the wayside like Thidwick's antlers and does not pass.
I urge my colleagues to join us in a spirited debate, but let's
exercise the kind of restraint, on a bipartisan basis, that will allow
us to have a significant, bipartisan, good-government accomplishment
here at the beginning of this session of Congress.
I listened to a conversation a while ago where somebody was asked,
why is the public opinion of Congress so bad? And the answer was that
it is because Congress has been so bad. This has not been a time in the
history of this great institution that I think any of us feel good
about. This is an opportunity to do something real that we can not only
feel good about but, more important, that our constituents can feel
good about.
I hope we will have a resounding vote at 5:30.
I yield to the Senator from Massachusetts.
The PRESIDING OFFICER. The Senator from Massachusetts.
Mr. BROWN of Massachusetts. Mr. President, I concur, and I have
always felt one good deed begets another good deed, and so on and so
forth. This is a measure the American people are clamoring for. We need
to reestablish the trust with the American people, and this is the
first step in doing that very thing.
Once again, I thank the chairman for referencing something I failed
to reference as well. I would encourage my colleagues on my side of the
aisle and my friends on the other side of the aisle to keep all
amendments germane. We need to make sure we move for cloture, get
cloture, and then have a free, fair, and spirited debate on the issues
that concern them but don't get sidetracked to the point where the bill
gets killed or pulled. I think that would be a travesty and a mistake.
So I am going to encourage my colleagues to make sure if they have a
concern, let's air it out and take a full and fair vote on it and move
forward.
I love hearing the Senator's stories. I am reading his book because
of his knowledge and history and the way he can weave things back and
forth. That is a very good analogy.
I too have concerns. We have referenced many times that there may be
forces beyond us who want to make sure this doesn't come out of this
Chamber and go next door and then ultimately be signed by the
President. I am not one of them. I want to make sure--as the Senator
from Connecticut, the Senator from Maine, and many of the other Members
and the cosponsors--that this bill comes out in a good and fair form.
We are here for a very specific reason, to address a very specific
issue that affects people, quite frankly, in a manner that I never
thought was possible. If there are other concerns, I commend the
chairman for publicly stating to bring them up in a separate matter on
a separate bill and address them if there are issues we have missed. I
have a fear--and I hope I am wrong--that by making it, as the Senator
from Connecticut referenced, too perfect or too sweet, it could fail,
and I don't want to see that. I want to make sure we have a laser-sharp
bill that addresses a very specific issue, and if we do it together and
work in a true bipartisan manner, we have an opportunity right now in
this moment in our history of this country to do something special.
I was sent here to do the people's business, and I do it each and
every day by working across party lines with good people and good
Democrats like the Senator from Connecticut and others. I take that
role very seriously. We have an opportunity right now to send a very
powerful message for which the American people are yearning. They want
us to do well. They want us to be good. They want us to be better than
we have been representing ourselves right now.
So I am encouraging--just to reference and take it a step further--my
colleagues to do the same thing. Let's put our party differences aside.
Let's put the inner party differences aside and push this legislation
through in a thoughtful, methodical, respectful, and responsible manner
that will make the American people say: OK, it is a good first step.
What is next, Congress? Are we going to do the postal bill and try to
save the postal bill? I hope that is the next issue. We need to work in
a truly bipartisan manner.
Once again, who is here? It is me, Senator Lieberman, Senator
Collins, and Senator Cochran who are pushing to try to save the post
office. That should be the next issue. What is after that? We need to
address our fiscal and financial issues so we can come out of this 3-
year recession in a lean-and-mean manner so we can be a better country
and be able to compete on a global basis. We need to start putting the
American people's interests first instead of everybody else's.
I usually get in trouble when I go off like this, but I think it is
critically important to let the people know that one good deed begets
another good deed, and this is the first step in this new calendar year
to do just that.
I yield the floor.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. LIEBERMAN. I appreciate the comments.
Mr. President, I am pleased to report that I just received notice
that within the hour the administration put out the Statement of
Administration Policy--the so-called SAP--strongly endorsing this
legislation, S. 2038, and we appreciate that very much. It is a very
strong statement of support for the principles and exactly the kinds of
things Senator Collins, Senator Brown, Senator Gillibrand, Senator
Tester, and I have been saying.
As the President said in his State of the Union speech, if we can get
this bill to his desk--and the sooner the better--he will sign it as
soon as he possibly can.
If there is no one else who wishes to speak at this time, I would
suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. LIEBERMAN. Mr. President, I ask unanimous consent that the order
for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Cloture Motion
Under the previous order and pursuant to rule XXII, the Chair lays
before the Senate the pending cloture motion, which the clerk will
report.
The assistant legislative clerk read as follows:
Cloture Motion
We, the undersigned Senators, in accordance with the
provisions of rule XXII of the Standing Rules of the Senate,
hereby move to bring to a close the debate on the motion to
proceed to Calendar No. 301, S. 2038, the Stop Trading on
Congressional Knowledge Act:
Harry Reid, Joseph I. Lieberman, Sherrod Brown, Joe
Manchin III, Tom Udall, Mark Begich, Herb Kohl, Bill
Nelson, Frank R. Lautenberg, Jeanne Shaheen, Richard
Blumenthal, Benjamin L. Cardin, Christopher A. Coons,
Dianne Feinstein, Patrick J. Leahy,
[[Page S149]]
Richard J. Durbin, Patty Murray, and Charles E.
Schumer.
The PRESIDING OFFICER. By unanimous consent, the mandatory quorum
call has been waived.
The question is, Is it the sense of the Senate that the debate on the
motion to proceed to S. 2038, a bill to prohibit Members of Congress
and employees of Congress from using nonpublic information derived from
their official positions for personal benefit, and for other purposes,
be brought to a close?
The yeas and nays are mandatory under the rule.
The clerk will call the roll.
The assistant legislative clerk called the roll.
Mr. DURBIN. I announce that the Senator from Louisiana (Ms. Landrieu)
and the Senator from New Jersey (Mr. Menendez) are necessarily absent.
Mr. KYL. The following Senators are necessarily absent: the Senator
from Georgia (Mr. Isakson), the Senator from Illinois (Mr. Kirk), and
the Senator from Mississippi (Mr. Wicker).
The yeas and nays resulted--yeas 93, nays 2, as follows:
[Rollcall Vote No. 3 Leg.]
YEAS--93
Akaka
Alexander
Ayotte
Barrasso
Baucus
Begich
Bennet
Bingaman
Blumenthal
Blunt
Boozman
Boxer
Brown (MA)
Brown (OH)
Cantwell
Cardin
Carper
Casey
Chambliss
Coats
Cochran
Collins
Conrad
Coons
Corker
Cornyn
Crapo
DeMint
Durbin
Enzi
Feinstein
Franken
Gillibrand
Graham
Grassley
Hagan
Harkin
Hatch
Heller
Hoeven
Hutchison
Inhofe
Inouye
Johanns
Johnson (SD)
Johnson (WI)
Kerry
Klobuchar
Kohl
Kyl
Lautenberg
Leahy
Lee
Levin
Lieberman
Lugar
Manchin
McCain
McCaskill
McConnell
Merkley
Mikulski
Moran
Murkowski
Murray
Nelson (NE)
Nelson (FL)
Paul
Portman
Pryor
Reed
Reid
Risch
Roberts
Rockefeller
Rubio
Sanders
Schumer
Sessions
Shaheen
Shelby
Snowe
Stabenow
Tester
Thune
Toomey
Udall (CO)
Udall (NM)
Vitter
Warner
Webb
Whitehouse
Wyden
NAYS--2
Burr
Coburn
NOT VOTING--5
Isakson
Kirk
Landrieu
Menendez
Wicker
The PRESIDING OFFICER. On this vote, the yeas are 93, the nays are 2.
Three-fifths of the Senators duly chosen and sworn having voted in the
affirmative, the motion is agreed to.
The Senator from Connecticut.
____________________