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House Committee Takes Up Congressional Insider Trading

December 6, 2011 - by Donny Shaw

Following last month’s 60 Minutes expose on insider trading by Congress, the House Financial Service Committee Act is holding a mark-up this morning of the STOCK Act, which seeks to end the practice of members of Congress trading stocks based on nonpublic information. Under current law, insider trading laws are hardly ever enforced for members of Congress, and we’ve known for some time that members’ investments consistently outperform the market by a significant amount. Legislation to stop congressional insider trading has been pending in the House and Senate for 6 years, and only now is the bill starting to move forward.

Let’s take a look at what it would do:

  • Amends the Security and Exchange Act to make it illegal for any person to buy or sell financial instruments while in possession of nonpublic information related to “pending or prospective” legislative matters if the information was obtained “knowingly from a Member or employee of Congress” or “by reason of being a Member or employee of Congress.”
  • Federal employees would also be banned from trading on nonpublic information, and it would be illegal for anybody to trade on such information if the information was knowingly received from a federal employee.
  • Amends the House Ethics manual to say that House employees shall not disclose nonpublic information if they have “reason to believe” that the information will be used to buy or sell financial instruments.
  • Requires employees of Congress to report any financial transactions worth over $1,000 to the House Clerk within 90 days.
  • Require disclosure, under the Lobbying Disclosure Act, of all “political intelligence activities,” defined as “any oral or written communication” involving federal employees “the information derived from which is intended for use in analyzing securities or commodities markets, or in informing investment decisions,” and is related to legislative activity, pending regulatory rules, or administration of an existing program or policy.

It’s certainly a good start, but it has some loopholes that need to be fixed. For example, law professor Stephen Bainbridge points out that thrid-party derivatives may be exempt since they are not necessarily issued by a company related to pending legislative activity. He also notes that the 90-day disclosure grace period is too long. He suggests a 48-hour disclosure rule, like the one corporate traders must abide by. Quicker disclosure would encourage public oversight of members’ financial transactions and that has the potential to be more powerful than the SEC rules in discouraging conflicts of interest in legislating.

Pictured above is Rep. Louise Slaughter [D, NY-28], who has been sponsoring the STOCK Act in Congress for years.

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