The Time Is Now: Let's Stop Congressional Insider Trading

Update (Jan. 30, 9:30 p.m. EST): Earlier this evening, the Senate voted 93-2 in favor of allowing debate to go forward on the STOCK Act. According to ABC News, the Senate could approve final passage of the bill as early as this week. Then it will be up to the House to consider the legislation. In a statement after the Senate vote, House Majority Leader Eric Cantor, R-Va., vowed that the House will "ensure action on legislation that meets the underlying goals of the STOCK Act in the most timely manner possible."

The Motley Fool will continue to follow this legislation as it makes its way through both houses. Now is the perfect time to let your representatives know what you think of the STOCK Act.

Today, shortly after the stock market closes, the Senate will convene for a cloture vote on the STOCK Act. By calling for a cloture vote, the Senate will begin debate on the legislation, thereby fast-tracking an actual vote on the Senate floor.

The legislation's full name makes plain its intentions: Stop Trading on Congressional Knowledge (STOCK). It is designed to make it illegal for members of Congress to trade stocks and bonds using nonpublic information to which only they, as the men and women who make our country's laws, are privy.

It's a law to restore fairness in Washington and protect the integrity of the stock markets.

Wait -- there's no law for that already?
Today's vote is the closest this legislation has come to becoming law -- by far.

The STOCK Act was first introduced in the House of Representatives in 2006, but that year -- and in two subsequent versions of the bill in 2007 and 2009 -- it suffered a quiet death, never even making it out of a committee.

The origins of the Act date back to 1995, when an ABC news magazine called Day One aired a report highlighting certain suspect financial transactions by members of Congress, and suggested the legislators may have been trading on information learned in the course of their work as lawmakers.

Professor Alan Ziobrowski of Georgia State University set out to prove Day One wrong, thinking Congress was "getting a bum rap." He dug through a massive amount of disclosure records to review some 6,000 stock transactions reported by members of the Senate.

Completely contrary to what Ziobrowski expected to find, the data revealed a trend of remarkable market outperformance: On average, U.S. senators outperformed the S&P 500 by an astonishing 12 percentage points, achieving some of "the highest excess returns ever recorded over a long period of time, significantly outperforming even hedge fund managers."

Why it matters
A later study disputed some of Ziobrowski's conclusions, finding that lawmakers did not achieve superior investment returns. Such ambiguity, though, hardly matters -- in this case, perception really is reality.

As my colleague Molly McCluskey writes later in this series,

We have to feel that our representatives truly represent our best interests, that by making the easy decisions we can trust them to make the hard ones. We have to know, without a shadow of a doubt, that when they make those hard decisions, they won't also be trading defense stocks right before voting to go to war or not, or shorting education stocks in the midst of a debate over the future of school funding.

And thus, while this legislation seems like a no-brainer to the vast majority of us, only now does this bill actually have a chance of passing.

Here at The Motley Fool, we've been advocating for this legislation for nearly two years now; we have even amassed almost 4,500 signatures in a "Pass the STOCK Act" petition drive.

As we detail later in this series, we believe the final version of the STOCK Act must contain at least three provisions:

  • Illegality: "Members must not use material nonpublic information that they receive by virtue of their congressional positions, or gained from performing their duties, for personal benefit."
  • Enforcement: "Members owe a duty of trust and confidence to Congress, the United States government, and the American people. Consequently, their use or disclosure of Congressional information is subject to the provisions of Section 10(b) of the Securities Exchange Act of 1934 and the SEC's Rule 10b-5."
  • Disclosure: "Members must report their transactions in publicly traded securities within 48 hours of executing each transaction. Congress shall develop a standard means of reporting such transactions electronically to ensure that this requirement not place an undue burden upon those who must report the transactions. This system shall require Members to accurately disclose the date of each transaction, its amount, and the security being traded."

Today we are very close to declaring victory in the battle for the STOCK Act. But as always, we need your help. We ask that you contact your congressional representatives -- House and Senate -- and let them know that you support the STOCK Act. Call, email, tweet (hashtag: #PasstheSTOCKACT), post on their Facebook pages -- just send the message. Here's how to find their contact information:

Over 200 years ago, James Madison argued that Congress must abide by the same laws as the citizenry, since that had "always been deemed one of the strongest bonds by which human policy can connect the rulers and the people together." We couldn't agree more. Let's do whatever we can to make sure the STOCK Act becomes law.

Rich Smith is a Motley Fool contributor. The Motley Fool has a disclosure policy.

Read/Post Comments (42) | Recommend This Article (161)

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 January 30, 2012, at 5:02 PM, selfdestruct2 wrote:

    These politicians have nerve. How can they justify having insider trading for the chosen few !?

  • Report this Comment On January 30, 2012, at 5:06 PM, TMFBane wrote:

    @selfdestruct2, They can't justify it. That's why we want to let them know we won't tolerate it any longer.

  • Report this Comment On January 30, 2012, at 5:20 PM, yreuven wrote:

    if you want more details that will make you angrier read this book Throw them all out by peter Schweizer. its mind numbing.

  • Report this Comment On January 30, 2012, at 5:25 PM, Chontichajim wrote:

    There are some politicians who are married to businessmen/investors but if these couples are serious about representing us in government then they need to agree to strict disclosure or find a different second job.

    I would prefer to see trading disclosures of Congress and their spouses within 30 minutes rather than 30 days. At least within 3 days until the software to show their trades online can be implemented.

  • Report this Comment On January 30, 2012, at 5:26 PM, xetn wrote:

    I do not believe there is any way to stop it. Sure, you can make it illegal (isn't it already) but does that actually stop anything?

    Take speeding, in most places, it is illegal, but it seems that most don't obey. Fraud is illegal, but did that stop Bernie Maddoff? No, not ever when several notices were sent to the authorities by people who do due diligence.

    How about people possessing/using cocaine, or any of the other illegal drugs of choice? Only when caught do they "get their due".

    All of this energy is a waste of time (in my opinion).

  • Report this Comment On January 30, 2012, at 5:32 PM, TMFBrich wrote:

    @yreuven: Agreed. As part of this series we interviewed Peter Schweizer. You can listen to the audio from that interview, and read the transcript, here: http://www.fool.com/investing/general/2012/01/30/throw-them-....

  • Report this Comment On January 30, 2012, at 5:35 PM, twolaz2p wrote:

    How about including all Congressional STAFF

    members and committee staff members?

  • Report this Comment On January 30, 2012, at 5:36 PM, TMFBrich wrote:

    @xetn, you wrote: "I do not believe there is any way to stop it. Sure, you can make it illegal (isn't it already) but does that actually stop anything?"

    I recommend reading this piece: http://www.fool.com/investing/general/2012/01/30/congress-di....

    Increased disclosure of these trades would go a long way toward solving the problem. Or as Matt Koppenheffer writes, "Make it illegal to trade on nonpublic information. But just as importantly, make significant changes to these disclosure forms so that the SEC, voters, and the media have the information necessary to be fully informed about our lawmakers' financial dealings."

  • Report this Comment On January 30, 2012, at 5:40 PM, djvalder wrote:

    While I may well agree with your sentiment MF should not be involving itself in political ajitation. I do not pay my subscription for this.

  • Report this Comment On January 30, 2012, at 6:17 PM, remark65 wrote:

    I am a subscriber. We complain about politicians all the time . I say we need to take every opportunity to send a message ...we will no longer put up with poor representation and at the same time making money that for the rest of us would go to jail for. . Once the politicians begin to hear from us they will realize they are going to have to start to clean up other areas or they will not get reelected.

    I would rather contact them now then wait till more people begin to get violent.

    I applaud MF for standing up what right !

  • Report this Comment On January 30, 2012, at 6:25 PM, TMFBane wrote:

    The STOCK Act just cleared a key procedural vote in the Senate by 93 to 2, thereby allowing a debate on the legislation to go forward. We'll be providing ongoing coverage and analysis on this as events continue to develop further!

  • Report this Comment On January 30, 2012, at 6:28 PM, dennyinusa wrote:

    Divalder,

    You are wrong they are not causing political agitation; they did not blame a political party. These people were elected to represent us, not to fill their own pockets. . I assumed insider trading was illegal for everybody. If they do not like the pay do not run for public office. Remember the term Public Servant.

    This is what all good investment organization should do, is educate people to things that put us at a disadvantage. Then together we can work to correct the problem. When congressmen, bankers, corporations, unions or Wall Street use inside information it destroys trust in institutions that we rely on throughout society. Once trust is lost the whole system starts to breakdown. I thank TMF for this information and the work they are doing to level the playing field for everyone.

  • Report this Comment On January 30, 2012, at 6:36 PM, Patrick1943 wrote:

    I agree with remark65 and Divalder. Not doing anything is what has allowed our elected representatives to take this country down the wrong path, and make rules for everyone else to follow but themselves.

    Thank you Fool's for making this an issue.

  • Report this Comment On January 30, 2012, at 6:39 PM, LohnRanger wrote:

    djvalder has a Congressional seat. Furthermore Susan, your paid subscription is for the Stock advisor or whatever paid service you decided to go with. The rest is free. Why you would support our leaders to have the ability to keep trading on inside information is beyond me..

  • Report this Comment On January 30, 2012, at 6:42 PM, denkas wrote:

    Disallowing members of Congress insider trading is not even touching the inequities that those "servants of their constituents" enjoy. They should not be exempt from any of the laws they pass that affect the rest of us, like healthcare, social security, student loan repayments, and ...ad infinitum. I have never had a job where I got to vote on my salary increases, pensions, and loan repayments. These are "PUBLIC SERVANTS"?? I guess that means the the public serves them.

  • Report this Comment On January 30, 2012, at 7:37 PM, sigman58 wrote:

    Agree more with Chontichajim than the 48 hour turnaround proposed elsewhere. It cannot be more than one day.

  • Report this Comment On January 30, 2012, at 9:34 PM, lowmaple wrote:

    a waste of time.? The Congressional members believe Americans are too supid and lazy to notice their misuse of their posts. At least show them that they are wrong!!

  • Report this Comment On January 30, 2012, at 9:57 PM, TMFDitty wrote:

    @sigman58: I applaud the enthusiasm, but ... right now lawmakers can buy a stock and (in some cases) not report it until 17 months later. In this context, I'd be thrilled to get the same 48-hour disclosure required of corporate insiders.

    Heck, if all we get is the 30-day disclosure the Senate is proposing, that'll already be a 17-fold improvement.

    TMFDitty

  • Report this Comment On January 30, 2012, at 10:05 PM, chris293 wrote:

    You might also consider who gives Congress

    it salary and benefits, and compare that with

    your own job, if you could decide how much you

    can earn a year and what your benefits are?

    Then this is similiar to 'boards of directors'

    saying what they are worth. In truth, aren't the

    shareholders the real bosses? A lot of conflicts

    of interests here aren't there?

    Now, lets hope the 'STOCK' act gets some results and restores good old fashion honesty

    in our society. I thought people were suppose

    to learn that at school or church? or at home?

  • Report this Comment On January 30, 2012, at 10:08 PM, kameljock wrote:

    While the bill bans trading, it does not bar legislators from performing political favors for companies whose stock they hold. It doesn't require any legislator to recluse themselves from voting on an issue that would affect a company they have a financial interest in.

    It is a step, just not the final step in require those in office to conduct our affairs in an ethical manner.

  • Report this Comment On January 30, 2012, at 10:35 PM, jetcityaaron wrote:

    Who is going to stop them from trading through someone else? A friend, relative, etc.

  • Report this Comment On January 30, 2012, at 10:45 PM, TMFHousel wrote:

    <<Who is going to stop them from trading through someone else? A friend, relative, etc.>>

    The threat of prison, ideally.

  • Report this Comment On January 30, 2012, at 11:21 PM, beastofbodmin wrote:

    What is the penalty for breaking this law?

  • Report this Comment On January 30, 2012, at 11:22 PM, mbdextrous wrote:

    1) First you tell them it's illegal

    2) then you say why this law is required

    3) after that, you give them a way out, if they do go against the law.

    What kind of message are you sending?

  • Report this Comment On January 30, 2012, at 11:32 PM, lil58 wrote:

    there will allways be another Bernie Maddoff , it might stop some people but people like Bernie will be allways there, that is human fault greed, jelousy,itc. I only hope there will be some left for us ordinary people.

  • Report this Comment On January 30, 2012, at 11:43 PM, jomueller1 wrote:

    It is disgusting how the politicians abuse their positions shamelessly. They will never stop insider trading. They will look for loop holes. All I can hope for is that once in while one of them gets caught and locked up.

    We also have to be aware of the fact that politicians do not run for their jobs because they friends of mankind but to enrich themselves without working.

  • Report this Comment On January 31, 2012, at 8:11 AM, ravenesque wrote:

    "We have to know, without a shadow of a doubt, that when they make those hard decisions, they won't also be trading defense stocks right before voting to go to war or not"

    http://michaelfury.wordpress.com/2011/03/23/profits-and-loss...

  • Report this Comment On January 31, 2012, at 8:15 AM, ravenesque wrote:

    Btw, what happened to these "suspect financial transactions"?

    http://michaelfury.wordpress.com/2011/11/11/pulverized-to-ne...

  • Report this Comment On January 31, 2012, at 9:31 AM, Tygered wrote:

    I hope for the best, but I am not optimistic. These guys will never vote against their own greed. But hope springs eternal in my heart.

  • Report this Comment On January 31, 2012, at 10:41 AM, TMFBreakerForce wrote:

    I've emailed both of my State Senators (NJ). I hope this is finally passed.

    Thanks to the Motley Fool for their support and hard work.

    Matt

  • Report this Comment On January 31, 2012, at 11:19 AM, TMFBane wrote:

    Thanks for taking the time to contact your senators, Matt! I'm confident it will make a difference.

  • Report this Comment On January 31, 2012, at 11:21 AM, TMFDitty wrote:

    @beastofbodmin, you can find the penalties for insider trading here:

    http://taft.law.uc.edu/CCL/34Act/sec21A.html

    If Congress creates a "duty of trust and confidence," as we are recommending, then the penalties for insider trading, applicable to everyone else, would apply to trading on Congressional knowledge as well.

    TMFDitty

  • Report this Comment On January 31, 2012, at 11:45 AM, hardy wrote:

    I'm not sure that putting bureaucrats in charge of congressional behavior is really the best strategy.

    First there's a balance of power issue. Congress should have some independence from the executive branch.

    Second, I don't have much faith in magical bureaucrats in fixing things. It's like believing in Santa Claus - I gave up on that idea long ago...

    I suspect a full disclosure law combined with a congressional ethics committee is the best compromise here, given those two constraints.

  • Report this Comment On January 31, 2012, at 5:33 PM, md1j wrote:

    Its no different with the national health care program that Congress so enthusiastically supported without full knowledge of the bills contents. Just like they enjoy unfettered insider trading they enjoy health insurance that is second to none. Had one congressman said they would vote to give up their health care program and have to utilize the same program they forced on us I would have been all in favor of the program. But it is telling when they won't give up their perks but want the rest of the nation to be enrolled.

    The Founding Fathers would be mostly disgusted with our representatives today.

  • Report this Comment On January 31, 2012, at 8:20 PM, ensabada wrote:

    mmm....they are 'public servants' yet appear to be serving their own self interests first. " i'm shocked" said the foolish voter. quick, the revolving door. it's the only out, i mean in!

  • Report this Comment On January 31, 2012, at 11:48 PM, amateur111 wrote:

    someone further up the stream said "MF should not be engaging in political agitation"

    my first response to that is: why not? MF has every right to engage in the political process or even to shout about something they see that just plain stinks - if MF should not be engaging in political "agitation" or any other form of political commentary -- then who should??

    my next comment is: why is it "agitation" to ask questions, provide information and suggest participation? that seems less like agitation and more like concern

  • Report this Comment On February 01, 2012, at 9:04 AM, wordmouse wrote:

    Are you pissed off enough? The rules for the representative class are never a part of the election discussion. YOU must write your representatives, YOU must question and follow up on this on any issue you submit. YOU must.....

  • Report this Comment On February 01, 2012, at 5:31 PM, DonaldS812 wrote:

    I would reccomend that the prohibition extend to staff as well.

  • Report this Comment On February 03, 2012, at 11:03 AM, mrbillCZ wrote:

    @DonaldS812...couldn't agree more. Hear hear to the Fools for bringing this front & center...long overdue, and shame to those who voted against it. Interesting to see what the House does with it, as they all try to polish a severly tarnished image.

  • Report this Comment On February 03, 2012, at 2:03 PM, geobabe54 wrote:

    This legislation is a good start, but it doesn't really take care of the problem. It should be extended to Congressional staffers and family members. And reporting within 30 days is too long; 3-5 days is much better. I hope that the final bill will include stiff penalties, especially prison sentences.

    Of course, since this is at best questionable ethics, I'd love to see a requirement that they turn over 1/2 of their ill-gotten gains to the US Treasury and/or that they be taxed at a comparable rate as earned income rather than as capital gains. Hey, I can dream, can't I?

  • Report this Comment On February 04, 2012, at 7:56 AM, milkman52 wrote:

    I'm sure they will run all there investments through another persons name. It's called bartering.

  • Report this Comment On February 06, 2012, at 1:39 PM, R2Big wrote:

    While this legislation is a good first step, tackling the root of the problem is far more important. And the root of the problem is that the government can pick who are the winners and who are the losers through creating laws that allow some companies to flourish.

    Any system that ignores this fact is going to fail.

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