From the May 2011 issue of Research Magazine • Subscribe!

Congress’s Free Pass on Insider Trading

The Galleon insider trading case has made top headlines everywhere, but what hasn’t been as extensively covered is how U.S. lawmakers are excluded from the same insider trading rules that govern Wall Street.

Unbeknownst to many people, current insider trading laws do not apply to nonpublic information about current or upcoming congressional activity. But a reintroduced bill called the STOCK Act (Stop Trading on Congressional Knowledge) aims to change that. The bill was first introduced in 2006 by Rep. Louis Slaughter (D.-N.Y.). Under the proposed rule, government workers would be banned from stock, commodity or bond trading based upon their access to privileged information.

Given the U.S. government’s massive intervention in the financial system over the past several years, it is perplexing that rules governing the financial transactions of members of Congress aren’t already in place.

If passed, here’s what the STOCK Act would do:

  • Prohibit members or employees of Congress from buying or selling stocks, bonds or commodities futures based on nonpublic information about pending or prospective legislative action.
  • Prohibit those outside of Congress from buying or selling stocks, bonds, or commodities futures based on nonpublic information about pending or prospective legislative action if that information is obtained from a member or employee of Congress.
  • Prohibit members, employees, or persons with nonpublic information from disclosing information about any pending or prospective legislative action if they believe that information will be used to buy or sell stocks, bonds, or commodities futures.
  • Require members of Congress and employees to report the purchase, sale, or exchange of any stock, bond, or commodities future in excess of $1,000 within 30 days. Members and employees who choose to place their stock holdings in blind trusts or mutual funds are exempt from this reporting requirement.
  • Require firms that specialize in “political intelligence” and obtain their information directly from Congress to register with the House and Senate, much like lobbying firms are now required to do.

Here’s an example of the type of financial conduct that is currently legal that would be banned under the proposed STOCK Act: Congressman A learns that the chairman of the Appropriations Committee has decided to provide a multimillion dollar defense contract for Company B in the Defense Appropriations bill. This information has not been released to the public, but will almost certainly drive Company B’s stock price up when it becomes public knowledge. Congressman A buys stock in Company B and makes a huge profit.

Individual or professional investors who traded like Congressman A would most certainly be prosecuted, fined and perhaps jailed.

Thomas Newkirk, a former official with the SEC’s enforcement division, told the Wall Street Journal several years ago: “If a congressman learns that his committee is about to do something that would affect a company, he can go trade on that because he is not obligated to keep that information confidential.... He is not breaching a duty of confidentiality to anybody and therefore would not be liable for insider trading.”

Until the STOCK Act passes, double standards with insider trading rules governing the personal financial transactions of congressional members will continue to reign.

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