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Is it illegal for lawmakers to trade stocks on insider info they learn on the job?

Analysis: Probably not, and it's a case that would be difficult for prosecutors to make.
Image: A trader works on the floor of the NYSE in New York
A trader works on the floor of the New York Stock Exchange (NYSE) in New York on March 20, 2020.Lucas Jackson / Reuters

WASHINGTON — Sen. Richard Burr, R-N.C., the chairman of the Senate Intelligence Committee, said on Friday that he did not act on any nonpublic information when he sold stocks last month, before the markets tanked because of the coronavirus.

Burr said he relied on news reports, not on classified briefings he received about the spread of the virus overseas. But suppose a member of Congress did rely on that kind information to buy or sell stock: Would that be illegal?

The answer is, probably not. The possible violation of insider trading laws based on a senator or congressman's access to official information is something the courts have never clearly defined, and it would be difficult for a prosecutor to build such a case.

Federal law has long banned insider trading, making it illegal for an employee of a business to buy or sell stock based on proprietary information. The provision is intended to prevent people in a company from having an advantage over outsiders.

That clearly wouldn't apply to members of Congress, since they aren't company insiders. But court rulings and regulations imposed over decades have made the reach of the law broader. In the language of the Securities and Exchange Commission, it's a violation to trade stock based on "material, nonpublic information obtained as part of a relationship of trust or confidence."

Congress appeared to apply that concept to itself when it passed the Stock Act in 2012. It amended securities law to say that all senators and representatives owe a duty of trust and confidence to the nation with respect to material, nonpublic information they obtain in the course of their official duties. That expanded on existing ethics rules that forbid members of Congress to use information they gain as part of their official duties in order to make a private profit.

Lamar Smith, a Texas Republican in the House at the time, praised the legislation saying, "The American people deserve to know that no one in any branch of government can profit from their office." Congress acted after a wave of news reports documented stock sales by House and Senate members based on information they learned of in their committees.

The law does not provide for a criminal penalty, but violators can face substantial fines.

Some supporters of the Stock Act thought it clearly banned the buying or selling of stocks based solely on information members of Congress learn about on the job, because it brought them under that "relationship of trust or confidence" rule — namely, their duty to the public. But that concept has never been tested in court, and some former SEC officials have said they doubt that members of Congress have a duty of confidentiality.

But even if that approach of the insider trading law clearly did apply to Congress, bringing a criminal case would be difficult for prosecutors because of the immunity provided by the Constitution's speech or debate clause.

"They'll never be be prosecute anybody for this, if they have to penetrate a committee to find out if that's where the information came from. That's speech-or-debate protected territory," said Stan Brand, a Washington lawyer and former U.S. House general counsel.

Members of Congress can nonetheless be prosecuted for insider trading when the information they act on comes from a company, not through the legislative process. Former Rep. Chris Collins, a New York Republican, was sentenced to 26 months in prison in January after he admitted revealing inside knowledge to his son about a drug company's stock that was likely to fall. Collins learned of the information because he served on the company's board.

Burr said Friday that he understands "the assumption many could make in hindsight" about his transactions, and he asked the Senate Ethics Committee to investigate the matter.