The SEC could be the last, best hope to keep members of Congress from insider trading. The agency already has one Republican senator on its radar.

• Some experts see the SEC as the agency best suited to police insider trading by members of Congress.
• It is investigating GOP Sen. Richard Burr and his brother-in-law over a stock sell-off.

It was the STOCK Act's moment in the sun.

Days before the coronavirus pandemic gripped the United States and sent markets crashing, Sen. Richard Burr sold off a significant portion of his stocks, raising suspicion that he was trading based on inside information gleaned from daily intelligence briefings.

The Justice Department opened a criminal investigation into whether Burr violated a law known as the Stop Trading on Congressional Knowledge, or STOCK, Act. After months of work, the department closed the case without bringing charges against the Republican senator from North Carolina. The US Senate Select Committee on Ethics, meanwhile, has taken no public action against Burr.

But Burr is not entirely cleared. Almost a year later, another enforcement agency — the Securities and Exchange Commission — continues to pursue him on civil grounds.

The SEC's investigation presents a test of the agency's appetite for enforcing the STOCK Act, a 2012 law designed to defend against conflicts of interest and force lawmakers to become more transparent about their personal finances.

But federal authorities have never prosecuted a federal lawmaker under the STOCK Act, and lawmakers have serially ignored the law's requirement to disclose their personal stock trades within 30 to 45 days of them being made.

The SEC is independent, but it can only do so much

In interviews, former SEC and congressional staffers said the SEC has certain advantages over the Justice Department that could position it as the enforcement muscle behind the STOCK Act.

Foremost, while the Justice Department has a tradition of independence, it nonetheless exists within an executive branch led by either a Republican or Democratic president.

The SEC's status as an independent commission, with seats divided between Democratic and Republican appointees, could therefore protect it from criticism that cases are politically motivated. And the commission has decades of experience monitoring markets for unusual activity and bringing insider-trading cases.

"The SEC understands how the financial markets work and, frankly, has a lot of expertise in bringing insider-trading cases," said Tyler Gellasch, a former Senate aide who helped draft the STOCK Act. "It also helps that the SEC is an independent agency, so its actions are often viewed as more cautious, and less overtly partisan."

An SEC spokesperson declined to comment.

Still, hurdles abound for any law-enforcement agency in the policing of elected lawmakers' financial trading.

In the Burr investigation, the Justice Department ran into novel legal issues surrounding the communications of lawmakers. For example, when the Justice Department seized Burr's cellphone, it needed to navigate around restrictions raised by the Constitution's speech or debate clause, which broadly shields lawmakers from scrutiny over legislative activity.

The SEC is nevertheless pressing ahead. The commission went to federal court in Manhattan to force Burr's brother-in-law Gerald Fauth to sit for an investigative interview. According to an SEC filing, Burr called Fauth after selling off more than $1.6 million in stock. After 50 seconds on the phone, Fauth called his broker and dumped his own stock, the filing shows.

Fauth sat for the interview in late November.

Proving insider trading 'gets sticky'

In the face of the Justice Department investigation, Burr said he based his trading on publicly available information about the emerging coronavirus, such as news reports from CNBC.

His case underscores how investigators can struggle to decipher when information — from a briefing or other closed-door setting — reaches the point of providing a degree of material, nonpublic detail that could lead to insider trading.

"Where it gets sticky is when the member of Congress has additional information that is not known to the public, that is more specific, and that a reasonable investor would want to know. And what the Burr case illustrates is the difficulty for the government of distinguishing between information that is, in some respects, public and, in other respects, not," said Daniel Hawke, a partner at the law firm Arnold & Porter and former chief of the SEC's market-abuse unit.

Hawke noted that the political sphere also features a wider exchange of information that would make it difficult for the SEC or another law-enforcement agency to draw a connection between a lawmaker's stock trade and inside information.

For the SEC, it's not as simple as monitoring the trading around the time of a business move such as a merger or acquisition.

Unlike an M&A context, "where maybe only a handful of people working on a deal actually know what's going on, one of the challenges on the Hill is that it's an information exchange," Hawke said. "Information is being received and disseminated constantly. Figuring out how to surveil that, how to determine what information is significant and what information isn't — that's very difficult and time-consuming, and takes a lot of manual effort."

The STOCK Act only goes so far

While independent, the SEC also faces a real political dilemma when investigating a member of Congress.

In 2019, former Rep. Chris Collins, a Republican from New York, pleaded guilty to insider trading and reached a settlement with the SEC resolving charges that he tipped his son off to negative trial results for a pharmaceutical drug. A federal judge later sentenced Collins to more than two years in prison, but then-President Donald Trump pardoned him in December 2020.

The STOCK Act didn't come into play in Collins' case because he learned of the negative trial results in his capacity as a member of the drug company's board, not as a member of Congress.

The House and Senate have oversight powers over the agency and regularly summon the SEC leadership to appear at committee hearings. SEC Chair Gary Gensler testified before the House Committee on Financial Services in October.

The SEC also relies on congressionally authorized funds for its annual budget, meaning that any investigation into a lawmaker is inherently an inquiry into the commission's appropriators.

For government-ethics advocates, that state of affairs has revealed how Congress failed — perhaps by its own choosing — to set up a robust enforcement regime for the STOCK Act.

The answer, advocates said, is to prohibit lawmakers from trading stocks while serving in Congress.

"That's the serious way to do this," said Meredith McGehee, a government ethics expert who lobbied on the STOCK Act.

"Everything else is a Band-Aid."