On March 13, 2015, Donna M. Nagy, Executive Associate Dean and Professor of Law at Indiana University Maurer School of Law, delivered the annual Ruby R. Vale Distinguished Scholar Lecture as part of the 2015 Ruby R. Vale Interscholatic Corporate Moot Court Competition.
Nagy’s lecture began by observing that acts of governing, whether in Congress or in the boardroom, implicate a host of agency issues. Conflicts of interest and other issues of ensuring that agents are acting in the best interest of the principals can exist in both contexts. But while corporate law has safeguards regarding conflicted directors, the discipline of the electoral process is often cited as the reason why there is no need for robust laws against self-dealing in the political context. Yet, directors also stand for election. In practice, Nagy asserted, elections often fail to provide a check: in the corporate context, challenges rarely succeed even where there is high shareholder dissatisfaction, and in politics, incumbency has large structural benefits.
Nagy identified two specific instances that raise questions regarding the ethics of lawmakers: congressional insider trading and the broader use of material non-public information for personal gain, and financial conflicts of interest.
Regarding congressional insider trading, Nagy suggested that the courts and federal prosecutors look to corporate law for an analogy because federal officials serve the public in a fiduciary capacity. According to Nagy, the Stock Act, a 2012 law that bans insider trading by Congress, was not necessary. The Stock Act amended the Securities Exchange Act so that all federal officials owe duties (e.g., of trust and confidence). Though conceding that the Stock Act improved on the status quo by creating a more effective system of transparency, Nagy nevertheless maintained that it was not necessary to amend the SEA to reflect what most ordinary people believe—that federal officials serve the public in a fiduciary capacity.
As to the broader issue of the use of material non-public information by elected officials, Nagy asserted that the Stock Act did not resolve the access that state officials have to inside information, or the ability, even on a federal level, to purchase real estate, or any other property not constituting a security, using material non-public information. Because an elected official’s self-serving use of material non-public information to profit from real estate has already been prosecuted, federal prosecutors should be able to draw upon an analogy from corporate law.
Regarding financial conflicts of interests and the widespread practice of holding personal investments in companies that are the subject of legislation, Nagy noted that members of Congress continue to own interests in companies directly affected by legislation, and disproportionately own interests in industries under their purview. Despite well-established fiduciary principles, Congress’ internal rules insulate financial conflict of interest practices.
In the corporate context, statutory provisions allow for three ways to justify an interested director transaction: (1) full disclosure and approval by disinterested directors; (2) approval by a majority of disinterested directors; (3) entire fairness to stockholders.
For government fiduciaries in the executive branch, there are strict regulations that mostly exceed the prophylactic rules of fiduciary law. 18 U.S.C. 208 is a criminal statute that includes broad anti-conflict regulation. It criminalizes conflicted actions even if it is unlikely that the conflict will influence the executive’s actions. Rather, the mere presence of conflict is sufficient for criminal liability.
In the judiciary, federal judges are prohibited by statute from hearing matters in which their impartiality could be affected. The statute mandates recusal where a judge’s financial interests are implicated, and broadly defines “financial interests” so much so that the ownership of one share of stock is enough to mandate recusal.
Congressional officials, however, are allowed to work and vote on legislation so long as they are not the sole beneficiary. This “sole beneficiary” provision in the rules of Congressional ethics places a gloss on their fiduciary obligations. The commentary to the Congressional rule explains that the rule is intended to be construed narrowly. There is a strong presumption that the lawmaker is working in the public interest and that any personal gain is incidental. Interested directors, however, are not granted any presumption that they are working in the best interests of the stockholders, and the business judgment rule applies only with disinterested transactions. Therefore, Nagy concluded, when personal financial interests are involved, political judgments—at least Congressional judgments—are more insulated than business judgments.
Nagy concluded the lecture by submitting that unlike in other branches of government, however, recusal is not an optimal solution for Congress. Nevertheless, Congress can, and should, prohibit members from holding interests in industries on which committees they serve. Notably, added Nagy, this rule is already applied to committee staffers, who are prohibited from holding interests in industries substantially affected by committee work. A stricter rule would prohibit members of Congress from holding securities interests except for general (mutual) funds.
Upon the conclusion of Nagy’s lecture, Professor Luke Scheuer commented that an outright ban on securities activities for Congressional members sounds attractive because, unlike the corporate context where stockholders can sue as a remedy for director ethical breaches, private suits alleging ethical violations would be problematic in the political sphere. Nagy responded that she has not yet advocated for derivative litigation in politics, but House and Senate rules would empower congressional ethics committee to take action.
In response to a question from Professor James May regarding analogies beyond the corporate context, Nagy noted that the United States is unique in that insider trading regulation is derived from interpretation of anti-fraud statutes, whereas other countries have direct statutory bans. In those jurisdictions that more specifically and explicitly ban uses of material non-public information, public officials can simply be added to the list.
Finally, Professor Lawrence Hamermesh noted that a ban on stock ownership may not face the same challenges as campaign finance laws because there is no First Amendment protections to own stock, whereas campaign contributions are now a form of protected political speech.