IV. Extent of cooperation on part of judicial personnel

1. The Review Committee.-The Judicial Conference program of reporting extra-judicial income, despite the added reporting burden, has been well received by officers of the federal judiciary. In the first six years of its existence, through August 1976, the Review Committee will have received approximately 8,000 reports from judges, bankruptcy judges and magistrates. The incidence of noncompliance with the reporting requirement has been very low. Approximately ten judges have regularly declined to file reports on the basis of "conscience." The variation in number has been from 9 to 12 in the last five years. Usually one or two judges, for one reason or another, have from time to time failed to file their reports on time. thus resulting in the listing of their names in the official reports. of the Judicial Conference. The number of non-reporting judges, aside from those not reporting for reasons of conscience, has never exceeded five.

No bankruptcy judge or United States magistrate has ever failed to file a report as a matter of conscience, although as many as four bankruptcy judges and two magistrates have neglected to file timely reports, resulting again in the publication of their names in Conference reports. Usually these have been newly appointed judicial officers who did not file initial reports. During three of the last six reporting periods all bankruptcy judges and magistrates submitted timely reports.

Judges who do not file reports for reasons of "conscience” have expressed various reasons for not doing so. Many of these judges have expressed the view that the requirement infringes upon the constitutional independence of the judiciary or that it is inconsistent with the dignity of the judicial office. Approximately halfof these judges are in senior status but continue to perform judicial services. Other judges, recognizing an obligation to comply with Judicial Conference directives, have expressed reservations on the need for a reporting system, but have faithfully complied.

2. The Advisory Committee.-The Advisory Committee has met with the most conscientious and sensitive cooperation on the part of those who have sought its advice. This is understandable; a judicial officer concerned enough about what he or she sees as an ethical problem to inquire of the Committee is likely to accept guidance. Nevertheless, the Committee has been impressed by the willingness of judges to forego, for example, the acceptance of various awards or appointments to interesting boards or commissions where such may be deemed to convey the appearance of impropriety. Occasionally, when the initial inquiry contains inadequate data on which to rest sound advice, the Committee will ask for further information. Quite often this will remove any question of ethical impropriety. As might be expected, recent inquiries increasingly find the basis of response in the accumulated opinions of the past six years. In such cases a reference to the published opinion proves sufficient. And in some instances the judge or other officer may be so punctilious that the inquiry is one where the only answer can be that the judge might use his or her own best judgment in the light of the Code. V. Congressional initiatives in judicial ethics

This survey would be less than complete if it reflected only what the federal judiciary has done in the years under review. Just as this report began with the noting of public concern in 1969, it ends with a brief account of proposals in Congress which would most significantly affect the judiciary.

Among the proposals submitted by Congressional committees to the Judicial Conference for its consideration and report are bills that would mandate financial reporting. Typically, these bills would require of government executives and officials, including the President, Congressmen, judges, heads of government agencies, candidates for elective federal office, etc., "full disclosure of personal financial interests, all sources of income, assets and liabilities, and transactions in real and personal property." The provisions in some bills would apply to every government officer and employee whose salary exceeds $15,000 per annum. Each year Congressional interests in legislation of this type seems to rise. As of the date of this document, hearings have begun and further hearings are contemplated. Thus far the Judicial Conference, on recommendation of the three Committees, has voiced opposition to these measures, as they pertain to judicial officers, on the basis that the federal judiciary has already adopted its own workable reporting system."

Judicial Conference action in September 1975 on H.R. 110 and H.R. 3249, 94th Congress.

Congressional interest in the affairs of the judiciary is also evident from other proposed legislation. In 1974 the Judicial Conference received a request from the Senate Judiciary Committee for its views on a bill, introduced in the 93rd Congress by Senator Nunn, to establish a "Council on Judicial Tenure" in the Judicial Branch. The Council, to be composed of 14 judges, would be charged with the duty to receive and investigate complaints against a justice or judge of the United States and to determine whether the complaint alleges grounds which would warrant removal, censure, or involuntary retirement. Appellate review would also be authorized. After consideration of the report of the Committee on Court Administration, which reviewed the bill, the Conference, without passing on its specific provisions, approved it in principle, subject to certain suggestions recommended by the Committee and adopted by the Conference.

In view of Conference action approving the Nunn bill in principle, the three Committees have deferred discussion of the desirability of creating a system within the judiciary for considering complaints in lieu of such legislation.

Following ABA approval of the Code of Judicial Conduct, the Congress in 1974 amended Section 455 of title 28, United States Code, to include the provisions of Canons 5C and 5D of the ABA Code of Judicial Conduct relating to disqualification and remittal of disqualification. In so doing Congress departed from the provisions of the Canons in several respects. Most significantly the new statute requires disqualification in any case in which a judge has a financial interest "however small" and prohibits any remittal of disqualification based inter alia upon a financial interest. Subsequently, the Judicial Conference, on recommendation of the Joint Committee, amended Canon 3C of the Code of Judicial Conduct for United States Judges to conform with the provisions of Section 455 and deleted Canon 3D which previously permitted a remittal of disqualification. The Commission on Revision of the Federal Court Appellate System has given added support for Congressional action in the area of judicial discipline. The final report of the Commission, date June 1975, contains this recommendation:

"F. DISCIPLINE OF JUDGES

"Public confidence in the courts is an essential ingredient of our system of government. Allegations of judicial misconduct threaten that confidence. Judicial incapacity inevitably affects the efficient functioning of the courts.

"The Commission recognizes that a mechanism for handling allegations of misconduct and incapacity is an important matter and recommends that Congress turn its attention to this subject." "

It is hoped that this survey will be useful in broadening understanding within the federal judiciary of the origin, scope, and methods followed in its efforts to secure adherence to the highest ethical standards. While acceptance and support of these efforts have been a credit to all involved, there always remains room for improvement. The Committees, recognizing that their work, while not accompanied by any sanction other than the weight of their opinion, is not subject to any review other than that of the Judicial Conference itself, earnestly solicit any suggestions.

Mr. DANIELSON. Our next witness is Mr. Harvey Pitt, General Counsel of the Securities and Exchange Commission. Would you please come forward, Mr. Pitt?

I see you have an associate. Would you identify him for the record?

TESTIMONY OF HARVEY PITT, SECURITIES AND EXCHANGE COMMISSION

Mr. PITT. Mr. Chairman, this is Paul Ganson, the Associate General Counsel of the Commission and our ethics counselor.

I am pleased to have the opportunity to appear before you to discuss H.R. 3249 and related bills. In light of your time constraints and for other good and sufficient reasons, if it is satisfactory to you, I will

• Structure and Internal Procedures: Recommendations for Change, Report of the Commission on Revision of the Federal Court Appellate System, Washington, D.C., June 1975, p. 69.

simply paraphrase my remarks and assume that the full statement will be contained in the record.

Mr. DANIELSON. The full statement will be contained in the record without objection-hearing none-and we will study it. So, go ahead, sir.

Mr. PITT. We are in somewhat of a different position than the previous witnesses, being an independent regulatory agency, and also an agency charged with the preservation of the fairness and orderliness of the securities market, which is in a sense at the heart of the provisions of the bills before you.

The Commission has a great deal of concern with the misuse of information that may come from any confidential relationship, including employment in a governmental agency; and therefore we are concerned about trading practices and securities practices in which some persons in a privileged position take advantage of those who are not.

The bills before you would require extensive financial reports by a host of elected officials, nominees for Federal office, Members of Congress, but also of all officers and employees of the Federal Government who are paid more than $25,000 a year. That $25,000 figure, of course, would encompass employees at least at the GS-12 level, who number in the thousands, I think over 100,000 employees, and these would be employees who are in nonpolicymaking positions and who are part of the competitive civil service.

The reports are rather extensive, they would include all amounts and sources of income, including gifts from any source so long as the items exceed $100 in value. They would require the identity of every asset and liability in excess of $1,000. They would require any securities or commodities transaction in amounts exceeding $1,000, and any purchase or sale of real property.

As some of the witnesses before you have indicated this creates, we think, for the Congress, a delicate balancing of the problem between public official accountability-which the Commission fully supports— and the right of privacy of Government employees and other persons, which is of major concern not only in the context of this legislation, but in the context of the Privacy Act, the Freedom of Information Act, and the recently adopted Sunshine Act.

We think that the underlying purpose of the bills, namely the desire to enhance the appearance as well as the fact of integrity and impartiality of those who seek and hold important public office is desirable; but we think there are distinctions between candidates for major Federal offices and Government employees. Beyond that we note that Government employees come in all sizes and shapes. There are some who are discretionary officials, policymaking officials, and those who are not. We think that the bill, as presently drafted, does not take account of the distinctions in functions of these individuals, and that is our prime concern with it.

As alluded to earlier, we are concerned about the mechanism of the marketplace, trading in securities, that it not be impaired. I should point out that any use of material, nonpublic information, by any agency, employee or official, would in most cases constitute a violation of the antifraud provisions of the Federal securities laws, as well as title 18, section 371 of the United States Code. There are many cases that we can refer the subcommittee to in which Government employees

have been subjected to securities law questions as a result of their conduct.

The Commission because of its particular concern about the marketplace in securities markets has adopted detailed rules requiring disclosure of securities transactions by its members and employees. In some instances we absolutely prohibit certain securities transactions, transactions in commodities futures contracts.

In essence, unlike the bills before you, our rules apply to all transactions effected by or on behalf of persons who are employed at the SEC, members of their families, in business relations, and otherwise. Our rules have two primary thrusts, and we think that these thrusts would be well applied to any kind of legislation.

The first is to prevent the appearance of a conflict of interest by someone misusing his Government position. This is a legitimate concern and it is a thrust of our regulations.

The second is to prevent what I would call episodic or ad hoc misuse of information from a Government position to prevent appearance of conflict, and because our employees are daily involved in market sensitive information, our rules prohibit any member or employee from effecting, or causing to be effected, any transaction in a security except for a bona fide investment purpose. So, if a member or employee of the SEC wishes to invest in any security whatsoever, it must be for an investment purpose, and it must appear to be for an investment purpose. To that end our rules require a 1-year holding period for securities, that is the presumptive indication of investment intent. An employee who tries to go in and out of the market to take advantage of shortchange fluctuations is in violation of our rules, and in part because that would create the appearance of misusing the information he would have at the SEC. We do not want the public to assume that our employees misuse their position.

Similarly, our rules absolutely prohibit transactions thought to involve other appearances of conflict of interest by employees because of the speculative nature of the transaction, commodity futures transactions. margin transactions, sales of securities not owned, short sales of securities not owned by the member or employee.

To avoid the episodic misuse of information we have more specific rules. Commission members and employees must avoid trading in securities which are the subject of specific matters before the Commission, registration statements, investigations, or other kinds of proceedings; and they cannot in any way purchase any security of an entity that is regulated by the Commission, a broker-dealer firm, a public utility holding company, an investment company in securities, these are absolutely prohibited by the SEC.

In addition, we require detailed reporting by our employees. When anyone comes on board they file a financial holding statement on their securities. They also give other information about accounts with securities firms, relatives who are partners or officers of securities firms and the like, as is detailed in our testimony.

In addition, all employees at the GS-15 level or above and certain other administrative and executive personnel of the Commission must file annually statements of employment and financial interest, including a list of names of all corporations or organizations to which there is

any continuing financial interest. A list of the names of creditors of the employees. A list of any interest an employee has in real property or land.

Unlike the proposals in H.R. 3249, however, the statements of employment and financial interest we require are maintained in confidential files by our director of personnel. The information may be disclosed by them only if the Commission itself or the Civil Service Commission so determines for good cause shown. The members of our Commission are subject to Executive Order 11222, which has the same effect.

We review these reports on a periodic basis. The personnel files of our personnel office are reviewed by my office.

On the whole our rules have worked extremely well, there have been very few serious violations of our employees' security transaction rules, but there have been one or two of them. When they have occurred, we have taken immediate action, most always resulting in the employee leaving the Commission. When minor violations occur, we take care of them immediately.

I propose to the committee what we have done and what our concerns are as a backdrop to the consideration of these bills. Our misgivings about the pending bills stem from the fact that they require detailed disclosures from the covered individuals unrelated to the Government department or agency, or functions of the individual. We think that an attempt should be made in the bills to require disclosures related to the activities. Federal communications officials should be required, for example-and I just pick that as an example-to make disclosures relating to communications companies, and so on with other agencies. But we don't think that the broad-brush approach of these bills which would simply require public disclosure of numerous Government employees of all financial resources in what appears to us to be somewhat of an indiscriminate manner, is the appropriate approach to dealing with public accountability.

We think while public disclosure of this information can have a prophylactic appeal, the detailed financial information required by the bills on matters totally unrelated to an individual's position or function may well discourage many highly qualified and dedicated persons from seeking Government employment.

In this connection it seems that the distinctions between this bill and the Privacy Act are difficult to fathom; the bill seems inconsistent. We would suggest, instead, that the required report be made, as modified in our suggestion, but be made with the Comptroller General, or the Civil Service Commission, or whoever the Congress deems appropriate; and that there be a requirement that these reports be reviewed and monitored.

We think public confidence should be restored and improved, as the bill seeks to do, simply by assuring them that an independent agency, set up by this Congress, will review these statements and check for abuses, placing primary responsibility initially in the agencies by which these persons are employed. On this basis we see no reason to make the distinctions we think the bills do between the rights of privacy of Government employees from those of other citizens, that the Privacy Act attempts to establish.