If you follow the Fool regularly (and really, why wouldn't you?) you know we recently launched a series devoted to the STOCK Act, the bill making its way through Congress that would make insider trading illegal for members of Congress and improve their trading disclosures. It's important to us that Congress be held to the same trading standards as everybody else. After years of pushing for its passage, we were thrilled to see the Stop Trading on Congressional Knowledge Act pass both the House and the Senate recently.
We were a little less than thrilled, however, to see several key provisions stripped from the act, and one amendment that we found questionable, added. It's an amendment that, if included in the merged bill that will be sent to the president, threatens to undermine the STOCK Act.
The Enzi amendment
Amendment 1510, introduced by Sen. Mike Enzi (R-Wyo.), was intended "to clarify that the transaction reporting requirement is not intended to apply to widely held investment funds."
Which raises the question: Why not? Why wouldn't widely held funds such as mutual funds and exchange-traded funds be included in the STOCK Act's 30-day disclosure requirement?
We posed this question to Enzi's office, and Dan Head, a spokesman for Enzi, told us that since widely held funds can't be influenced by members of Congress or their staffs, they would be exempt from the STOCK Act. "The amendment keeps in place current reporting requirements for widely held plans, which include exchange-traded funds (ETFs)." (Emphasis his.)
But is this a problem? Could members use mutual funds to profit from nonpublic information? In traditional Fool fashion, our responses were mixed. Some of the team thought the amendment wouldn't affect things much; others thought it hid nefarious motives.
The suspicious among us looked immediately to Enzi. What were his motives in such an amendment? Was he a large holder of mutual funds? Was questionable trading in mutual funds as common in Congress as questionable stock trading?
We get it. Mutual funds are boring.
We understand that mutual funds aren't exactly the sexy darlings of the investment world. Most members of Congress holding mutual funds do so as a standard retirement package. Widely held funds in Congress like America Funds Growth Fund of America (AGTHX) and Blackrock Global Allocation Fund (MDLOX) are so broadly diversified that it'd be hard to claim a Congress member investing in them is betting on anything specific other than a better, more prosperous future. Furthermore, many members of Congress hold the same funds year over year and have regularly scheduled share purchases. They're the sort of transactions you'd see as part of a payroll deduction.
And Enzi? It doesn't seem like his motives for the amendment are to hide questionable mutual fund trading on his part. His mutual funds are diversified, featuring a wide array of stocks across a broad spectrum, which would make it difficult to profit from any specific committee decision or new law. Moreover, he hasn't made a habit of excessive trading in and out of them. (We checked his records from 2008-2010, the last year available.)
Nefarious? Probably not.
Unless you know how to play them (and some Congress members apparently do)
At the other end of the spectrum lies House Financial Services Chairman Spencer Bachus (R-Ala.), who is being investigated by the Office of Congressional Ethics for possible insider trading violations. A look at his mutual fund holdings shows he popped in and out of funds like a 6-year-old playing double-dutch.
Somewhere in between Bachus and Enzi are members such as Rep. Kenny Marchant (R-Texas) and Sen. Jeff Bingaman (D-N.M.). Marchant's accounts include trades in very targeted funds, including the Powershares Agriculture Fund. The fund holds stakes in corn, soybeans, wheat, cattle, coffee, and cocoa, among others. It's not a stretch to think it could be heavily influenced by legislation on biofuels, factory farming, or fair trade standards, to name a few.
Bingaman, the retiring chairman of the Energy and Natural Resources Committee, traded in the SPDR Select Sector Fund-Energy (NYSE: XLE ) and SPDR Select Sector Fund -- Financial (NYSE: XLF ) in 2010, the most recently reported year. Wells Fargo (NYSE: WFC ) , JPMorgan (NYSE: JPM ) , and Citigroup (NYSE: C ) account for roughly one-quarter of the latter's holdings.
Remember when we fretted about Congress members trading financial stocks during financial bailout deliberations? We focused on individual stocks, but the SPDR Financial Fund would have worked just as well for trading on information at the time. Looking ahead, when we consider the transparency that we're hoping to get from the STOCK Act, this is exactly the kind of targeted fund we want Congress members disclosing soon after they buy it, not once per year.
Just say "no" to obfuscation
Most instances of trading in mutual funds are probably innocent. However, if the whole point of the STOCK Act is to change not only how Congress trades, but the perception of how Congress trades, excluding mutual funds from STOCK Act oversight undermines the process.
Maintaining current reporting standards for mutual funds simply doesn't work. It creates two separate reporting procedures, one for stocks and one for mutual funds. Think that's not a problem? Existing disclosure practices are disgraceful, and there's no guarantee that passing the STOCK Act will make those disclosures clear, as well as transparent.