I'm simultaneously appalled but not surprised by news that the Stop Trading on Congressional Knowledge Act is again stalled in Congress. While our rulers impetuously drive towards ill-conceived Wall Street "reform," they continue to refuse to put their own house in order.
A bill that would require speedier disclosure of stock trades by lawmakers has languished for years on Capitol Hill, suggesting Congress has little appetite for new rules on how its members manage their money.
The legislation, by Democratic Reps. Brian Baird of Washington and Louise Slaughter of New York, would prohibit lawmakers from trading in financial markets based on nonpublic information they learn on the job. It would also require them to make their financial transactions public within 90 days of a purchase or sale.
Currently, those disclosures are filed once a year, and insider-trading laws generally do not apply to lawmakers, leaving them free to trade on nonpublic information.
At issue is the lawmakers' private financial activity. A Wall Street Journal article on Tuesday reported that several members of the House and Senate and their spouses bet against financial and real-estate markets in 2008, when markets were crumbling. Lawmakers made dozens of investments in leveraged funds that are designed to go up in value as the market goes down.
There was no evidence that any lawmaker based personal financial transactions on nonpublic information received through congressional hearings, meetings with lobbyists or private briefings with other government officials. ...
A senior Democratic aide said "it's no surprise that the legislation is unpopular [on Capitol Hill]. It means more work, more oversight and more scrutiny for members." The Democratic aide said most of the public doesn't know that lawmakers can trade on nonpublic information, adding, "It's not like there is a lot of phone-banking going on telling them to get on this bill."
You can download my article The Stop Trading on Congressional Knowledge Act from SSRN. In it, I explain that:
A 2004 study of the results of stock trading by United States Senators during the 1990s found that that senators on average beat the market by 12% a year. In sharp contrast, U.S. households on average underperformed the market by 1.4% a year and even corporate insiders on average beat the market by only about 6% a year during that period. A reasonable inference is that some Senators had access to - and were using - material nonpublic information about the companies in whose stock they trade.If members of Congress had any sense of propriety, the STOCK Act would have passed years ago. But since I'm finishing up an expanded article on the Act, I guess I'm glad they're a bunch of tools.
Under current law, it is uncertain whether members of Congress can be held liable for insider trading. The proposed Stop Trading on Congressional Knowledge Act addresses that problem by instructing the Securities and Exchange Commission to adopt rules intended to prohibit such trading.
This article analyzes present law to determine whether members of Congress, Congressional employees, and other federal government employees can be held liable for trading on the basis of material nonpublic information. It argues that there is no public policy rationale for permitting such trading and that doing so creates perverse legislative incentives and opens the door to corruption. The article explains that the Speech and Debate Clause of the U.S. Constitution is no barrier to legislative and regulatory restrictions on Congressional insider trading. Finally, the article critiques the current version of the STOCK Act, proposing several improvements.
