STOCK Act prohibits insider trading in Congress

Insider trading is the buying or selling of securities or commodities based on nonpublic information in violation of confidentiality – either to the issuing company or the source of information. Before 2012, congressional officials and employees during official business did not owe a duty of confidentiality to these companies and thus were not liable for insider trading. By having access to “nonpublic information,” gathered through official oversight proceedings, government officials could make big bucks at the public’s expense. Furthermore, lobbyists and brokers also prowled the halls of Congress for information to use in stock trading all the while not disclosing their clients and activities.

As active traders, government officials could reap large benefits, often unsurprisingly in the very market they oversaw from their committee perches. Studies found that members of Congress enjoyed a 12 percent higher rate of return on stock investments than the market and House members a 6 percent higher rate of return. This form of insider trading would be illegal for any normal citizen. The fact that government insiders could “cash in” provoked understandable public outrage.

Public Citizen advocated tirelessly beginning in 2006 to stop congressional insider trading.

Make no mistake: Though no one will admit it, lobbyists and brokers appear to have enjoyed a very profitable relationship with members of Congress, getting them to divulge information about pending legislation that will directly impact the markets, and then trading on that information. Craig Holman, government affairs lobbyist for Public Citizen

The STOCK Act

First introduced by U.S. Reps. Brian Baird (D-Wash.) and Louise Slaughter (D-N.Y.) in 2006, the STOCK Act gathered little traction in Congress. The measure attracted only 14 co-sponsors that year.

Public Citizen tipped off investigative journalists at “60 Minutes” as to the abuses of congressional insider trading. “60 Minutes” aired a dramatic expose in 2011 highlighting the extent of insider trading by members of Congress and the legislation rapidly gained public – and congressional – attention. The number of co-sponsors on the House bill went from nine to 131 in a matter of days, and two versions of the legislation were introduced in the Senate for the first time.

The original legislation contained the three key pillars. These included:

• Clarifying that the laws against insider trading apply to members of Congress and congressional staff.
• Mandating real-time disclosure of stock trades by members of Congress and senior staff, posted on the Internet in a “searchable, sortable and downloadable” format.
• Requiring Wall Street operatives and lobbyists who gather congressional information for trading purposes, called “political intelligence consultants,” to register and disclose their activities and clients under the disclosure system of the Lobbying Disclosure Act (LDA).

Months later, the STOCK Act passed in the House by a vote of 417-2 and in the Senate by a vote of 96-3.

The final legislation approved in 2012 was weakened when House Majority Leader Eric Cantor led lawmakers to exclude the provision mandating disclosure of the political intelligence industry. (Cantor subsequently lost reelection and joined Wall Street.)

Republican members of Congress, irritated by then-President Barack Obama’s support of the STOCK Act, decided to vastly expand the online disclosure requirement of stock trading activity to include some 28,000 employees of the executive branch as well as Congress. “What’s good for the goose is good for the gander,” reasoned Sen. Richard Shelby (R-Ga.).

After passage of the STOCK Act in 2012, the online disclosure requirement for executive branch employees soon became problematic. This universe captured many security officials and ambassadors in foreign countries, raising security concerns. A reasonable solution would have been to rein in the scope of online disclosures for executive branch personnel by excluding those with genuine safety issues.

Instead, Congress overreacted and approved legislation in 2013 with no reading of the bill and no debate that slashed the number of executive branch employees subject to online disclosure to about 70, consisting of Cabinet officials who are severely restricted from trading on the stock market anyway. The revised bill also eliminated the requirement that congressional staff trades are to be reported online and ended the plans to create a “searchable, sortable and downloadable” database to present the trades of those officials who remained covered by the law.

Today, the STOCK Act still bans congressional insider trading, but only a relatively small group of public officials are required to provide timely disclosure of their stock trading activities and these online disclosures are no longer sortable and downloadable.

Still, a 2017 Public Citizen report showed the STOCK Act was effective in vastly reducing insider trading by members of Congress, reducing overall congressional stock trading activity by about two-thirds. Nevertheless, of the members who continue trading on the stock market, many of them trade stocks in businesses they oversee in their official congressional duties.

Public Citizen continues to fight for critical provisions to be added to the STOCK Act and put teeth back into the law. We continue to push to open the books on the political intelligence industry and disclose online their sources of information, activities and clients, so that all citizens play by the same rules. And we are advocating prohibiting members from trading stocks in industries that fall under their committee jurisdictions.

The STOCK Act is a legislative imperative. We know that many members of Congress are active traders in the market, and they enjoy a 6 percent higher rate of return on their investments than the market. Either these members of Congress are geniuses when it comes to stock trading, or they know something the rest of us don’t – and trade on it. Craig Holman, government affairs lobbyist for Public Citizen