Insider trading by Congress may go out kicking and screaming
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The 9 percent of Americans who approve of the way Congress is conducting the nation's business may reconsider their opinion if they take a look at what's happened to a measure designed to regulate congressional behavior.
House Majority Leader Eric Cantor, R-Va., last week scuttled a vote on a bill that addresses the populist outrage over the investing habits of the 535 members of the U.S. House and Senate. His decision came after the Stop Trading on Congressional Knowledge Act -- or STOCK Act -- had garnered the support of a majority of House members, including 75 from Mr. Cantor's Grand Old Party.
The timing understandably led some to connect the dots by concluding that Mr. Cantor was taken aback by the prospect of Congress having to obey the same laws the rest of us do.
The STOCK act, introduced by Reps. Louise Slaughter, D-N.Y., and Tim Walz, D-Minn., would prohibit members of Congress and federal employees from making investment decisions based on nonpublic information they obtain as part of their jobs. It would also put restrictions on the "political intelligence" industry, where lobbyists, hedge funds and others seek access to the wealth of nonpublic information available in Washington to improve their investment decision making.
Anyone who fails to see just how valuable this information can be should read "Throw Them All Out" by Peter Schweizer. But before doing so, you might consider medication of some sort to control your blood pressure, for Mr. Schweizer documents how the investments of multiple members of Congress overlap with their legislative activities. His conclusion: It is "standard behavior" in Washington for politicians to trade stocks while they are considering legislation that affects those stocks.
Furthermore, academic researchers who have analyzed investments made by members of Congress concluded that they significantly outperform the broad market and that their success has something to do with their access to information that is off-limits to other investors.
You don't have to be a proponent of class warfare to understand why these findings resonate with the unwashed masses.
Consider this response to Mr. Cantor's decision to postpone a markup of the proposal, a key step that leads to a vote by the full House. The markup was scheduled to occur this week.
"This action by the Republican leadership ... is yet another example of this Congress not wanting to do anything -- let alone something bipartisan, something with massive public support, something as common sense as banning insider trading in Congress," said Rep. Carolyn Maloney, D-N.Y.
There are those who say insider trading laws already apply to members of Congress, including Indiana University law Professor Donna M. Nagy, who testified Tuesday at a congressional hearing on the proposed legislation.
"Congressional insider trading is already illegal under existing law," Ms. Nagy said in prepared testimony before the House Committee on Financial Services.
Robert L. Walker, former chief counsel for the House and Senate ethics committees and now an attorney with a Washington, D.C., law firm, told the committee the same thing.
Robert Khuzami, director of the Security and Exchange Commission's enforcement division, told the House committee that although "there is no reason why" members of Congress and their staff are exempt from securities regulations, applying insider trading laws to Congress "is without direct precedent." And although ethics rules restrict congressional use of nonpublic information, that does not stop members of Congress from doing what critics deem to be insider trading. Two possible explanations: Congress has been reluctant to police members over ethical lapses; and it controls the budget of the SEC, the federal agency that polices insider trading.
There are concerns that the STOCK Act, as written, could make it harder to prosecute insider trading cases against those outside of Congress and that it may not prevent the type of behavior its sponsors are targeting.
This is a legitimate concern given how many times congressional lawmaking illustrates the unintended consequences of good intentions.
The proposal's shortcomings conceivably could be addressed during the markup Mr. Cantor has postponed; but given congressional efficiency these days, that might be too much to expect.
Nevertheless, a majority of House members want to do something about it, even if only to restore a small measure of the public confidence Congress has frittered away with its rancorous, partisan bickering over the debt limit, budget talks and on other fronts.
"Failure to pass the STOCK Act this session will only serve to further erode the public trust and ensure single digit congressional approval ratings continue," Reps. Slaughter and Walz wrote in a letter to Mr. Cantor.
Members of Congress are missing the point if their primary motivation for enacting legislation is to get the American public off their back.
What the American public demands -- and deserves -- is a Congress that wants to do the right thing because it's the right thing to do, not because it will make voters think their hearts are in the right place.
First Published December 11, 2011 12:00 am