Inside job

The US Securities and Exchange Commission may prove at least as wimpy with lawmakers as it is with their donors. Thanks to a law that's in the works, the regulator will soon have far greater license to crack down on congressional insider traders. But new research suggests enforcers go easier on bosses of companies that make political contributions. If even donors are shielded, lawmakers themselves stand to get off lightly.

The SEC has never been above politics. US senators must approve the appointment of its five commissioners and, at least as important, sign off on its budget. So, there's plenty of opportunity for meddling. On Thursday, for instance, the House was due to consider ordering the watchdog to beef up its cost-benefit analysis of new regulations, a measure designed to delay unpopular rules like some of those under the Dodd-Frank financial reforms.

The politicians' influence may explain why the SEC has traditionally shied away from pursuing lawmakers for insider trading. Congress itself is investigating Representative Spencer Bachus over selling financial markets short after a confidential briefing in 2008. Legally, nothing prevents regulators making similar enquiries. But they have mumbled about the law's murkiness to justify inaction.

That excuse won't wash any longer if, as expected, the so-called STOCK Act becomes law. It explicitly prohibits congressional insider trading. Yet, the prospects for vigorous enforcement aren't encouraging.

The SEC and the Justice Department already treat corporate officers relatively leniently if their companies or chief executives have made campaign donations, according to a Florida State University study. On average, sentences are shorter and fines less, the authors say, a possible consequence of contributors persuading lawmakers to nudge the enforcers. The study supports prior research finding that lobbying and political contributions blunt fraud detection.

Launching an insider trading investigation against a member of Congress would demonstrate the SEC's independence. Finding promising candidates shouldn't be too tough, given the uncommonly strong performance of the average congressional portfolio. The harder task would be to weather any political retribution. Expecting the watchdog to bite the hand that feeds it and appoints its bosses may be asking too much.