Monday, January 30, 2012

Senate Set to Pass Legislation to Curb Use of Insider Information by Members of Congress and Staff

The Senate is set to pass legislation barring members of Congress from profiting on inside information they obtain as part of the job and that is not readily available to the public. The dispute over the applicability of insider trading laws to Congress centers largely on the issue of whether Congress owes a legally enforceable fiduciary duty to the source from which they receive material, non-public information. The Stop Trading on Congressional Knowledge (STOCK) Act, S 2038, makes it explicit that Members and staff owe such a duty under the securities laws. The full Senate voted to proceed to debate on the bill by a 93-2 vote on January 30.

Specifically, the legislation provides that, for purposes of insider trading prohibitions under the Securities Exchange Act, the prohibition against Members of Congress and employees of Congress using inside information for personal benefit states a duty of trust and confidence. HR 2038 authorizes the SEC to issue regulations implementing the legislation and otherwise ensuring that Members and staff are subject to insider trading prohibitions. Nothing in the Act diminishes an existing legal obligation of Members and staff and makes clear that the STOCK Act does not limit or otherwise alter existing securities laws.

A public perception has developed that Congress is not covered by insider trading laws, and worse, has exempted itself from them, said Senator Joseph Lieberman (I-Conn.), the sponsor of the legislation. This is not true, he noted, but the legislation eliminates ambiguities in current insider trading rules that might make it harder to prosecute a member of Congress than a member of the public for using inside information for personal benefit.

HR 2308 also makes conforming changes to the Commodity Exchange Act to ensure that the insider trading prohibitions under that Act apply to Members of Congress and staff.

Within12 months of enactment, the STOCK Act directs the GAO to submit a report to Congress assessing the role of political intelligence in the financial markets and the extent to which investors are using access to Congressional insiders and other federal employees to inform their investment decisions. This report is intended to shed light on the practice and better inform any future Congressional action in this area.

The report must discuss what is known about the prevalence of the sale of political intelligence and the extent to which investors rely on such information; as well as what is known about the effect that the sale of political intelligence may have on the financial markets. The report must also examine the extent to which information which is being sold would be considered non-public information and the legal and ethical issues that may be raised by the sale of political intelligence. Importantly, any benefits from imposing disclosure requirements on those who engage in political intelligence activities must be discussed, as well as any legal and practical issues that may be raised by the imposition of disclosure requirements on those who engage in political intelligence activities.

For these purposes, the Act defines political intelligence to mean information that is derived by a seller from direct communications with executive branch and legislative branch officials; and provided in exchange for financial compensation to a client who intends, and who is known by the seller to intend, to use the information to inform investment decisions.

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