“Send me a bill that bans insider trading by members of Congress and I will sign it tomorrow,” President Obama proclaimed in his State of the Union on Jan. 24, 2012.
After receiving a rousing applause and more than two months later, Obama finally signed the STOCK Act into law on April 4. (STOCK is an acronym for “Stop Trading on Congressional Knowledge Act.”)
The STOCK Act is supposed to prevent members of Congress from trading stocks based on the nonpublic information they obtain in their dealings with business leaders. But the guts of the Act left out some major things.
A Few Years Tardy
Interestingly, the original STOCK bill was first introduced back in 2006, during the Renaissance period, by Rep. Louise Slaughter (D-N.Y.). The only reason it was even resurrected from way back then was because of a CBS 60 Minutes news report that exposed House speaker John Boehner (R-Ohio) and Rep. Nancy Pelosi (D-Calif.) over trading in their personal investment accounts.
The investment portfolios of congressmen and senators, according to academic research, consistently beat stocks indexes like the Dow (DIA) and the S&P 500 (SPY).
“We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain,” stated a 2011 paper titled “Abnormal Returns from the Common Stock Investments of Members of the U.S. House of Representatives” by academics Alan J. Ziobrowski, Ping Cheng, James W. Boyd and Brigitte J. Ziobrowski.
Under the new STOCK Act, members of Congress, their aides and many members of the executive branch cannot use inside information they learn on the job to trade stocks or other securities. The law requires public disclosure of any trades within 45 days and reports to be made available online in a database that anyone can search.
The new STOCK Act law also limits members of Congress and executive employees to participating only in those initial public stock offerings that are available to the general public. Why this rule wasn’t already a law is being studied closely by legal students who are planning to be divorce attorneys.