Slaughter Calls on Congress to Close Insider Trading Loophole

(Remarks as prepared for delivery)

Mr. Chairman, thank you for having this important hearing today and for inviting me to testify.  I hope our discussion will help lead to the timely and decisive passage of this legislation to close the insider trading loophole and to bring transparency to a rapidly expanding political intelligence industry.

?Mr. Baird and I first introduced the STOCK Act in 2006 after increasing reports of members of congress or their staff abusing their official status and access to information for private gain.  Indeed, a 2004 study by Professor Alan Ziobrowski of Georgia State University, whom I am pleased will be testifying in the second panel today, confirmed that United States Senators received returns on investment that were approximately 25 percent higher than what typical Americans were able to achieve. 

While various reports of members and staff using information improperly for financial gain and hard data showing that Senators were realizing significantly higher returns on investment than the average investor do not prove the existence of a widespread abuse of power and trust, they do however reveal serious loopholes and a potential for abuse that require immediate action and preventive measures.

Furthermore, political intelligence firms, which provide investors with inside information about impending legislative action which can be used to inform investment decisions, have been operating largely in secret and without controls.  What started out as a handful of firms in the 1970s, political intelligence companies had grown into an industry that brought in an estimated $40 million a year by 2006. 

Mr. Chairman, there was more than enough reason to introduce this legislation in 2006 to crack down on insider trading by members and staff and bring accountability to the political intelligence industry.  Since then, we have entered into the worst economic crisis since the Great Depression, and the implications of a failure to act immediately on this issue are great.

Congress and the Federal Government are now so enmeshed in the operations of our financial markets that the potential for abuse by members of Congress, congressional staff, and federal employees is staggering.  

The liquidity crunch that began in August 2007, setting off a chain of events leading to the near collapse of the entire global financial system in September 2008, marked the beginning of unprecedented involvement of the federal government in our financial system, and thus unprecedented opportunity for lawmakers and federal government employees to use knowledge obtained from their official status for private financial gain. 

Between the Federal Reserve’s massive injections of liquidity into the financial markets and its role in “bailing out” or the decision not to “bail out” Bear Stearns and Lehman Brothers for instance; the Treasury’s role in implementing the $700 billion Troubled Asset Relief Program (TARP); and Congress’ role in legislating TARP, Congress and federal employees have had early access to so much sensitive information that can seriously affect the stock market, that we cannot wait any longer to close these loopholes.

Moreover, the upcoming financial market regulatory reform will bring with it even greater opportunity for those with early access to information to profit on an immense scale. 

Throughout our current economic crisis, and indeed since their creation in the 1970’s, so called “political intelligence” firms have operated quietly in the background without any regulation or oversight.  These firms focus not on influencing Congress, but rather gathering information on forthcoming legislative action in order to give their clients an advantage over other investors. 

With leading experts noting that political intelligence businesses have quadrupled in size since 2003, these businesses are now emerging as a key factor in the lobby industry, and should be regulated accordingly. Such an important and increasingly relevant business should certainly be required to make its activities known to the public.

Members of Congress, congressional staff, and federal employees have the unique opportunity and means to make profound changes in our economy, the country and the world.  But with this historical opportunity comes the serious potential for abuse of power and the public trust. 

Now I sincerely believe that the vast majority of members of Congress, congressional staff, and federal employees are here to serve the best interests of their constituents and the public, not to line their own pockets.  But by explicitly prohibiting the improper use of sensitive information for personal gain, we will be taking an enormous step in providing transparency while preserving and strengthening public faith in our government and the democratic process. 

Mr. Chairman, once again, let me thank you for holding this hearing today to shed light on this important issue.  I look forward to working with you and all the Members of this Committee, as well as any other interested parties, to enact this bill.

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United States House of Representatives
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