Selective disclosure by federal officials and the case for an FGD (fairer government disclosure) regime

This Article addresses a problem at the intersection of securities regulation and government ethics: the selective disclosure of market-moving information, by federal officials in the executive and legislative branches, to securities investors outside the government who use that information for trading. These privileged investors, often aided by political intelligence consultants, can profit substantially from their access to knowledgeable sources inside the government. In most instances, however, neither the disclosure nor the trading violates the antifraud provisions of the federal securities laws (under which the insider trading prohibitions arise). This legally protected favoritism undermines investor confidence in the fairness and integrity of securities markets-and in government itself. Congress considered these harms in the debates leading up to the Stop Trading on Congressional Knowledge (STOCK) Act of 2012. But it wisely opted to study the role of political intelligence in financial markets before legislating further. To address securities trading on the basis of selectively disclosed government information, this Article examines an analogous situation in the private sector that plagued individual investors until relatively recently. Selective disclosure of issuer information by corporate executives to securities analysts and professional investors had been regarded as blatantly unfair yet, in most instances, not illegal. Regulation FD, which the Securities and Exchange Commission (SEC) adopted in 2000, addressed this unfairness by looking beyond the construct of fraudulent tipping and trading under Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The solution involved regulating the timing and manner of disclosures by corporate insiders, rather than the conduct of outsiders who gather and trade on the basis of those disclosures. Regulation FD embraced this approach for publicly traded companies and corporate executives have been adhering to it for more than a decade. This Article proposes an analogous FGD regime-standing for Fairer Government Disclosure-that would prompt federal agencies, as well as members of Congress and their staffs, to deploy a variety of strategies that could substantially reduce the amount of selective disclosure of nonpublic government information to persons who are likely to use it in securities trading. The Article first gathers together press reports, agency and congressional correspondence, and other materials that demonstrate the ubiquity of selective disclosure in the federal government. It then analyzes insider trading law to show that most of these instances of selective disclosure are not illegal. The Article concludes that the problem can be solved-or at least curtailed-with more effective internal controls on the federal officials who selectively disclose government information. It thus begins a discussion as to how such controls could be developed without compromising the quality and timeliness of disclosures to persons, including voters, who must have information in order to make informed decisions.