The regulation of insider trading by members of Congress and other government officials should be abandoned in favor of rules that apply equally to all sources of income. After writing about it for almost 10 years, I’m convinced that opposition to any insider trading is ultimately motivated by two pernicious commitments: (1) a lack of respect for income earned by trading securities and (2) an opposition to unequal economic opportunities.
Only in finance do we punish making money based on secrets. Journalists and for-profit newspapers regularly rely on non-public information to outcompete their rivals. Sometimes, this means publishing illegally disclosed information, as was the case with the Pentagon Papers. Companies engaged in mineral exploration can buy land rights without disclosing their mineral discoveries to current land owners. And manufacturers can use trade secrets about their production processes to maintain a competitive advantage. Why is trading in public securities different?
Many see securities markets such as casinos and think that every investor should have an equal chance of winning “the game.” Moreover, examples of unequal economic opportunities can make some of us very upset. Many were bothered by LeBron James using his clout to secure his son a place on the Los Angeles Lakers. Others were put off by Warren Buffett choosing one of his sons to replace him as chairman of Berkshire Hathaway’s board. But no one suggested putting any of these men in jail for taking advantage of opportunities that were not also available to the rest of us. And no one should.
Economic inequality is a permanent feature of reality. Fighting against it is like fighting against gravity — a lose-lose proposition.
Officials regularly describe defendants in insider trading cases as effectively embezzling their employer’s inside information by using it without authorization. Few take the time to explain that several rules have been put in place to prevent employers from authorizing the use of inside information for securities trading. That includes laws that punish employers for doing too little to prevent the “misappropriation” of their information.
So, what is a better alternative to the Stop Insider Trading Act for those who accept economic inequality and respect finance professionals?
One option is to bar officials (and possibly their closest family members) from having any other sources of income while in office. The other option is to treat income from securities transactions in the same way we treat income from all other sources — only punish (or condemn) officials if there is evidence that the opportunity to obtain the income was improperly motivated or how those officials exercised their authority, i.e., they changed their votes to move stock prices in a specific direction or to increase the value of their lake front property.
WE PAID $3 BILLION FOR LEBANON’S ARMY TO MAKE EXCUSES FOR HEZBOLLAH
Only a blanket ban on outside sources of income would avoid both (1) the appearance that lawmakers sometimes abuse their offices and (2) fueling voter bias against finance professionals. However, such a ban may encourage only the slothful and unindustrious to seek government office, or it may make politicians even more antagonistic toward wealthier people.
The best way forward may be mandating the disclosure of all outside sources of income; or at least making that information available to all other members of Congress.
Kevin Douglas is an associate professor of Law at Michigan State University.