Elected Insiders: Why the STOCK Act Matters to You

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Getty Images• Salary of rank-and-file members of the U.S. Congress: $174,000.
• Average annual Civil Service Retirement System benefits for retired members as of 2007: $63,696.
• Profits legislators can make by trading on inside information: Priceless
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For more than five years, Congress has been looking into alleged conflicts of interest on Capitol Hill, investigating whether its members are trading stocks on "inside information" that they acquire while doing the people's business.

Four times in that period, lawmakers in the House have introduced the Stop Trading On Congressional Knowledge Act to bar members from investing based on knowledge they gained in the course of their duties.

Three times, the proposed STOCK Act has died in committee. Will the fourth time be the charm? We'll find out soon when the Senate returns to work and joins the House of Representatives, which went back into session this week.

Something's Rotten in the District of Columbia

A lot of people have a lot to lose if this bill becomes law.

Late last year, 60 Minutes ran a report on the phenomenon of insider trading in Congress. Among the allegations leveled were suggestions that then-House Speaker Nancy Pelosi (D-Calif.) received preferential access to the Visa IPO -- just before the House began considering laws to regulate the credit card industry. The report also suggested that current Speaker John Boehner (R-Ohio) traded health-care stocks in 2009, even as his party was actively fighting a new law to reform health care. Meanwhile, The Wall Street Journal reports that rank-and-file members, and their staffers, were actively shorting U.S. Treasury bond funds in the middle of the financial crisis.

Two studies conducted by professor Alan Ziobrowski of Georgia State University suggest this problem has been going on for years.

The original study, published in 2004, found that stock market investments made by U.S. senators outperformed returns on the S&P 500 by 12 percentage points annually. A more recent study of trades made by U.S. representatives found a 6-point outperformance among House members -- less impressive than their senatorial brethren, but equivalent to what you might find among corporate officers trading shares of their own companies' stocks.

Rep. Louise Slaughter, co-author of the STOCK Act, explains: "If a congressman learns that his committee is about to do something that would affect a company, he can go trade on that because he is not obligated to keep that information confidential." There's no law that explicitly permits this, mind you. But there's no law that forbids it, either.

Barring censure by the House itself for acting "unethically," there's currently nothing anybody can do about it.

There Ought To Be a Law

This, in a nutshell, is why the STOCK Act is important. As matters stand, when you log onto your discount brokerage account and place an order to sell shares of ExxonMobil (XOM), for example, it's entirely possible that the guy buying them from you is a congressman who knows there's an oil and gas industry lobbyist making the rounds on Capitol Hill seeking tax breaks for Exxon. Or you may find yourself buying shares of Google (GOOG) -- from some senator who's working on the Stop Online Piracy Act.

The chances of this happening are small, to be sure. But just knowing -- or even suspecting -- that when you invest in stocks, you may be playing a rigged game against a government official in the know, could shake confidence in the stock market.

What America needs, and what Americans deserve, is a level playing field. We need to know that the laws Congress writes apply to them, and not just to us.

A Bit of Good News

Now here's the good news: For the first time since the STOCK Act's first introduction five years ago, there's a chance that this law will pass. Bipartisan conflicts among House leaders notwithstanding, the STOCK Act has one advantage working in its favor: tripartisan support.

And no, that's not a typo. In the Senate, STOCK Act legislation is sponsored by both Republican Scott Brown of Massachusetts, and Democrat Kirsten Gillibrand of New York. Last month, the two senators' bills went into the Homeland Security Committee and came out with support from, among others, Independent Sen. Joe Lieberman of Connecticut. The bill might actually make it to the Senate floor for a vote. And in the House, the STOCK Act has attracted support from both sides of the aisle -- and an astounding 246 co-sponsors -- a 56% majority in its favor, before the bill even comes up for a vote.

Of course, this still means there are 189 House Representatives who still need convincing. Is your representative one of them? Find out -- and tell them what you think.

The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google and Visa. Motley Fool contributor Rich Smith does not own shares of any company mentioned above.

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