The Stop Trading on Congressional Knowledge (STOCK) Act: a Tutorial

"Whenever the people are well-informed, they can be trusted with their own government ... Whenever things get so far wrong as to attract their notice, they may be relied on to set them to rights." 
--
Thomas Jefferson

"You can know the name of a bird in all the languages of the world, but when you're finished, you'll know absolutely nothing whatever about the bird ... So let's look at the bird and see what it's doing -- that's what counts." 
-- Richard Feynman

Going on two years now, we've sounded the alarm about a problem in Washington: Congressmen (and -women) trading stocks based on inside knowledge of laws that will affect these same companies. Lawmakers are getting rich at the expense of the people they're elected to represent.

More recently, we've told you of a law working its way through Congress that aims to fix this problem: the Stop Trading on Congressional Knowledge (STOCK) Act. Ever since 60 Minutes ran a story on how certain U.S. Congressmen have been trading shares of Visa (NYSE: V  ) , General Electric (NYSE: GE  ) , UnitedHealth Group (NYSE: UNH  ) , and other stocks based on knowledge of laws working their way through Congress, public support for the STOCK Act has grown. Support in Congress itself is also growing. At last count, 242 members of the House of Representatives and 32 U.S. Senators support the STOCK Act.

But did you know there is more than one STOCK Act?

Two's company, five is a crowd
Depending on how you count them, there are as many as four separate versions of the STOCK Act floating around Washington today. There's the original version, based on a House bill first proposed by Reps. Brian Baird and Louise Slaughter five years ago. The Senate has two more variants -- one proposed by Sen. Scott Brown, a second proposed by Sen. Kirsten Gillibrand, and a third version that's coming out of Sen. Joe Lieberman's Homeland Security and Governmental Affairs Committee, which attempts to merge and improve upon Sens. Brown's and Gillibrand's work.

Early next year, House Majority Leader Eric Cantor -- himself an active trader of stocks ranging from Altria (NYSE: MO  ) to Wells Fargo (NYSE: WFC  ) -- plans to take up a version of the STOCK Act. Very soon, we could have not one, but five different STOCK Acts vying for our attention. Which brings me to my point: Maybe you support the STOCK Act. But which STOCK Act do you support? Which one should you support?

In the interests of informing this debate, I've gone through the two leading contenders with the proverbial fine-toothed comb. What I've found is that there are three key areas where the Senate's consensus version of the Act differs from the House's. Which version is better? You be the judge.

Start the clock
Right now, Congress' ethics rules require each representative and senator to file "disclosures" of their trading activity once per year. The House version of the STOCK Act tightens this up considerably, by requiring disclosure of a trade within 90 days after it takes place. The new Senate version goes a step further, imposing a 30-day deadline.

Verbosity is not a virtue
Of course, what we really want is to ensure that when lawmakers disclose their trades, they can honestly tell us they did nothing wrong, that they followed the rules and avoided trading on inside information. Both the Senate and House STOCK Acts try to ensure this, but in different ways. The most obvious difference is size... and complexity. The House STOCK Act weighs in at a hefty 18 pages, and employs such convoluted passages as:

... the Commission shall by rule prohibit any person from buying or selling any commodity for future delivery or swap while such person is in possession of material nonpublic information, as defined by the Commission, relating to any pending or prospective legislative action relating to such commodity ... if such information was obtained by reason of such person being a Member or employee of Congress ... or such information was obtained from a Member or employee of Congress, and such person knows that the information was so obtained.

By contrast, the Senate's version is a veritable model of svelte lawmaking: "No Member of Congress and no employee of Congress shall use any nonpublic information derived from the individual's position as a Member of Congress or employee of Congress, or gained from performance of the individual's duties, for personal benefit." Period.

...and neither is complexity
Now, complexity is inherent in lawmaking, and I give the House props for trying to dot all the i's, cross all the t's, and close all the loopholes in their version of the STOCK Act. Whereas the Senate bill bans use of "any nonpublic information" for personal gain, the House tries to tailor its bill to capture only "material" nonpublic information. The House also hews to the main concerns voiced about insider trading, regulating material information that relates to "pending or prospective legislation." And in an effort to regulate all possible wrongdoers, the House version favors long lists -- regulating, for example, the conduct of any: "Member, Delegate, Resident Commissioner, officer, or employee."

But if you ask me, the House spends too much time "naming birds." A better solution might be to borrow a bird book from the dedicated ornithologists at the SEC -- as the Senate has done.

The Senate, you see, incorporates by reference the whole body of securities regulation worked out over the past 80 years by simply imposing a "duty of trust and confidence of each Member of Congress and of each employee of Congress." This language is already part of the case law from decades of judges ruling on insider trading cases. The effect of this language is to clearly subject Congressional trading to the general rules on insider trading applicable to everyone else.

Personally, I think this is the more elegant solution. In fact, I think the Senate STOCK Act as a whole is more broad-reaching than the House's point-by-point attack on insider trading. But what do you think?

Email us at imoscovitz@fool.com and tell us whether you think a broad-brush ban on insider trading, and a 30-day disclosure period (as proposed by the Senate) is the best solution, or whether you think the House is right to close down the loopholes as it finds them, one by one -- and hope none escape it. In turn, we'll add you to our contact list and keep you up to date as both (or is it all three, four, or five?) of these laws make their way through Congress.

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.

The Motley Fool owns shares of Wells Fargo, UnitedHealth Group, and Altria Group. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Visa and UnitedHealth Group. Motley Fool newsletter services have recommended creating a diagonal call position in UnitedHealth Group.

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 (18) | Recommend This Article (40)

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 28, 2011, at 5:45 PM, Doris411 wrote:

    It would be helpful if you provided the bill numbers for the versions you mention. This makes it a great deal easier to nag ... I mean, to express my concerns to my Congressman and Senators clearly.

  • Report this Comment On December 28, 2011, at 6:05 PM, TMFDitty wrote:

    @Doris411: Your wish = my command.

    The House version currently stuck in committee is H. 1148.

    http://www.govtrack.us/congress/bill.xpd?bill=h112-1148

    The publicly available Senate versions are, respectively:

    S. 1871

    http://www.govtrack.us/congress/bill.xpd?bill=s112-1871

    and S. 1903

    http://www.govtrack.us/congress/bill.xpd?bill=s112-1903

    The integrated version that came out of Sen. Lieberman's committee is, to the best of my knowledge, still not publicly available online; nor has it been given its own number. And of course, Congressman Cantor's bill, if he really intends to write one, does not yet exist.

    Foolish best,

    TMFDitty

  • Report this Comment On December 28, 2011, at 6:23 PM, Doris411 wrote:

    Thanks, Rich.

    The sections on disclosure in all three versions seem to specify disclosure within 90 days. Are the links out-dated, or have they changed since you reviewed them? Or is my vision so bad that I'm mis-reading the numbers? (a genuine possibility -- that's some small print!)

    I did notice that the House version seems slated to take effect more quickly -- 90 days after passage instead of 270 in the Senate versions -- at least for the disclosure provision.

  • Report this Comment On December 28, 2011, at 6:30 PM, wolfman225 wrote:

    In general, if things are as presented I would tend to prefer the Senate version. The more concise the legislation can be written, using wherever possible common (plain) English usages, the clearer it's meaning and intent will be, resulting in fewer loopholes.

    There is no real need to expand legislation with unnecessary verbosity and legalese. All it does is obfuscate the meaning and intent of the bill(s) and enable the intentional insertion of such loopholes desired by special interests of both parties.

    Do you think it will ever be possible to persuade lawmakers to give up the self-aggrandizement of using ten dollar words in favor of writing all legislation in "plain English" so we voters can actually grant (or withhold) our "informed consent"?

  • Report this Comment On December 28, 2011, at 6:46 PM, money4eds wrote:

    Senate version, same law for all. Simple and to the point.

  • Report this Comment On December 28, 2011, at 6:54 PM, TMFDitty wrote:

    @Doris411: No need to put the optometrist's kids through college just yet.

    The House bill says 90 days, and the original Senate bills were both based on the House bill -- so all three public documents say 90 days for now. It's the unpublished, unnumbered, unavailable Lieberman version that has the stricter 30-day disclosure period.

    TMFDitty

  • Report this Comment On December 29, 2011, at 5:41 AM, GeorgeAJH wrote:

    It would be most helpful if the Congresional Record would publish what trades were executed by each member of the Congress.

  • Report this Comment On December 29, 2011, at 10:35 AM, TMFDitty wrote:

    @GeorgeAJH: Agreed. The more disclosure, the merrier. But for now, you can probably find most of what you want to know here:

    http://www.opensecrets.org/pfds/index.php

    TMFDitty

  • Report this Comment On December 29, 2011, at 11:38 AM, Indiscr33t wrote:

    Senate version.

    Still blows me away a single man can stop a bill that says: "Though shall not F#$% thy constituency nor thy country."

    Blows...Me...Away

  • Report this Comment On December 29, 2011, at 12:48 PM, smallcomp84 wrote:

    I contacted my congressman, Rep. James Lankford, OK. He responded to me that instead of supporting H.R. 1148, he preferred to support H.R. 480, which, "would require Members of Congress to place their assets in a "blind trust" in the same manner as the President of the United States to protect gains or losses from influence by legislation enacted during their tenure in office."

    "I prefer this bill to H.R. 1148 because it amends the actual Rules of the House rather than complicating current statutes about this issue."

    A blind trust does sound intriguing to me. Any thoughts?

  • Report this Comment On December 29, 2011, at 1:21 PM, CCharing wrote:

    Does anyone know where or what website they are using to look at the holdings of certain members of congress?

    To my knowledge I don't know any site that provides this information (how often are members of congress required to file this information?)

  • Report this Comment On December 29, 2011, at 2:44 PM, TMFBane wrote:

    @CCharing, Open Secrets is a very useful site that has a lot of this info:

    http://www.opensecrets.org/pfds/index.php

    As the site itself says, however, it is not easy to have precise information because the disclosure system for our Congressmen and Senators does not require exact values. They have to disclose this info once per year.

  • Report this Comment On December 29, 2011, at 3:42 PM, diverdon56 wrote:

    Passing this act is not going to put any money in my pocket. It may be the right thing to do, but it is not as important as getting the segregated funds back for MF Global investors. If I were going to write my congress critter it would be about that not this.

  • Report this Comment On December 29, 2011, at 4:57 PM, TMFDitty wrote:

    smallcomp84: I admit to some skepticism here. The most immediate thought that comes to mind is: "What about the Congressman's relatives, friends, and so on?" A blind trust won't solve the tipping issue, and may be easy to work around by having ones friends and relatives do one's trading for them.

    That said, I think we should be open to various alternative routes towards greater transparency and fair dealing in Congress ... so long as the general momentum is in the forwards direction.

    TMFDitty

  • Report this Comment On December 30, 2011, at 11:32 AM, winze1sm wrote:

    H.R. 1148 requires political intelligence firms to register like lobbyists. The Senate bill simply requires a GAO study of the industry. This is a key difference in the bills. The final version must keep the strong registration requirements. There may be the occassional bad actor on the Hill making gains, but its the political intelligence industry that is really cheating the market with congressional insider information. Focus should be the hedge fund manager paying for access to the Hill, because that's where the real crime truly lies.

  • Report this Comment On December 30, 2011, at 4:06 PM, TMFDitty wrote:

    Good point. Noted.

    But I wonder if the Senate's version, by prohibiting "tipping," might not solve the PI problem all on its own?

    TMFDitty

  • Report this Comment On January 04, 2012, at 12:14 PM, gsosbee wrote:

    Must investigate the fbi's role in both congressional illegal tredes and fbi manipulation (and trades) in the futures markets over the past 50 years.

    "You must contrive for your future Rulers another and a better life than that of a Ruler, and then you may have a well ordered State; for only in the State which offers this, will they rule who are truly rich, not in silver and gold, but in virtue and wisdom, which are the true blessings of life." Plato, The Republic.

    Congress does not investigate fbi crimes because many in congress engage in unethical or criminal activities. Here is evidence that congress is hopelessly corrupt from fear of fbi and fbi's blackmail methods.

    http://sosbeevfbi.ning.com/profiles/blogs/this-congress-of-t...

    Sources of fbi/cia Financing For Global Criminal Intel Operations

    http://ttu.academia.edu/geralsosbee

    The fbi/cia thugs, kidnappers, torturers, assassins, burglars, etc., obtain all the money they need for their criminal operations from multiple sources: Congress, Illegal drug operations and money laundering schemes, theft and seizure of Targets' assets, blackmail, theft (including burglary & robbery) and the stock markets around the globe. The two corrupt groups regularly tap into the equities,commodities and futures markets for guaranteed huge profits. the SEC and other federal agencies ignore these criminal market manipulations because the fbi/cia are "securing the USA from terrorist attacks and are at the same defending freedom."

    The corrupt congress of the USA (under threat of blackmail or harassment by fbi thugs) is aware of and allows market manipulations under the authority of its various intel, budgetary and oversight committees (indeed many in congress now also engage in criminal trades on insider information); also the intel courts (owing their allegiance to fbi/cia assassins) have inside scoop regarding fbi/cia fraud in the money markets as a result of the secret courts' reviews of the global criminal activities of the fbi/cia assassins and torturers. These courts 'sign off' (or authorize) on the illegal trades.

    See:

    http://www.sosbeevfbi.com/part4-worldinabo.html

    And:

    http://sosbeevfbi.ning.com/profiles/blogs/sources-of-fbi-cia...

  • Report this Comment On January 22, 2012, at 2:30 AM, swamimarti wrote:

    I would like to see Congress in blind trusts, but all insider trading as defined by SEC should be banned if they are not in blind trusts. Some Congress members might prefer blind trusts to the disclosure process and that would be even better.

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