Wednesday, April 04, 2012

President Signs STOCK Act Prohibiting Insider Trading by Federal Officials

The President signed the Stop Trading on Congressional Knowledge (STOCK) Act, S 2038, barring members of Congress and their staffs, as well as executive branch and judicial branch officials and their staffs, from trading on inside information they obtain as part of the job and that is not readily available to the public. The Act provides that no federal government official may use nonpublic information that they learn about by virtue of their office for the purpose of trading and making a profit in the securities or commodities markets.

In a signing statement, President Obama said that the STOCK Act clarifies that if members of Congress use nonpublic information to gain an unfair advantage in the market, then they are breaking the law. The Act creates new disclosure requirements and new measures of accountability and transparency for thousands of federal employees. That is a good and necessary thing, said the President, since `` We were sent here to serve the American people and look out for their interests -- not to look out for our own interests.’’

But the President went on say that there is more work to do to close the deficit of trust and limit the corrosive influence of money in politics. For example, he said that any elected official should be limited from owning stocks in industries that they have the power to impact. Also, people who bundle campaign contributions should not be able to lobby Congress, and vice versa. These are ideas that should garner bipartisan support, noted the President, as he urged Congress to ``build off today’s bipartisan effort to get them done.’’

The Stock Act provides that the insider trading ban applies to all legislative, executive and judicial branch officials and their staffs. All three branches should be held to the same standard because all three branches must be worthy of the public’s trust, according to House Judiciary Committee Chair Lamar Smith (R-TX). Cong. Record, Feb. 9, 2012, p. H649.

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 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 final version. The House added the judicial branch to the legislation.

While members of Congress and other federal officials are not exempt from the federal securities laws, including prohibitions on insider trading, it was unclear if there existed a fiduciary duty to the United States. Misappropriating information gained through an employment relationship is illegal, but there is conflicting case law on whether members of Congress actually constitute employees of the federal government. The Act establishes a fiduciary duty against insider trading by all three branches of government. The Act authorizes the SEC, CFTC and Department of Justice to bring and prosecute insider trading cases throughout the federal government.

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, and executive and judicial branch employees, using inside information for personal benefit states a duty of trust and confidence. The Act 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.

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

The legislation 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. This provision prevents federal officials from receiving special early access to securities IPOs, which can result in significant profits for the well connected.

The legislation enhances financial disclosure rules for federal public officials. Financial disclosure forms will be made publicly available in searchable, downloadable databases on government websites.

The Act also requires prompt reporting, within 30 days, of significant securities transactions by key federal officials and employees in order to bring the financial dealings of public servants into the light of day. According to Senator Joseph Lieberman (I-CT), the SEC has indicated that that kind of required disclosure of securities trades will help the Commission ensure that insider trading laws are not being violated. Cong. Record, Feb. 2, 2012, S299.

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