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Congratulations, STOCK Act. You'll Be a Law!

By Rich Smith - Updated Apr 7, 2017 at 6:13PM

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At long last, a bill that bans insider trading in Congress passes.

It's official. On Thursday, March 22, 2012, the U.S. Senate passed by near unanimous vote a bill to Stop Trading On Congressional Knowledge. A bill that (in theory at least) will put an end to members trading stocks with the use of inside information, known to them from their work as representatives -- but unknown to most of the people they were elected to represent.

Six years in the making, the bill died three times in committee, got sidelined in the House in 2011, and was assaulted by a horde of mutant amendments in the Senate in early 2012. But it survived.  After winning with landslide votes in both the Senate and House in February, the STOCK Act was adopted by a 96-3 vote in the Senate yesterday, and now heads to President Barack Obama's desk for signing.

The lowdown on the STOCK Act
What does the STOCK Act do? Basically, it boils down to three big things:

First and foremost, the act explicitly states that members have a duty to the United States and its citizens, and to the institution of Congress itself, to keep confidential any material information they come into possession of in the course of performing their duties. That sounds like a "well, duh!" statement to most of us, but legal scholars have been debating for years whether such a duty actually exists in law.

Now we know it does, because the law says it does. As a result, the entire history of SEC regulation of insider trading can now be applied in full to members of Congress.

Second, the act forbids public officials, including members of Congress, from using their government office to obtain preferential access to hot IPOs.

Third, to help voters ensure that Congress is doing what it's now legally obliged to do (and not do the things it's now legally forbidden from doing), the act requires members of Congress (and senior members of the executive branch) to disclose their trading activity within 30 days after placing a trade. That's different than the current disclosure requirement, which had trades and disclosures being separated by as much as 17 calendar months. Further improving the system currently in place, these disclosures will need to be made electronically, in standardized form, and will be open to the public for review.

Don't let the perfect be the enemy of the good
Cynics will no doubt point out that a key amendment to the Senate version of the STOCK Act, requiring political intelligence firms to register as lobbyists do now, is missing from the act passed by Congress yesterday. They'll note that certain other beneficial provisions, such as tightening rules on gift-giving to government officials, also fell by the wayside. They'll say, in short, that the law isn't as good as it might have been. That it isn't "perfect."

No argument there. But then again, few laws passed in a democracy of competing interests pass the "perfection" test. In this Fool's opinion, though, I say the STOCK Act is good enough, and it's considerably better than what we had before it was passed, which was... nothing. There was no clarity on whether trading on congressional knowledge was illegal. There were no disclosure requirements worth much more than the scraps of paper that the disclosures were (often literally) scribbled upon. Nothing.

Foolish takeaway
There's a reason we here at the Fool have worked for oh-so-many-months (years, even) to get this law a fair hearing before Congress. There's a reason opponents of the STOCK Act fought for six long years to keep this bill from becoming law, and I submit to you that that reason probably isn't that they thought the law would not work, or that it wasn't worth passing.

It was worth passing. You were right to support it. And when Obama signs the STOCK Act into law, you deserve to give yourself a pat on the back.

Here at The Motley Fool, we thank you for your support. (Everyone click the link, and sing along now.)

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