The Underwhelming STOCK Act
After the CBS special a few weeks ago on Congressional insider trading, the long-stalled STOCK Act seems to be getting a little momentum; it has picked up sponsors and been reintroduced.
Legal expert Stephen Bainbridge, however, is not impressed:
- After Congress defeats proposed legislation that would have sharply increased Acme's costs of doing business, Acme's CEO gives a key Congressman a hot tip on Acme stock as a pay off. There was a legislative action, but it was in the past and, accordingly, is neither pending nor prospective.
- A Member of Congress learned from a Cabinet member that a government agency was about to enter a large procurement contract. There is no "pending or prospective" legislative action, but there is valuable material nonpublic information on which the member could trade.
- The CEO of Acme is an avid hunter. Congress is considering legislative action that would ban hunting of the CEO's favorite game animal. The CEO of Acme gives a key Congressman a hot tip on Acme stock as a bribe to oppose the hunting law. This is perhaps the most egregious form of Congressional insider trading, yet there is no "pending or prospective legislative action relating to such issuer." To the contrary, the legislative action in question is entirely unrelated to the issuer.
- During a confidential committee investigation, a Member of Congress learns that Acme is about to announce a major new discovery. The member infers that Ajax--Acme's major competitor--will take a serious hit. The member shorts Ajax stock. Technically, the member has not traded in the stock of "such issuer."
Three other problems with the present statutory language deserve mention. First, the Act applies only to "the securities of any issuer." The rulemaking authorized by the Act thus could not proscribe trading in third-party derivatives, except to the extent they are captured by the commodities provision of the Act. Second, while the Act authorizes a ban on tippee trading, it does not expressly authorize a regulatory ban on tipping by members or staffers. There is no reason members and staffers should be allowed to tip with impunity. Finally, Rule 14e-3 prohibits tippees from trading on the basis of material nonpublic information about a tender offer not only if the tippee knows the information came from one of the specified sources, but also if the tippee "has reason to know" that it came from a proscribed source. The STOCK Act should do likewise with respect to information obtained from a member or staffer.
Congress should be holding itself to a higher standard than everyone else. But even when pressed, it seems that they can't quite bring themselves to do it.