New York, NY – Last week, the US Senate passed the House version of the Stop Trading on Congressional Knowledge (STOCK) Act in a 96-3 vote, thereby sending the final bill to the President to sign. This bill bans members of Congress and other Federal employees from personally profiting from nonpublic information obtained from the person’s position or gained in the performance of official responsibilities. However, Senators Reid and Lieberman went out of their way to clarify that the STOCK Act should not restrict government transparency.
Lowdown on the STOCK Act
The final version of the STOCK Act accomplishes a few basic things. This includes:
First, the bill explicitly states that employees of the legislative and federal branches of government have a duty to the United States and its citizens, and to the institution of Congress itself, to keep confidential any material information they come into possession of in the course of performing their duties. In addition, the bill prohibits government employees from financially profiting from material nonpublic information they obtained as a result of their jobs.
The STOCK Act also expressly forbids public officials, including members of Congress, from using their government office to obtain preferential access to IPOs.
To help provide transparency regarding Congress’ investment activity, the STOCK Act requires that members of Congress and senior members of the executive branch disclose any trading activity exceeding $1,000 within 30 days after placing a trade. These disclosures will need to be made electronically, in standardized form, and will be open to the public for review.
The final version of the STOCK Act did not include a controversial requirement that all firms that provide political intelligence services be required to register in a manner similar to lobbyists. Instead, the bill that the President will sign requires that the GAO prepare a report for Congress on the role of political intelligence firms, addressing the effects of political intelligence on the financial markets, related legal and ethical considerations, and the pros and cons of requiring political intelligence firms to register.
Clarity on Transparency and MNPI
An important clarification on the impact of the STOCK Act came from a colloquy between Senator’s Reid and Lieberman. Both Senators agreed that the STOCK Act is not intended to limit government transparency or hinder the dissemination of information to the public regarding Congressional activities and deliberations.
As part of this discussion, Senator Reid explained that an employee of Congress who, in the course of conducting their duties, has a private conversation with a constituent, does not automatically violate the duty of trust imposed by the STOCK Act. Senator Reid later tried to reassure legislative employees that based on discussions between his office and the SEC, that to be found guilty of insider trading, the SEC would need to prove that a Member of Congress or their staff acted with corrupt intent, knowingly, recklessly, or in bad faith. In other words, a government employee could not inadvertently provide material nonpublic information that was deemed to be tipping in an insider trading case.
Senator Lieberman also explained that the STOCK Act does not automatically transform information about Congressional deliberations or actions that previously was not material according to SEC definitions, into material information. In other words, government employees who provide information regarding Congressional deliberations or actions that don’t have an impact on securities prices won’t be seen to have provided inside information.
“Our goal in drafting the duty provisions of the STOCK act was to ensure that insider trading restrictions apply to government officials no differently than they do to the rest of the public, but at the same time, avoid unintended consequences that could curtail interaction between Congress and the public,” stated Lieberman.
This also means that investors who receive non material information from political insiders won’t be charged with insider trading just because they received this information from employees who have a duty of confidentiality to the government. However, this does mean that investors will be required to perform the same kind of analysis on information received from political insiders that they currently perform on potential MNPI from public companies. They need to determine if this information is both nonpublic and material.
The complete text of this colloquy is included below.
Mr. REID. There are many important issues facing our country today and solutions will require bipartisan cooperation. The STOCK Act has enjoyed overwhelmingly bipartisan support because it addresses a key issue, namely government accountability to the American people.
Members of Congress and those we employ must be held accountable to the same standards and laws as the citizens we represent. We owe a duty of trust and loyalty to the American people to conduct our private lives with the highest integrity and to never abuse our office to gain unfair or unethical financial advantages. I am pleased that we have voted overwhelmingly to pass a bill that closes any loopholes, real or perceived, in this regard.
I would note specifically that the STOCK Act requires that Members of Congress and their staffs abstain from profiting on any nonpublic information derived from a person’s position or gained in the performance of official responsibilities. The bill also makes absolutely clear that Members and staff are not exempt from the insider trading prohibitions arising under the securities laws, including section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
However, and I think my distinguished colleague from Connecticut will agree, the STOCK Act should not be interpreted as limiting government transparency in any way. Discourse with the public, whether privately or publically, is vital to maintaining a healthy democratic society.
Mr. LIEBERMAN. I thank the Senator from Nevada. I am happy about the reforms that Congress has adopted, and I agree that the STOCK Act is not intended to limit government transparency or hinder dissemination of information to interested parties regarding Congressional activities and deliberations.
In the interest of clarity for the record, I would like to state that the STOCK Act does not turn information regarding Congressional activities and deliberations that was previously not material, into material information with respect to securities laws. I would also note that a Member or employee of Congress who, in the course of performing their duties, has a nonpublic conversation with a citizen or constituent does not automatically violate the duty imposed by Section 4(b)(2) the STOCK Act.
Mr. REID. I thank the Member from Connecticut for his comments. With regard to the Chairman’s last remark, I would like to point out that my office has fielded concerns from multiple sources that the duty language may be interpreted by the SEC as creating liability for public officials and their staff when communicating privately with constituents. There is concern that a threat of this would have a significant chilling effect on government transparency. I understand however that in conversations with my Leadership staff the SEC has explicitly clarified that it does not view the STOCK Act as creating new limitations on the disclosure of Congressional information in conversations with constituents. I also understand that Leadership staff has been assured by the SEC that any case brought under the insider trading prohibitions would still require the SEC to prove that a Member of Congress or their staff acted with scienter, which means acting corruptly, knowingly, recklessly or in bad faith.
Mr. LIEBERMAN. The Democratic Leader is correct. As the Director of Enforcement at the SEC, Robert Khuzami, stated in his testimony before the House Financial Services Committee: “You have to be acting with corrupt intent, knowledge, or recklessness. If you act in good faith, you’re not going to be guilty.” Leadership staff had detailed conversations with the SEC while drafting the duty provisions and raised these concerns specifically. Our goal in drafting the duty provisions of the STOCK act was to ensure that
insider trading restrictions apply to government officials no differently than they do to the rest of the public, but at the same time, avoid unintended consequences that could curtail interaction between Congress and the public.
Mr. REID. Furthermore, it is my understanding that Section 11 of this bill is not intended to override the authority of the President to exempt from public availability the financial disclosure reports of individuals engaged in intelligence activities, which is contained in section 105(a)(1) of the Ethics in Government Act. As to the executive branch, section 105(a)(1) applies to all of the public availability requirements of this bill.
Mr. Lieberman. That is correct. It is not the intent of the STOCK Act to override the President’s authority for necessary exemptions for intelligence activities.