Can you get prosecuted as a senator for insider trading if you buy an ETF? If the senator used insider information and bought an ETF that had a big holding of a stock that went up as a result of an action only insiders would have known, can you get charged for insider trading, or would it be too difficult to make a case for it given that most ETF are well diversified? I am thinking even if the ETF had 10%+ holding, there wouldn't seem to be big case for insider trading if someone were to buy an ETF with a large holding of a particular stock. Am I wrong?
You are mostly mistaken.
Prior to the enactment of the STOCK Act in 2012 (as amended in 2013), insider trading by members of Congress based upon information obtained in their official duties was legal.
This is no longer the case, but there is no private cause of action to enforce the STOCK Act. Instead, the principal means by which violations are enforced is via a federal criminal prosecution which is something that the Justice Department is very reluctant to direct at a member of Congress.
There are at least two barriers to such prosecutions, in addition to the political issues involved with having an agency prosecute members of the body that funds it and regulates it:
To bring a case here, however, federal authorities must overcome two obstacles: the Speech and Debate Clause, and proving “materiality” in novel circumstances. Indeed, the announcement that the authorities have closed their investigations into three senators may show these obstacles already have proven too steep.
As a result, it is hard to bring federal criminal cases against members of Congress (or their aides) to enforce the STOCK Act, so it is much more toothless than it seems on the surface.
The further fact that a security is structured as an Exchange Traded Fund (ETF), however, is not itself necessarily all that much of a barrier to insider trading criminal liability for members of Congress, beyond the barriers already noted.
This is because many ETFs are focused on something less than the total securities market.
If a member of Congress, for example, has inside information on something that will impact the entire manufacturing industry, that member of Congress can engaged in insider trading in an ETF pertinent to that industry. Similarly, if a member of Congress gains advanced insight about an imminent war in Latin America, the member of Congress could engage in insider trading in connection with a Latin American securities ETF.
There is no requirement that insider trading be restricted to, or focused upon, a single issuer of securities (i.e. it does not have to be limited to stocks or bonds in a single corporation).