Thursday, February 09, 2012

House Passes Legislation Curbing Use of Inside Information by Legislative and Executive Branches, Drops Grassley Political Intelligence Provision

The House passed 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 vote was 417-2. A different version of the legislation earlier passed the Senate by a vote of 96-3. 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 federal securities laws. A floor amendment offered by Senator Richard Shelby (R-Ala) extending the prohibition on insider trading to the executive branch and independent agencies was approved by a 58-41 vote; and was retained in the House version.

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.
HR 2308 also makes conforming changes to the Commodity Exchange Act to ensure that the insider trading prohibitions under that Act apply.

The House bill, but not the Senate, amends Section 21A of the Securities Exchange Act to provide that persons covered by the legislation may not purchase securities that are the subject of an initial public offering in any manner other than is available to members of the public generally.

The House removed a provision in S 2038 requiring political-intelligence practitioners to disclose their activities for the first time and make them adhere to the same registration requirements of lobbyists. This provision was added to the legislation by Senator Charles Grassley (R-Iowa) and was approved by a vote of 60-39.The House legislation replaces Grassley’s disclosure requirements with a study of the industry. Senator Grassley said he was extremely disappointed that the House killed the provision.The Senate clearly voted to try to shed light on an industry that’s behind the scenes, he noted, and if the Senate language is too broad, as opponents say, why not propose a solution instead of scrapping the provision altogether. Senator Grassley hopes to see a vehicle for meaningful transparency through a House-Senate conference or other means. If Congress delays action, the political intelligence industry will stay in the shadows, he said.