Last updated on: 4/18/2012 12:23:33 PM PST | Author: ProCon.org
Should insider trading by Congress be allowed?
About This Topic
With the information they gain on the job, members of Congress could have an advantage in trading stocks over those who lack such information. A 2004 Georgia State University study revealed that US Senators' stock trades performed 12.3% better than the market average. A 2011 study showed that US House members' stock trades performed 6% better than the market average.
According to the US Securities Exchange Commission, insider trading is in part "buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security."
While members of Congress are not exempt from federal securities laws (including insider trading prohibitions), insider trading regulations do not clearly define whether government officials trading on inside government information is considered illegal insider trading. It remains unclear whether a member of Congress has a fiduciary duty to the United States (misappropriating information gained through an employment relationship is illegal, but case law conflicts as to whether members of Congress actually constitute "employees” of the federal government), whether the information on which the Member trades is "material” (Is there "a substantial likelihood” that a reasonable investor "would consider it important” in making an investment decision?), and whether the information on which the member traded is "nonpublic.”
The US House of Representatives Ethics Manual states that its members should "never use any information coming to him confidentially in the performance of governmental duties as a means for making private profit," and the Senate Ethics Manual states that its Conflict of Interest Rule 37(1) provides for "a broad prohibition against members, officers or employees deriving financial benefit, directly or indirectly, from the use of their official position[s].” No arrests or prosecutions, however, have ever been made against members of Congress for insider trading based on nonpublic congressional knowledge.
In addition, the spurt in the growth of "political intelligence operatives," firms that sell market-moving legislative information gathered on Capitol Hill for stock trades on Wall Street, has increased public scrutiny of the legitimacy and fairness of trading on such information. Political intelligence operatives are estimated to have grown into a $40 million industry. In Mar. 2008, Representative Baird and Representative Slaughter presented the Political Intelligence Disclosure Act that would have required specifically the political intelligence community to disclose their clients, profits, and activities. The proposed bill did not come to a vote.
In Mar. 28, 2006, Representatives Brian Baird (D-WA) and Louise Slaughter (D-NY) proposed a bill known as the Stop Trading on Congressional Knowledge (STOCK) Act to prohibit the trading of securities based on material nonpublic information obtained in Congress. However, the bill did not come to a vote. It was reintroduced in the 110th (May 16, 2007) and 111th (Jan. 26, 2009) House sessions where it also died in committee. On Mar. 17, 2011, Tim Walz (D-MN) introduced the STOCK Act into the 112th House session where it gained one co-sponsor and was referred to various committees. Eight more co-sponsors joined by Nov. 4, 2011.
On Nov. 13, 2011, 60 Minutes reported that several members of Congress allegedly used insider information for personal gain. The STOCK Act received 84 additional House co-sponsors in the five days following the report, and Scott Brown (R-MA) filed the STOCK Act in the Senate on Nov. 15, 2011. Kirsten Gillibrand (D-NY) also filed a variation of the STOCK Act in the Senate on Nov. 17, 2011.
On Jan. 24, 2012, in his State of the Union Address, President Obama said "Send me a bill that bans insider trading by members of Congress, and I will sign it tomorrow.” Immediately after the speech, Senate Majority Leader Harry Reid (D-NV) told reporters, "I think people should have enough sense not to do it [insider trading] without legislation, but I will support legislation.” On Feb. 2, 2012 the Senate passed the bill 96-3, and on Feb. 9, 2012 the House of Representatives passed the bill 417-2. On Apr. 4, 2012, the STOCK Act was signed into law by President Obama.
PRO Allowing Congressional Insider Trading
CON Allowing Congressional Insider Trading
PRO: Proponents argue that insider trading law only applies when one breaches a duty of confidentiality to the source of information and that lawmakers who trade stocks based on congressional knowledge have no such duty to Congress. Proponents also believe that regulating insider trading in general is inefficient, would be impossible to implement in Congress, and could harm the flow of information between Capitol Hill and the public.
CON: Some opponents consider it already illegal for legislators to trade securities based on congressional knowledge, because such information can be "nonpublic," "material," and such actions violate the Code of Ethics for Government Service. Opponents say that congressional insider trading raises questions of accountability and conflicts of interest in Congress. They believe government officials should be held to the same standards as all other Americans.