02/22/2012 07:50 pm ET Updated Apr 23, 2012

Insider Trading In Congress: SEC Chair Cautions Constitution Makes Enforcement Difficult

* SEC's Schapiro endorses insider-trading curb for lawmakers

* Schapiro says bill may help SEC bring cases

* Says constitutional protections could still pose challenge

* Schapiro also mulling reforms for high-speed traders

By Sarah N. Lynch

WASHINGTON, Feb 22 (Reuters) - The top U.S. securities regulator endorsed a bill that would put new curbs on insider trading by members of Congress, but cautioned that constitutional protections for lawmakers could make it hard to enforce.

"I think the STOCK Act can be helpful to us," said SEC Chairman Mary Schapiro, who spoke about a variety of policy issues at a breakfast on Wednesday sponsored by the Christian Science Monitor.

The legislation, aimed at ensuring lawmakers do not profit from non-public knowledge they gain through their positions, is the most extensive effort to clamp down on Congress' personal business dealings in years.

Both chambers of Congress have passed bills on the matter, but a few differences need to be resolved before a final version can be sent to President Barack Obama.

Although the SEC already has broad authority to bring insider-trading cases against anyone, including federal lawmakers, it has never done so in part because of lawmakers' unique privileges and relationship to government.

One of the biggest challenges the SEC faces in bringing an insider-trading case against lawmakers involves showing how they breached a duty of trust and confidence.

Schapiro said the bill is helpful because for the first time it provides "clarity that there is in fact a duty that members of Congress owe" to the government.

"This is very useful because we need to show a violation of a duty when we bring an insider-trading case," she said.

But she noted that lawmakers still enjoy constitutional protections that could make it difficult for enforcement officials to bring a case.

She pointed to the "speech or debate clause" of the U.S. Constitution that gives members of Congress protection against prosecutions that threaten the legislative process.

The courts have extended that privilege to include the communication of nonpublic information that is connected to legislative activity. Schapiro said the clause could complicate any future SEC investigations.

"That is the constitution. You can't ask Congress to fix that with legislation," she said.

For years, a handful of lawmakers have tried to clarify how insider trading bans apply to Congress, but the legislation didn't get momentum until a November report by CBS' "60 Minutes" that questioned whether some lawmakers had used privileged information to make trades.

House Financial Services Chairman Spencer Bachus was one of the lawmakers featured for his trades during the financial crisis.

Bachus faces a congressional investigation into his trades. He has strongly denied any wrongdoing.


Schapiro also spoke about a range of policy areas the SEC is exploring, from Dodd-Frank rulemaking to market structure reforms being weighed following the May 6, 2010 "flash crash."

Schapiro said the agency is still reviewing potential reforms targeting high-frequency traders.

She voiced concerns that their trades are often "unrelated to the fundamentals of the company being traded" and driven instead by "the miniscule, aberrational price moves" that can be taken advantage of by locating their computerized trading programs next to an exchange's data center.

"That worries me in some ways," she said. "At the end of the day, our markets have to exist for companies to raise capital." (Reporting By Sarah N. Lynch; additional reporting by David Lawder; editing by Andre Grenon)