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It took a recent report on “60 Minutes” to galvanize Congress into action after the program criticized members who made profitable securities trades based on information they had learned on Capitol Hill. In a recently published book, “Throw Them All Out,” Peter Schweizer asserted that members of Congress may be exempt from some insider trading laws.

House and Senate committees plan to hold hearings soon on bills that would prohibit trading on information “relating to any pending or prospective legislative action” to address this perceived gap in the law. But even if Congress does pass legislation tightening the rules, there are significant political and constitutional hurdles that would make it difficult to effectively enforce the new law.

It is not clear whether members of Congress are in fact exempt from the insider trading laws. There is no statute defining the prohibition on insider trading, so there is no particular provision that allows members of Congress or their staff to trade on material nonpublic information learned on Capitol Hill with impunity.

Insider trading has been recognized as securities fraud, with rules against it developed by the Supreme Court and the Securities and Exchange Commission in fits and starts over the past 40 years. To prove insider trading, the government must show someone breached a duty of trust and confidence by trading on material nonpublic information. The contours of the prohibition get fuzzy once the circumstances move beyond corporate insiders using confidential information to trade or tip off others for their own benefit.

A member of Congress would certainly violate the law if that person learned about a pending corporate transaction, say a merger, and then traded on it before the information became public. When the information concerns legislative developments that can affect a company or an industry, determining whether it is “material” becomes more difficult because it is not always clear how one step in the legislative process may affect the stock market.

But that does not mean Congress is somehow immune from being charged with insider trading. Donna M. Nagy, a professor at the Indiana University Maurer School of Law, published a paper this year arguing that the purported exemption for Capitol Hill misapprehends the scope of the insider trading prohibition.

Regardless of whether Congress is covered by the current law, the proposed legislation, called the Stop Trading on Congressional Knowledge Act, would make it clear that trading on legislative information is a form of securities fraud, removing any doubt about whether it could be applied to lawmakers and their staff. The proposed law has been around for years, and I testified about an earlier version of the bill in July 2009.

But there was no movement on the legislation until “60 Minutes” on CBS brought broad public attention on the issue earlier this month.

Passage of the legislation is unlikely to result in new insider trading cases involving Capitol Hill because of two significant hurdles to pursuing investigations of members of Congress and their staff.

The political problem is that the S.E.C., which takes the lead in most investigations, must obtain its appropriations from Congress every year. There have been threats to cut the S.E.C.’s budget in response to primarily Republican objections to the scope of the Dodd-Frank Act, which tightened financial regulations, and the agency is not immune to feeling political pressure over its decisions. An inquiry into trading by a powerful member is unlikely to be well received on Capitol Hill, so there is a risk that Congress could use its power of the purse to punish the S.E.C. for pursuing a case.

Apart from potential political problems in pursuing insider trading cases, the Constitution puts up a significant roadblock to investigating a member of Congress: the Speech or Debate Clause. The provision, which traces its roots to conflicts between the English monarch and Parliament, provides that “for any Speech or Debate in either House, [members] shall not be questioned in any other Place.”

The Constitution protects Congress from interference in its operations by both the executive branch and the judiciary, providing a type of immunity to members from having to answer questions in court, responding to subpoenas or being prosecuted with evidence of actions involving the legislative process. The purpose is to preserve the separation of powers between the different branches of government so that Congress can operate free from outside interference.

The Supreme Court, in United States v. Brewster, determined that the protection applies “to an act which was clearly a part of the legislative process,” so not everything a congressman does is free from scrutiny. In a later decision regarding disclosure of the Pentagon Papers, Gravel v. United States, the Supreme Court held that the Speech or Debate Clause applied to a grand jury investigation and covered Congressional staff members whose acts are related to the legislative process to the same extent it applied to elected members.

In recent years, Congress has taken the position that criminal investigators went too far by interfering with legislative operations in gathering evidence. The House of Representatives filed briefs challenging a search by Federal Bureau of Investigation agents of the office of Representative William J. Jefferson, Democrat of Louisiana, in May 2006 and the wiretapping of Representative Rick Renzi, Republican of Arizona, in 2007, arguing that these tactics in criminal corruption investigations violated the privilege of members of Congress not to have legislative information disclosed. In neither case was the congressman questioned, but the constitutional protection extends beyond just examining witnesses. Mr. Jefferson was convicted of bribery and other charges in 2009 and sentenced to 13 years in prison, and Mr. Renzi is awaiting trial in Arizona on corruption charges.

An insider trading investigation typically requires the S.E.C. to subpoena records to determine what information a person who traded or tipped had at a particular point in time, and who the person communicated with. Once it gathers the relevant documents, the S.E.C. usually takes the testimony of those who may have been involved in the transaction, which could require questioning representatives and senators about the likelihood of legislative action to establish the information was material.

The House and Senate bills specifically prohibit trading on “pending or prospective legislative action,” which means a focal point of any insider trading inquiry will be on information generated as part of the legislative process. But that information is at the heart of the Speech or Debate Clause protection, which prevents any questioning of members of Congress or their staff about that process to preserve the independence of the legislative branch.

Passing the legislation would do little good if the S.E.C. and the Justice Department would be stymied in trying to conduct an investigation by an assertion of the Speech or Debate Clause to stop the case dead in its tracks. Congress could try to waive the constitutional protection in advance as part of any law it passes, but it is not clear whether that would prevent an individual member from asserting it in a particular case in the future. Opening Congress to the possibility of a wide-ranging S.E.C. or Justice Department inquiry is unlikely to go over well with members suspicious of the motives of the executive branch.

Passing a law for the sake of public perception when it could not be enforced would be the height of cynicism. Before extending the prohibition on insider trading based on legislative information, Congress will have to grapple with the question whether it is willing to open itself up to being investigated if any of its members and their staff misuse that information for personal gain.



House Bill on Congressional Insider Trading



Senate Bill on Congressional Insider Trading