Were We Wrong to Support the STOCK Act?

In the State of the Union address on Jan. 24, 2012, President Barack Obama urged Congress to "send me a bill that bans insider trading by members of Congress; I will sign it tomorrow." It took a bit longer than "tomorrow." But after passing by near-unanimous vote in the U.S. Senate on March 22, the president signed the STOCK Act into law on April 4. This event set several wheels in motion:

First and foremost, the STOCK Act clarified that members of Congress are not exempt from federal laws forbidding insider trading -- a question that, believe it or not, had been in some dispute.

The STOCK Act required members of Congress, their staffs, and their close relatives to report stock trades within 45 days of making them, and further required that their public financial disclosure reports be made available online in searchable electronic databases.

This being an election year, other provisions pandering to... er, protecting the voters, were also added at the last minute by our elected demagogues... er, I mean representatives: rules extending the law's purview to senior government officials as well as members of Congress; rules requiring members and government officials to publish the terms of their mortgages; a ban on senior executives at Fannie Mae and Freddie Mac getting paid bonuses; and of course the famous "Pelosi Provision" forbidding members from getting preferred access to hot IPOs -- inspired by former House Speaker Nancy Pelosi's profiting from the Visa IPO a few years back.

But still, the key rules were these:

  • Rule No. 1: No insider trading by members of Congress.
  • Rule No. 2: Public disclosure of trades on the Internet so that voters could make sure that members of Congress were following Rule No. 1.

Those were the two key things we asked for when The Motley Fool urged passing the STOCK Act last year. So as long as these made it in, any junk the politicos tossed on afterward is beside the point, right?

Unfortunately, no. Not right.
Turns out, in Congress' rush to pass the act before voters got a chance to punish them for not passing it, "mistakes were made." Most notably, as CNN pointed out earlier this month, the version of the STOCK Act that passed in the House of Representatives (the one that then went to the Senate for approval and passage into law), shifted some language around from the original Senate bill. The details are arcane, but here's the upshot:

The law as passed technically does not require family members of senators and representatives to disclose their stock trades. And going with the letter of the law, the House Ethics Committee says it will not require U.S. representatives' family members to disclose their stock trades.

Oops
Oops is right. Remember, the whole intent of the STOCK Act was to end insider trading by members of Congress, a practice that one academic study showed to have given members a 6-percentage-point-per-year profit advantage over the S&P 500 for 16 straight years. Forbidding trading by members of Congress, but permitting their husbands, wives, and kids to trade for them, kind of defeats the purpose of the law.

Meanwhile, on the other side of D.C.
A second objection to the STOCK Act has in recent days been raised by government employees, including some that The Washington Post describes as "heavy hitters." Former Homeland Security Secretary Michael Chertoff, former CIA Director Michael Hayden, former U.S. Attorney General Michael Mukasey -- and many more.

These worthies have joined with employees of the Congressional Research Service, the International Federation of Professional and Technical Engineers, the Senior Executives Association, and others to criticize rules making their finances public, too. Their objection: Requirements contained on Office of Government Ethics Form 278 (which will be Internet-searchable under the STOCK Act), that they disclose details not only of their investments and stock trades, but also details of their bank savings accounts and even "liabilities over $10,000 owed to any one creditor" are wholly unnecessary to prevent illegal insider trading, while at the same time jeopardizing "the privacy and integrity afforded by the Ethics in Government Act system."

These employees worry that publishing this information will make it easier for identity thieves to impersonate them, attract "frivolous lawsuits" from people looking for deep-pocketed targets, and contribute to workplace conflicts when underlings find out how rich their boss is.

These worries alone, the law's critics say, are enough to hinder "recruitment and retention of career executives." But even worse, veteran members of the U.S. diplomatic and intelligence corps point out that publishing senior officials' financial statements will assist foreign governments in "building a data base on [U.S. government] employees" and will also be perused by foreign intelligence services looking for potential agents to recruit. "Ah, I see you owe MasterCard $100,000, Comrade, and your investments in Groupon and Zynga did not work out so well. Deliver to us schematics for the Pentagon's flux capacitor technology, and we will make all your problems go away."

In short, a law that aimed to prevent corruption in government could actually be used to encourage it.

Foolish final thought
That's a scary thought. Taken alongside the typo that threatens to invalidate the whole purpose of the STOCK Act by permitting congressional relatives to trade on inside information, one could argue that this law was not terribly well thought out. One could say it was rushed to judgment, before Congress had a chance to think it all through -- a victim of the most important piece of legislation ever to come out of Washington, D.C.: the law of unintended consequences.

One could argue this, except for the fact we've been asking Congress to fix this problem since at least 2006, when Reps. Brian Baird of Washington and Louise Slaughter of New York first introduced the legislation -- to zero interest from their colleagues. Or since 2004, when professor Alan Ziobrowski of Georgia State University first published the study proving that insider trading was going on in Congress.

Eight years later, the STOCK Act may be "good enough for government work," but we can still make it better.

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

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 (33)

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 August 02, 2012, at 10:18 AM, sgordonson wrote:

    "permitting congressional relatives to trade on inside information" .

    Since they are not elected officials, aren't family members covered by the same law that applies to you and I?

    Though a reporting requirement for family members of would make it easier to detect insider trading, we don't need additional laws if one already on the books is applicable. I think we can agree there are too many overlapping laws already.

  • Report this Comment On August 02, 2012, at 11:02 AM, TMFDivine wrote:

    Very interesting article. 6 percentage points better than the S&P for 16 years is an unbelievable advantage!

    I think @sgordonson has a good question there. I would be interested to hear about whether family members are exempt from the same insider trading laws you and I must follow (and if they are, then what the hell?)

    10 points for working a flux capacitor reference into your piece. That takes skill.

  • Report this Comment On August 02, 2012, at 11:21 AM, JacksonInVA wrote:

    These were not mistakes. US Politicians are all liars, cheats, and thieves. We need to end the party system, end the private finance of political campaigns, and end the "ethics" committee making any scum of congress subject to the same laws and enforcement mechanism as US Citizens.

  • Report this Comment On August 02, 2012, at 12:06 PM, TMFJLo wrote:

    Great research with excellent perspective.

    Looks like the STOCK Act needs a bit of a tune-up before we can really count on it to achieve (only) its underlying purpose.

  • Report this Comment On August 02, 2012, at 1:06 PM, irvingfisher wrote:

    Thanks for the link to the flux capacitor. nice touch. Let us know when the petition on change.org is posted. I'll sign it.

  • Report this Comment On August 02, 2012, at 1:22 PM, whyaduck1128 wrote:

    If nothing else, the law as passed makes the elected putzes (or their lawyers, or brokers) think a little bit before blatantly trading on insider information. They have to come up with a way to structure the deals so they don't show on the demagogue's radar.

  • Report this Comment On August 02, 2012, at 2:55 PM, Gary06 wrote:

    So what's the problem here? If it's truly a "typo" / "mistake" thing, then fix it, Congress. Amend the law approriately to put the same restrictions / notice requirements on relatives and pass it with the same "overwhelming support" that the original bill received. It would be interesting and very telling to see which Congressmen/women would choose to retract their support to such an amendment after supporting the original bill.

  • Report this Comment On August 02, 2012, at 6:33 PM, iamlard wrote:

    It was definitely not a 'typo'...the guilty party is prominently listed numerous times.

    http://online.wsj.com/article/SB1000142405297020436940457721...

  • Report this Comment On August 02, 2012, at 6:34 PM, GETRICHSLOW2 wrote:

    Does any of this surprise you?

    Business as usual in Wa-Wa.

  • Report this Comment On August 02, 2012, at 7:30 PM, iamlard wrote:

    You can't spell Congress without "con".

  • Report this Comment On August 02, 2012, at 7:42 PM, vidar712 wrote:

    "...one could argue that this law was not terribly well thought out. One could say it was rushed to judgment, before Congress had a chance to think it all through..."

    Are we still talking about the STOCK act? Or are we discussing every piece of legislation?

  • Report this Comment On August 02, 2012, at 7:50 PM, SuntanIronMan wrote:

    Unless I'm mistaken (and I very well could be), it was only members of congress who were exempt from insider trading laws. So wouldn't family members already be covered by existing laws? And if they are, then mission accomplished (aside from the issue of actually enforcing the STOCK Act, which seems to be the most problematic part of this whole thing).

  • Report this Comment On August 02, 2012, at 8:46 PM, TrojanFan wrote:

    The whole point of this is to set a trap to more easily ensnare and I applaud that.

    Whether relatives were covered by previous laws on the books or not is irrelevant.

    By placing an affirmative reporting obligation upon them, and making non-compliance a civil or criminal offense we are raising the bar and that's the whole point.

    We're merely treating our lawmakers and their families with the contempt they deserve for consistently and dutifully earning our collective mistrust over the years.

  • Report this Comment On August 02, 2012, at 10:47 PM, sdchan wrote:

    Does anyone else see the irony of members of the public 'outraged' at WallStreet... and at the same time voting in these scoundrels to clean up the Street?

    WallStreet wishes it had the info Congress does. As usual, politicians point fingers here and there. A huge % of the public believes every word.

    And those people vote.

  • Report this Comment On August 03, 2012, at 12:11 AM, rtichy wrote:

    Several of the earlier posters have a misunderstanding of the previous existing insider trading laws. An ordinary investor with no ties to a company and no corrupt practices with or against "insiders" has no "insider" status. So if you come by secret, revelatory info about a company honestly and trade on it, you are in no way breaking the law.

    Congresspeople were not considered insiders because they did not have a fiduciary responsibility to the companies or the shareholders-- so they were not "insiders" even though they had the ability to direct huge government contracts or be aware of huge government contracts before they were awarded.

    The Ethics committee stating that congressional relatives will not be investigated is troubling, because of course, they now can get revelatory info from Congresspeople, who are now "insiders"... so how is that not illegal?! (working in concert with an insider, right?!)

  • Report this Comment On August 03, 2012, at 2:08 AM, GingerInOz wrote:

    Wonderful article! And the comments are first class! Regarding the passing of THIS law, was it completely written before voting? Seems like the aristocracy in the house, senate, White House, etc., apparently have better things to do than read, study, and CONSIDER THE CITIZENS THEY ARE SUPPOSED TO BE SERVING before passing/pushing legislation. Government debt is killing us and threatening our country and the freedom of each US citizen. Yes, we need reform. The voting process feels hopeless when candidates lie about their positions on issues and hide behind their facades when "courting" voters.

    Somehow, we need to work hard to change what is going on or all of our freedoms to do so will be gone!

  • Report this Comment On August 03, 2012, at 6:21 AM, nunnatheabovetwo wrote:

    Integrity! If anyone in congress or in a position of power has knowledge of how laws will be passed to their advantage their "Integrity" radar would have gone off. Things were left alone for their enrichment. There is little or no integrity in public office these people are there for their own benefit. There are countless times where laws are written poorly to enhance someone's pocketbooks. We have few public servants anymore, only people who serve themselves.

  • Report this Comment On August 03, 2012, at 11:35 AM, Gordogato wrote:

    An important point: Senior government executives (some political appointees, but mostly ordinary, career civilian employees) were already required to disclose all of this information to their agencies' ethics offices, where their finances were reviewed independently for conflicts of interest. The reports were always "public", though you had to call up the ethics office and request the file on a specific employee, sort of like a FOIA request. (Mid-level employees also file similar, less detailed reports which are similarly reviewed, but then held confidentially.) Civil servants already had accountability and annual checks of their integrity. What the STOCK act needlessly changed was requiring these reports to be posted on-line for anyone in the world to search and data mine without needing to provide a reason or go through an ethics office gatekeeper.

Add your comment.

DocumentId: 1964308, ~/Articles/ArticleHandler.aspx, 4/20/2014 12:54:22 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement