Securities and Exchange Commission Historical Society

The Mechanics of Legislation: Congress, the SEC and Financial Regulation

Rolling Thunder of Insider Trading: ITSFEA of 1988

Congress Takes Command

April 18, 1989 Note to Richard Carnell from U.S. Senator Donald Riegle; courtesy of the National Archives and Records Administration

In 1984, before the scandals emerged and largely at the behest of the SEC, Congress passed the Insider Trading Sanctions Act of 1984. That legislation strengthened the penalties for violating existing federal securities laws and authorized the SEC to collect a new civil penalty against persons for violating insider trading rules. President Reagan stated that “abuses by insiders and those who receive tips erode investor confidence in the securities markets…(making) public investors less willing to place their money at risk if they believe other traders, unlawfully utilizing material nonpublic information, have unfair advantages.” 20

Those changes had been drafted by the SEC, acting proactively to address court cases that appeared to make their effort to fight insider trading more problematic. Yet in 1987, when insider trading scandals exploded in the public consciousness, it was Congress and not the SEC that led the reform effort. Before, SEC experts proposed legislation to a willing Congress; by 1987, in reaction to the public crisis, experts in Congress took the lead in drafting and pushing insider trading reforms.

Several factors help explain why the influence of the SEC with respect to the new legislative effort diminished. During the early 1980s, SEC Chairman John S.R. Shad opposed major increases to the SEC’s budget. Only when the insider trading crisis roiled public consciousness did Chairman Shad request increased funding. 21

After Shad’s retirement in 1987, President Reagan appointed David S. Ruder, a Northwestern University Law School professor with substantial experience in securities law, as Chairman. That fall, on October 19th, the Dow Jones Industrial Average dropped 508 points, or 22.1 percent of its full value. This single-day market drop, in the midst of high-profile insider trading scandals, undermined investor confidence, and caused Congress to jump to the forefront of a legislative response to the situation. Critics in Congress argued that the SEC failed to prevent insider trading abuses and the market break. Faced with a deluge of constituent concerns, Congress responded with an activist legislative agenda.

As Congress took control of the agenda, the expertise of both individual members of Congress and long-term committee staff grew. On the Senate Banking Committee, Steven Harris and Richard Carnell exerted considerable legislative influence. Their long experience in financial and securities legislative matters made them invaluable. Their institutional knowledge of the law and of the legislative process put them at a significant advantage over the SEC in offering advice on pending legislation. The legislative memos they prepared provided reasoned advice on specific provisions of the legislation, but also on legislative strategy for upcoming hearings. The extent and scope of their knowledge about the legislative process and the complications facing Congress as it navigated a bill to passage made them enormously influential. 22


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Footnotes:

(20) August 11, 1984 The Public Papers of President Ronald Reagan, University of Texas Archives.

(21) Kaswell,147.

(22) June 15, 1987 Memo to Senate Banking Committee from Steven Harris and Richard Carnell on insider trading.

Related Museum Resources

Papers

March 20, 1980
image pdf (Courtesy of David Morf)
October 13, 1981
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 14, 1981
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 20, 1981
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 27, 1981
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 27, 1981
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
November 20, 1981
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
November 23, 1981
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
April 6, 1982
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 13, 1982
transcript pdf (Courtesy of the Ronald Reagan Library)
January 22, 1987
transcript pdf (Courtesy of National Archives and Records Administration)
February 19, 1987
image pdf (Courtesy of National Archives and Records Administration)
March 9, 1987
transcript pdf (Courtesy of National Archives and Records Administration)
March 13, 1987
transcript pdf (Courtesy of National Archives and Records Administration)
April 2, 1987
transcript pdf (Courtesy of National Archives and Records Administration)
April 8, 1987
image pdf (Courtesy of National Archives and Records Administration)
April 8, 1987
transcript pdf (Courtesy of National Archives and Records Administration)
May 13, 1987
image pdf (Courtesy of National Archives and Records Administration)
May 22, 1987
image pdf (Courtesy of National Archives and Records Administration)
June 1, 1987
image pdf (Courtesy of National Archives)
June 15, 1987
image pdf (Courtesy of National Archives and Records Administration)
June 15, 1987
image pdf (Courtesy of National Archives)
August 1987
transcript pdf (Courtesy of National Archives and Records Administration)
October 22, 1987
transcript pdf (Courtesy of John J. Phelan, Jr.)
October 22, 1987
transcript pdf (Courtesy of John J. Phelan, Jr.)
October 22, 1987
image pdf (Courtesy of National Archives and Records Administration)
October 26, 1987
transcript pdf (Courtesy of John J. Phelan, Jr.)
October 28, 1987
image pdf (Courtesy of National Archives and Records Administration)
October 30, 1987
transcript pdf (Courtesy of John J. Phelan, Jr.)
November 2, 1987
image pdf (Courtesy of National Archives and Records Administration)
November 16, 1987
transcript pdf (Mickey Edwards Papers, courtesy of the Carl Albert Congressional Research and Studies Center, University of Oklahoma, Norman, Oklahoma)
November 23, 1987
transcript pdf (Courtesy of National Archives and Records Administration)
December 22, 1987
image pdf (Courtesy of National Archives and Records Administration)
February 1988
The October 1987 Market Break: Report by SEC Division of Market Regulation

(Courtesy of Alton Harvey)

February 5, 1988
image pdf (Courtesy of National Archives and Records Administration)
February 5, 1988
image pdf (Courtesy of National Archives and Records Administration)
March 3, 1988
image pdf (Courtesy of National Archives and Records Administration)
October 19, 1988
image pdf (Courtesy of the Ronald Reagan Library)
June 27, 1989
transcript pdf (Anonymous)
1997
image pdf (Government Records)
October 1997
image pdf (Courtesy of Andrea M. Corcoran)
July 31, 2007
transcript pdf
August 2, 2007
transcript pdf
November 1, 2007
transcript pdf (Courtesy of Andrea M. Corcoran)

Programs

01 November 2007

Keeping the Markets Open - Lessons Learned from the 1987 Market Break

Moderator: Brandon Becker

Presenter(s): Andrea Corcoran, Christopher Cox, William Johnston, Richard Ketchum, David Ruder, Erik Sirri

Galleries

Wrestling with Reform: Financial Scandals and the Legislation They Inspire

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