Support Your Local "Sheriff" ... in Supporting the STOCK Act

Salary of members of the United States Congress: $174,000.

Average annual Civil Service Retirement System benefits for retired members as of 2007: $63,696.

The profits they can make by trading on inside information?

Priceless.

Ladies and gentlemen, Congress has a problem. (OK, it's got many problems -- but let's take them one at a time.) The one I want to focus on today, and the one I've been writing about for the past 18 months, concerns insider trading.

Most investors know that it's wrong to trade on inside information, if for no other reason than because folks who get caught trading on insider information tend to get hauled into court and prosecuted by the SEC. But according to economics professor Alan Ziobrowski of Georgia State University, Congress hasn't yet "gotten the memo." You see, current law doesn't impose a clear "fiduciary duty" on congressmen, which would prevent their trading on information learned in the course of conducting the nation's business. And because what isn't forbidden is permitted, they do it.

Trade on inside information, that is. As a result, the professor's research shows that the average U.S. representative outperforms the S&P 500 by about 6 percentage points per year on his stock trades, and the average U.S. senator outperforms by 12 percentage points. The professor concludes that this outperformance is only humanly possible to achieve and sustain through use of inside information.

The more things stay the same, the more they must change
As I say, this is all perfectly legal under U.S. law, and has been so for many decades. What's more, despite several years of trying to get legislation passed to prevent the practice, it remains legal today -- but perhaps not for much longer. When I first began advocating for passage of the STOCK Act, over a year ago, only a bare half-dozen congressmen were on record supporting a law that would ban insider trading on Capitol Hill. Fast-forward, though, and today, co-signers of this landmark legislation are 180 persons strong... and growing.

How many congressmen does it take to change a light bulb?
180 congressmen is "a whole lot more than nothing," but, as Adlai Stevenson once said, "we still need a majority to win." If we as a nation are going to change what's wrong about Washington -- to end the insider dealing and correct the misconception that what's good for the rest of the nation isn't good enough for its elected representatives, we need more support.

That's where you come in. Last month, the STOCK Act got a second chance at passage when 60 Minutes aired a report on high-ranking members of Congress who've been trading shares of General Electric (NYSE: GE  ) , Visa (NYSE: V  ) , and health insurers like UnitedHealth Group (NYSE: UNH  ) , allegedly using their positions to reap outsize profits. Since that report ran, we here at the Fool have received a flood of reader emails asking us to keep pushing for passage of the STOCK Act. More than 500 individual letters. More than 3,000 signatures on our petition in support of the law. From across the nation, investors like you have spoken with one voice, demanding that Congress:

  • pass a law that forbids trading on information available only to Capitol Hill insiders ...
  • punish congressmen who break the law ...
  • and require congressmen to file regular reports on their trading activity, not just the once-per-year update on the dollar value of securities they've bought or sold that is currently required.

Judging from this response, I'm pretty sure most of the nation supports the STOCK Act today. On the other hand, support in a few states -- Alaska, Mississippi, North Dakota, and Wyoming -- seems still in doubt:

What's the matter with these guys?
I can only assume that no one in these four states supports passage of the STOCK Act. Because, alone in the Union, these states currently boast not a single congressman on record supporting the law.

Alabama's in favor of stopping insider trading in Congress. Virginia, and Rhode Island, too. Washington -- both the district and the state -- support the STOCK Act. And out in California, a whopping 22 representatives have signed on as co-sponsors to the bill originally authored by Minnesota Rep. Timothy Walz, and his colleague Rep. Louise Slaughter of New York.

Do you support banning insider trading in Congress? If so, has your congressman signed on as a co-sponsor (see the growing list of co-sponsors here). And if not, why isn’t your elected representative ... representing your wishes?

If you support the STOCK Act:

  • First, shoot us a blank email to imoscovitz@fool.com to let us know that trading on inside knowledge of upcoming laws in Congress is not OK with you. We'll do our darnedest to make our collective voice heard.
  • Second, don't feel compelled to wait. Take direct action to get this law passed: Add your voice to the petition urging Congress to get off its keister and pass the STOCK Act now!

Fool contributor Rich Smith does not own (or short) shares of any company named above, but Motley Fool newsletter services have recommended buying shares of Visa. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (22) | Recommend This Article (70)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 07, 2011, at 5:05 PM, Dagansinferno wrote:

    I think the "insider trading" just goes to illustrate the sometimes "out of touch" nature that some of the elected officials. That is to say, if it's wrong for the general public to do, what gives them an exemption? Is it a vital component to their duties? Does insider trading provide them with the additional resources to perform their job at a higher level? I would argue no.

    Additionally, even the small number of supporters in the states is disturbing. It's a civil service profession, they're goal is to provide adequate service to the public. It's fine being compensated for your hard-work, but this is going way above those means. Argue term limits or not, I think changing the salary structure is a good first step. Set a low-salary limit based on the State the elected official is representing (of course accounting for COLA, etc). Let's say for Arizona it might be $35k per year. That's a capped salary, and additional compensation through a bonus is applicable at the end of each year based on certain metrics. I'm not saying it's a clear-cut answer, just that if we really want to attract those who are passionate, and are truly interested in policy change and stability that we want to compensate them, not grossly reward them such that their largest motivator for being in legislation is profiting.

    I've digressed, but the bottom-line is if we want re-institute trust back in our government and the underlying economy, we can't have insider trading like this, it just further disenfranchises those already frustrated with the Government's handling of economic affairs. We want stability, not further "class separation" and "antics" on the part of those who, allegedly, represent us.

  • Report this Comment On December 07, 2011, at 5:20 PM, OneLegged wrote:

    I'm not holding my breath. With such a massive conflict of interest in passing this I guarantee there will plenty of Mack truck sized loopholes in any final draft. Congress is broken. They are incapable doing anything that is in the interest of the country.

    Vote 'em all out!

  • Report this Comment On December 07, 2011, at 5:50 PM, TMFGortok wrote:

    This is solely my opinion (read: I do not speak for The Motley Fool), but it seems crazy to me that a citizen could be held liable for 'insider trading' if they go into a restaurant and happen to overhear a drunk CEO talk to his CFO about something that's going to boost that company's stock. That just doesn't make sense.

    I say, if it's legal for Congress, it should be legal for the American people.

  • Report this Comment On December 07, 2011, at 5:54 PM, WikiCPA wrote:

    Couldn't we just make their Schedule D or their transactions open to the public? Similar to the way Insider Execs have to show their trading activity?

  • Report this Comment On December 07, 2011, at 6:55 PM, TMFBreakerRob wrote:

    OK....you've got my interest!

    I have:

    * sent an email to my Representative (he's not yet a co-sponsor), asking him when he's going to get on board.

    * Shared this article on Facebook in an attempt to get friends and family involved. (I've "liked" The Motley Fool and the article pops up on Facebook).

    * Also sent a message to a relative in another State who has a radio talk show...to get him on board.

    Folks, you might think you don't have influence, but you have *some*. Use it! Don't read this and just move on.

  • Report this Comment On December 07, 2011, at 8:35 PM, Merton123 wrote:

    I believe that there are reasonable reasons for congressman not to support the STOCK act. For example their jobs require them to talk with different stakeholders about passing laws. There are winners and losers with regulatory reform. The StOCK act would require that the congressman disclose who the winners and losers of any changes in government regulation. And if they don't do a good job then someone (a political opponent) will state you have broken the law.

    I have a hard time believing that companies just call up their local congressman and give them inside information to trade on right out of the blue. The Wall Street Journal just had a recent article about a hedge fund that paid a million dollars to their source on the board of directors for information.

    There is no free lunch and the STOCK act will discourage good quality people from seeking public office

  • Report this Comment On December 07, 2011, at 9:26 PM, UKIAHED wrote:

    so, this is all fine and good - but you would have to prove insider trading - you know, the whole court thing - why not impose the same rules on congress as the president?

    "The President has formed a blind trust under the Ethics in Government Act, as amended, to handle and invest his personal assets during his Presidency."

    Maybe it is just me - but trusting congressmen to abide by the law - seems problematic. A blind trust takes a lack or morals out of the equation...

  • Report this Comment On December 08, 2011, at 12:16 AM, TMFDitty wrote:

    @Merton123: Those are fair points and I thank you for contributing to the discussion. Allow me to respond point by point:

    1. Do companies "just call up their local congressman" in order to give stock tips? Maybe, maybe not. I'm honestly more concerned about the more common case in which a Congressman is voting on a law that will impose regulations on XYZ Corp, and feels tempted to then sell stock in XYZ Corp. The STOCK Act as currently worded would outlaw something like this.

    2. There's also the argument that insider trading is a *good* thing, that must be considered. That by watching what "those in the know" are doing, we can better decide what we should be doing. I'm not 100% on board with this, but I believe we can do a lot of good by shining daylight on what Congressmen are doing -- improving disclosure. Once-annual disclosures of trading activity are insufficient. Congressmen should disclose at least four times a year (as the STOCK Act requires), and preferably disclose an *intent* to trade *before* trading.

    In future columns, I'll be arguing for improvements to the act as drafted, including this improvement.

    TMFDitty

  • Report this Comment On December 08, 2011, at 1:13 AM, maiday2000 wrote:

    The reason these legislators have the opportunity for outsized gain is that their legislation picks winners and losers through subsidization and/or regulation. I am not saying that we can't have regulations, but the government has gone far beyond what is necessary to ensure the free functioning of markets. There is no profit like the kind you can make taking advantage of the government and its rules undertaken for "good intentions."

    You want to make congressmen disclose an "intent to trade?" What about their staffers, many of whom have the same information and have profited as well? What about the people who talk to the staffers? Seriously though, this bill is just going to be another few pages in the already bloated Federal Register that won't accomplish much except waste people's time and make a few wanna be do-gooders make it feel like they accomplished something.

    *yawn*

  • Report this Comment On December 08, 2011, at 2:06 AM, WeWereWallStreet wrote:

    C'mon, Rich. Think it through. If they make insider trading against the law, then they'll be formalizing what we already know: they're all crooks. That's maybe not such a bad thing.

    But then they'll find some way to wriggle out of being punished when their laybout brothers-in-law start trading for them, and our collective cynicism level will go up some more. Better to not even start down that road.

    We're all privileged and we're all going to keep doing whatever we want. That's why one goes to business school, isn't it? www.WeWereWallStreet.com/About-Us.html

  • Report this Comment On December 08, 2011, at 2:34 AM, Risky88 wrote:

    tim walz!

    My representative!

    go

    msu mankato!

  • Report this Comment On December 08, 2011, at 8:02 AM, ravenesque wrote:
  • Report this Comment On December 08, 2011, at 8:53 AM, hiddenflem wrote:

    why is there no facebook share button? this article could go viral if you placed it right...

  • Report this Comment On December 08, 2011, at 9:10 AM, GenYfool wrote:

    That's why we need smaller federal government. The people that end up there have very little in the way of morals. The smaller the Federal government becomes, the less effect their immorality will have on the rest of the country.

    But to make this effective, you'd almost have to ban Congress, their staff, and their immediate family from trading altogether. It's not clear that Nancy Pelousy's husband's VISA gains would be prohibited by such an act, since they were really only "bribing" her, not specifically trading on insider information (her husband got an early shot at some IPO - which ought to be illegal anyway).

    I'd be in favor of the act if it had real teeth. I'm afaid they will just find ways to dance around it (Roman's chapter 1 - "they invent new ways to do evil").

  • Report this Comment On December 08, 2011, at 10:31 AM, ed1007 wrote:

    I'm honestly more concerned about the more common case in which a Congressman is voting on a law that will impose regulations on XYZ Corp, and feels tempted to then sell stock in XYZ Corp. The STOCK Act as currently worded would outlaw something like this.

    But these votes are not secret. where is the "insider trading?" Perhaps you mean the congressman has insider knowledge of the contents of a bill, since they have shown a tendency to "slip" provisions into legislation much to long to actually read in any reasonable amount of time at the last min? Or perhaps you mean they have inside knowledge of the likelihood of a piece of legislation passing?

    However, I am for very strong reform of our legislative process. Limiting the ability of federal employees and public servants to trade on inside information is as good a place to start as any.

  • Report this Comment On December 09, 2011, at 5:44 PM, xetn wrote:

    Frankly, I don't believe any legislation can or will stop any of this activity. I seriously doubt a government goon condemning another government goon that created his position. If we had a true market economy, there would be no federal regulations and hence the government crooks would not have access to this information.

  • Report this Comment On December 09, 2011, at 10:21 PM, donbcms wrote:

    You CANNOT run the Federal Government WITHOUT "REGULATIONS".!.!

    Wake Up!.!

  • Report this Comment On December 09, 2011, at 10:24 PM, donbcms wrote:

    AND "ENFORCE" THEM!.!

  • Report this Comment On December 10, 2011, at 3:59 PM, hermitinvestor wrote:

    While ugly, the actual cost of "insider trading" to us citizens is tiny compared to the money wasted by Congressmen, Senators and federal bureaucrats just doing what we all agree is their job: writing and enforcing laws and regulations. Many of these are wasteful, unnecessary or just plain dumb.

  • Report this Comment On December 11, 2011, at 1:08 PM, Morgana wrote:

    Bring back INTEGRITY. It made life easier. (Yes, yes, I know. Many people in Congress will have to Google the meaning.)

  • Report this Comment On December 15, 2011, at 10:42 PM, irjsi wrote:

    re 'Dagansinferno' "... if it's wrong for the general public to do, what gives them an exemption?"

    answer:

    'Congress' are 'Aristocrats'!

    'We-The-People' are 'Serfs'!

    Is that clear enough for you Dagansinferno?

    also, your comment: "Argue term limits..."

    As 'It is a given', that

    'You can't Legislate Morality'!,

    nor 'Ethics'!,

    nor Integrity!

    nor Trust*!

    *("...re-institute trust..." from Dagansinferno also!)

    And there is no way to 'bestow A Conscience' for a person who has either 'lost' his/hers, or who never had one!

    as an 'Alternative', I suggest:

    That subsequent to each and every 'member of the 'Aristocracy', after having 'amassed' Assets of $2,000,000.00*, ask them to 'step aside', and give others an opportunity to 'feed-from-that-same-trough'!

    *$2,000,000.00 *(by that time, they should have established a sufficient number of 'Contacts' for continued 'Asset Appreciation' to assure a 'comfortable', and 'Gentile' life . . . Gentlemen Farmers, etc.

    "We The People" have been asleep for some 50 or 60 years. Please WAKE-UP::::::

    "Our 'Government' Demands to Eat First!,

    "And, as such, Our 'Government' has ceased to be a government

    Of, For, By "We The People" !

    To which the 'Aristocrats' reply:

    "You got Your 'Food Stamps'!",

    "You got your 'Welfare Checks'!",

    "You got your 'Social Security'!,

    "You got your Healthcare!"

    "How much do You want?"

    "However, 'What you Want' does not matter!

    "You Got All You're Gonna Get!"

    Eventually "We The People" will make a stand! ('Ballots'! NOT 'Balas'!

    because Our 'Aristocracy' does not intend to 'just walk-away'!

    Roy J Stewart,

    Phoenix AZ

  • Report this Comment On December 26, 2011, at 2:28 PM, thidmark wrote:

    "the STOCK act will discourage good quality people from seeking public office"

    Judging by the current crop of public officials, I'd say that's already happened.

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