In a WSJ op-ed on Congressional insider trading, Yale law professor Jon Macey argues that the main version of the STOCK Act now before Congress is seriously flawed:
The "Stock" Act, as it is called, would make it illegal for members of Congress and staff to buy or sell securities based on certain nonpublic information. It would toughen disclosure obligations by requiring congressmen and their staffers to report securities trades of more than $1,000 to the clerk of the House (or the secretary of the Senate) within 90 days. And it would bring the new cottage industry in Washington, the so-called political intelligence consultants used by hedge funds, under the same rules that govern lobbyists. These political intelligence consultants are hired by professional investors to pry information out of Congress and staffers to guide trading decisions. ...
... [But] what Congress really wants is to keep making the big bucks that come from trading on inside information but to trick those outside of the Beltway into believing they are doing something about this corruption. For one thing, the rules proposed for Capitol Hill are not like those that apply to the rest of us. Ours are so broad and vague that prosecutors enjoy almost unfettered discretion in deciding when and whom to prosecute.
Congress's rules would be clear and precise. And not too broad; in fact they are too narrow. For example, the proposed rules in the Stock bill are directed only at information related to pending legislation. It would appear that inside information obtained by a congressman during a regulatory briefing, or in another context unrelated to pending legislation, would not be covered.
Regular readers know that this is a drum I've been beating for quite a while. (You can look it up in the archives.) Indeed, I've made the same complaints repeatedly.
So I was pleasantly surprised when I saw Senator Kirsten Gillibrand's proposed revision of the STOCK Act (see press release here). As Gillibrand explains:
The newly revised version of the STOCK Act explicitly bars a member of Congress from engaging in insider trading or otherwise using nonpublic information for their own personal benefit, and clarifies that this provision constitutes a sufficient basis for the Securities and Exchange Commission to investigate and prosecute members of Congress engaging in insider trading - including the “tipping” of non-public information. By incorporating feedback from witnesses at last week’s committee hearing, the legislation directly corrects the ambiguity in existing laws to ensure that members of Congress, their families and their staffs are fully covered by insider trading laws. The legislation is carefully crafted to not alter existing insider trading law, but to simply ensure that members of Congress, their families, and their staff are fully covered by it.
In addition, the revised legislation further enhances disclosure requirements by requiring that members of Congress report stock and other major financial transactions within 30 days, dramatically less than the current annual reporting requirement, and reduced from the 90 days proposed in the original draft of the legislation.
What Gillibrand's proposal does is to completely rethink the STOCK Act by simply applying existing law to Congress:
‘‘SEC. 602. GENERAL PROHIBITION.
‘‘No Member of Congress and no employee of Congress shall use any nonpublic information derived from the individual’s position as a Member of Congress or employee of Congress, or gained from performance of the individual’s duties, for personal benefit.
‘‘SEC. 603. IMPLEMENTING RULES.
‘‘The Select Committee on Ethics of the Senate and the Committee on Standards of Official Conduct of the House of Representatives shall issue rules or regulations to carry out the purposes of section 602.
‘‘SEC. 604. APPLICABILITY TO SECURITIES LAWS.
‘‘(a) IN GENERAL.—For the purposes of the insider 8 trading prohibitions arising under section 10(b) of the Securities Exchange Act of 1934 and rule 10b–5 thereunder, the prohibition set forth in section 602 states a duty of trust and confidence of each Member of Congress and of each employee of Congress to Congress, the United States Government, and the citizens of the United States.
‘‘(b) RULEMAKING AUTHORITY.—The Securities and Exchange Commission may issue such rules or regulations as the Commission determines are necessary or appropriate to implement subsection (a) or to otherwise ensure that Members of Congress and employees of Congress are subject to the insider trading prohibitions that apply generally.”
Notice how many problems this approach solves:
- It takes a broad approach to the problem rather than the prior version, whose "too narrow" approach Macey and I have criticized.
- It brings the law governing Congress into line with the law governing the rest of us, solving a clear fairness problem.
- Although I would prefer a clear and bright-line definition of insider trading that applies to everyone, I understand that that's politically very difficult. Indeed, Congress has consistently chosen to leave the task of defining insider trading to the SEC and the courts. So simply extending that judge-made law to Congress is a more than acceptable second best solution.
- The Act is no longer limited to insider trading on the basis of information about pending legislation, closing a major loophole.
- By incorporating current law, the bill implicitly bans tipping by members of Congress, closing another major loophole.
- The requirement that Congressional transactions be disclosed within 30 days is an improvement on the current requirement of annual disclosures and on the 90 day disclosure requirement in the original version of the Stock Act, although still far shorter than the 2 days corporate insiders have to disclose their trades.
In sum, Senator Gillibrand and her staff are to be highly commended for coming up with a ban on Congressional insider trading that is simple, effective, comprehensive, and workable. Now we just have to get it past roadblocks like House Majority Leader Eric Cantor and the rest of the business as usual gang.