New York – When is inside information not illegal? When U.S. lawmakers or their staff trade on nonpublic regulatory or legislative information. Two House Democrats introduced legislation last week to create insider-trading rules for legislators and executive-branch employees. The bill also would require greater oversight of the growing “political intelligence” industry, the Washington analogue to expert networks, and prohibit disclosing non-public information about prospective legislation to investors.
The STOCK Act
The Stop Trading on Congressional Knowledge Act, or STOCK Act, would prohibit Members of Congress and federal employees from profiting from nonpublic information they obtain via their official positions. Under the proposed bill, lawmakers and staffers would have to disclose any stock, bond or commodity-futures transactions in excess of $1,000 within 90 days.
The legislation was first introduced by Rep. Louise Slaughter (D., N.Y.) in 2006, and was re-introduced last Thursday with co-sponsorship from Rep. Tim Walz (D., Minn.)
“This bill is about transparency and fairness,” said Congresswoman Slaughter. “As it stands today, neither Members of Congress nor their staff can be held legally accountable for making personal investment decisions based on non-public information.”
“This is a matter of equality under the law,” said Congressman Walz, “The same standards we have established for Wall Street should apply to Congress. The potential for abuse is obvious and troubling and there is simply no good reason Congress should get to play by a separate set of rules in the stock market.”
Components of the STOCK Act:
- Prohibits Members and employees of Congress from buying or selling securities, swaps, security based swaps, or commodity futures based on nonpublic information they obtain because of their status;
- Prohibits Executive Branch employees from buying or selling securities, swaps, security based swaps, or commodity futures based on nonpublic information they obtain because of their status;
- Prohibits those outside Congress from buying or selling securities, swaps, security based swaps, or commodity futures based on nonpublic information obtained from within Congress or the Executive Branch;
- Prohibits Members and employees of Congress from disclosing any non-public information about any pending or prospective legislative action for investment purposes;
- Requires Members and employees of Congress to report the purchase, sale or exchange of any stock, bond, or commodity future transaction in excess of $1,000 within 90 days. Members and employees who choose to place their stock in holdings in blind trusts or mutual funds would be exempt from the reporting requirement; and,
- Requires firms that specialize in “political intelligence” and that obtain their information directly from Congress to register with the House and Senate, much like lobbying firms are now required to do.
Political Intelligence Research
Political intelligence research has been one of the few boom areas within investment research over the past few years. We track twenty-five political intelligence firms which provide investors with one-on-one access to Washington insiders. With a few notable exceptions, most political intelligence is provided by lobbying firms. The sponsors of the STOCK Act estimate the annual revenues of political intelligence firms at $30 to $40 million, based on an article in BusinessWeek from 2005.
The STOCK Act requires political intelligence firms to register with the House and Senate, much like lobbyists. The political intelligence firms we spoke to see no issues with this provision. More problematic is a provision prohibiting members and employees of Congress from disclosing any non-public information about any pending or prospective legislative action for investment purposes. At the very least, this would require the implementation of more stringent compliance practices, and most likely put a major damper on use of political intelligence firms.
Representative Slaughter: “Even more troubling [than inside trading by Congressional staff] is that unregistered firms might be using Congressional nonpublic information to make financial transactions at the expense of the average investor. This bill places those individuals under insider trading rules and enhanced disclosure rules.”
The bigger question is whether the legislation is likely to become law. Washington hands were skeptical, primarily because the legislation has been languishing since 2006, before being reintroduced last week. One knowledgeable source opined that the legislation has no chance barring a major scandal involving Washington insiders. Galleon Group doesn’t count…