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    Stock Act

February 12, 2012

End of the Inside Track – Congressional Insider Trading Derailed

CongressThose in Congress occupy a unique niche in American society.  They are gatekeepers for the creation of the laws we are bound by as citizens.  In that role, the temptation for gaming the system for financial advantage is great and often the oversight is weak.  Over the last several decades, Congress has often demonstrated an unapologetic propensity to live above the laws they make for the rest of us.

A case in point – insider trading.  American citizens are constrained by the provisions of the 1934 Securities and Exchange Act from trading the stocks of companies about which they may have important, non-public information.  However, members of Congress have no such constraint under this Act thanks to the very lucrative exemption they created for themselves.  Members of both parties were happy to exploit this convenient exemption, ignoring the ethical lapse it represents, until the CBS news magazine 60 Minutes brought the matter into full public view.


Peter Schweizer

The research underlying the 60 Minutes report was developed by Peter Schweizer, a fellow at the conservative Hoover Institution, for his new book Throw Them All Out.  The uncomfortable exposure brought a sudden rush to support the STOCK Act,  legislation to curtail insider trading of securities by lawmakers and officials in the executive branch.  The bill had languished for years with only 2 sponsors.  On February 9, the House of Representatives passed the bill overwhelmingly by a vote of 417 to 2, with over a hundred sponsors.

This initial test of support for the STOCK Act, complete with the ethical posturing by members who had only months before been happy to profit on non-public information, was impressive.  But the real test will come as the final bill gets worked out in conference committee meetings.  One of the key issues is how to deal with the purveyors of political intelligence – often former members of Congress in the employ of hedge funds or other groups that can profit from inside knowledge of Congressional activities and intentions.

The Founding Fathers designed the government to operate within a system of institutional checks and balances.  But when it comes to curbing the “legal graft” practiced by those with the power to make laws, the most powerful check has turned out be the transparency brought by our ubiquitous, instant and always on media.

Perhaps the STOCK Act will go some way toward improving the very low esteem in which Congress is held these days – with job approval ratings now at 11 percent.  It is critical for us as a society that we not lose trust in our governing bodies. As Meg McCardle noted in her recent article “Capitol Gains” for The Atlantic magazine:

“In the end, the problem with congressional insider trading isn’t that it undermines confidence in the market—Congress frequently does that openly. The problem with congressional insider trading is that it erodes confidence in our political institutions. We can’t really afford to deplete that pitiful stock much further.”