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Opinion: Where is the SEC?

By: Publius

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By: Publius

In our previous article, we discussed how the Supreme Court egregiously missed a chance to do right by the American people when it refused to hear former Xerox executive Barry Romeril’s case and take a closer look at the SEC’s gag order policy. Today, we will look at how Congress has also let its citizens down and how the SEC has seemingly turned a blind eye.

Throughout this series, we have repeatedly discussed the complex web of rules and regulations that we as financial professionals must navigate in order to stay on the right side of the law and avoid receiving a “ticket”, as Warren Buffett calls it. While there are many convoluted requirements to which financial professionals must adhere, one area that most all of us have a firm grasp on – and even individuals outside of the industry are at least familiar with – is that of insider trading.

Insider trading is the practice of buying and selling securities based on information to which the general public does not have access. In fact, the SEC was created to protect investors from just this kind of activity, and, in 1934, the same year that the SEC was founded, Congress passed the Securities Exchange Act, which requires publicly traded companies to report profit and loss statements, financial statement schedules, and information regarding directors and officers.

An example of insider trading occurred in 2014, when Shivbir Grewal was serving as outside counsel for Spectrum Pharmaceuticals. Mr. Grewal learned that the company was about to announce a significant decline in expected revenue and, within 48 hours, he sold his entire investment in the company. He told his wife the news, and she also sold all of her shares in Spectrum. The Grewal’s avoided losses of approximately $45,000 by selling ahead of Spectrum’s announcement. Without admitting or denying the allegations, of course, the couple agreed to pay approximately $90,000 to settle the case, and Mr. Grewal was suspended from serving as an attorney for any publicly traded company or entity regulated by the SEC. A very serious “ticket”, indeed.

The act of insider trading is considered by many to be a serious violation of trust and fiduciary duty. As such, it carries heavy penalties – up to 20 years in prison and a fine of $5 million for individuals and $25 million for entities whose securities are publicly traded.

So, we might expect that when 72 members of Congress were recently identified as being in violation of the Stop Trading on Congressional Knowledge (STOCK) Act of 2012, a law passed by Congress to combat insider trading and conflicts of interest among its own members, these Congressmen and women would also receive similar punishments. Several members of Congress, on both sides of the aisle, were late in disclosing, or did not disclose at all, their various stock transactions. Excuses ranged from clerical errors to accounting mistakes to ignorance of the law. The penalty? A mere $200 fine, which may be waived by House or Senate ethics officials.

There are many examples of behavior from those in Congress which bear, at least, a resemblance to corruption. Senator Richard Burr (R-N.C.) sold over $1 million worth of shares a week before the market crash of 2020. He encouraged his brother to do the same. The Justice Department did not charge Senator Burr. Speaker of the House Nancy Pelosi’s husband, Paul Pelosi, recently exercised millions of dollars of call options for NVIDIA and sold huge quantities of Apple and Visa, companies regularly scrutinized by Congress.

If the SEC is so diligent in coming after individuals, why does it not regulate Congress with the same vigor? Is it because Congress funds the SEC? According to USASpending.gov, in fiscal year 2022, the SEC received $2.66 billion from Congress.

When an individual is found guilty of violating stock laws, he or she faces the threat of huge fines, loss of reputation in the industry, possible jail time, and more. If a member of Congress violates the law, they face a possible fine of $200, if that. It is the lack of separation of powers which has set up this system that works differently for different groups of people and is counter to everything that the SEC was established to do. The SEC seems to work to actively punish individuals and smaller firms, often to the point that these groups are ruined, while it looks the other way when members of Congress make the same or worse mistakes. This is not just bad for business; this is un-American. The SEC was designed to protect all of us, as investors and financial professionals, regardless of our business size or stature.

What are your thoughts? Are you also wondering where the SEC is when it comes to Congress? Please email me at Publius.Connect@gmail.com and let me know. It is only by working together that we may create a regulatory agency that truly serves all of us.

Editor’s note: The author of the preceding article is a chief executive officer in the financial services industry, who, for fairly obvious reasons, elects to share his thoughts on this subject anonymously. The DI Wire does not normally publish articles that do not disclose the author. In this instance, however, we have allowed it given the nature of the piece, the importance of open discussion and varying viewpoints, and the fact that we have personally confirmed Publius’ identity.

The views and opinions expressed in the article are those of the author and do not necessarily reflect the views of The DI Wire.

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