The recent coverage by the WSJ of insider trading by Congressional staffers (scroll down) has prompted renewed attention to the Stop Trading on Congressional Knowledge (STOCK) Act. Unfortunately, this good government bill appears to be headed--once again--for the same dust bin to which all good government bills seem to be consigned. The WSJ reports:
Rep. Brian Baird (D., Wash.) and a handful of other lawmakers including Rep. Louise Slaughter (D., N.Y.) have for years supported legislation that would explicitly make it illegal for members and their aides to trade stocks and other securities based on non-public information gleaned from the legislative process. Mr. Baird, however, retires at the end of this year.
When the bill—the Stop Trading on Congressional Knowledge Act, or Stock Act—was introduced nearly five years ago, just 14 other lawmakers endorsed it.
A current version of the bill has fared worse, with support from just nine lawmakers. There is no companion legislation in the Senate. ...
... Unlike many executive branch employees, lawmakers and aides don't have restrictions on their stock holdings and ownership interests in companies they oversee. ...
Rather than passing legislation, Mr. Baird said he has come to believe in recent months Congress should simply amend its official ethics guidelines and rules. The next House majority, for example, could easily add the new rules as part of the process of convening the new Congress in 2011, he said.
Mr. Baird also said the new rules should require disclosures of all trades within 48 hours, as the Stock Act states, instead of a year afterward, as current rules require. He said any improper trading would then be more easily detected, because observers would be attuned to congressional activities at the time their trades were made.
I analyzed the STOCK Act in detail in my article The Stop Trading on Congressional Knowledge Act. The Act is not perfect and I suggest a number of improvements, but its a damn sight better than leaving it up to ethics rules. The GOP needs to demonstrate its commitment to a new way of doing things in DC. Passing the STOCK Act would be a good start.
As for why I prefer the Act to ethics rules changes, I explored that issue in my article Insider Trading Inside the Beltway. In it, I conclude that:
The core problem with self-enforcement by Congress is that the ethics committees of the House and Senate are notoriously reluctant to prosecute Members.[1] “Watchdog groups have long criticized the House and Senate ethics committees as ineffective and toothless.”[2] Leaving the problem of insider trading to those committees therefore is an untenable solution if Congressional insider trading is to be successfully prevented.
In contrast, the SEC has a long track record of successfully prosecuting insider trading cases.[3] The SEC has a number of investigatory tools and core competencies that serve it well in insider trading cases.[4] It is therefore better positioned that inexperienced and ineffective Congressional ethics committees to enforce a ban on Congressional insider trading.
To be sure, as already noted, the SEC to date has been “unwilling to take any sort of initiative against insider trading by senators and other congressional officers.”[5] It is plausible that this failure is an intractable one. Any government agency is likely to be reluctant to bite the budgetary hand that feeds it. To the extent the SEC’s failure stems from a recognition that current law does not reach Members of Congress, however, a clear statement of the SEC’s authority to regulate Congressional insider trading could prompt a more aggressive enforcement stance on the SEC’s part.
[1] Barbabella et al., supra note TBA, at 28-31.
[2] Dierdre Shesgreen, Congress Split over Handling Ethics Inquiries, St. Louis Post-Dispatch, Mar. 12, 2006, at B4.
[3] See Danné L. Johnson, SEC Settlements: Agency Self-Interest or Public Interest, 12 Fordham J. Corp. & Fin. L. 627, 672 (2007) (“A recent survey of SEC cases points to anecdotal evidence that the SEC is most successful when it is pursuing its core areas of enforcement, such as standard account fraud cases and insider trading cases.”).
[4] See generally Stephen M. Bainbridge, Incorporating State Law Fiduciary Duties into the Federal Insider Trading Prohibition, 52 Wash. & Lee L. Rev. 1189, 1262-66 (1995) (discussing the tools the SEC uses in investigating and prosecuting insider trading cases).
[5] Macey & O’Hara, supra note TBA, at 108.
