Sunday, December 04, 2011

Senate and House Legislation Would Prevent Insider Trading by Congress and Employees

Bi-partisan companion Senate and House legislation prohibiting Members and employees of Congress from buying or selling securities, swaps, security based swaps, or commodity futures based on nonpublic information they obtain because of their status are gaining momentum and may pass before the end of the first session of the 112th Congress. The Stop Trading on Congressional Knowledge Act (STOCK Act) redefines insider trading to include knowledge gained from Congressional work and service, creates rules and reporting requirements, and requires political intelligence consultants to register as lobbyists. Currently, according to Senator Kirsten Gillibrand (D-NY), sponsor of S. 1903, insider trading by members of Congress and their staffs is not prohibited by the Securities Exchange Act or Congressional rules.

The legislation amends the definition of insider trading to include purchasing assets on the basis of knowledge of a legislative action gained from a member or employee of Congress or by virtue of being a member or employee of Congress. This would require the SEC and CFTC to adopt regulations to prevent such use and go after cases of insider trading by members of Congress. It would also require reporting within 90 days of a member or employee making a transaction of more than $1,000 to provide oversight of possible violations or inappropriate practices.

In addition, the Stock Act amends Senate and House rules to make it a violation of the rules to provide information with the understanding that it will be used to buy or sell an asset or to use knowledge gained from Congressional work to buy or sell a stock or commodity. The legislation would also require political intelligence consultants, individuals contacting legislative and executive branch employees to acquire market intelligence regarding a proposed rule, regulation or legislation, to register as lobbyists, and would make them subject to the same reporting requirements and other restrictions imposed on lobbyists.

According to Rep. Louise Slaughter (D-NY), co-sponsor of the House bill, HR 1148, the increase in the number of political intelligence firms suggests that the leaking of nonpublic congressional information occurs regularly. Starting from a handful of firms in the 1970s, she noted, political intelligence firms have grown into an industry that brings in an estimated $40 million a year.