The Time Is Now: Let's Stop Congressional Insider Trading

Update (Jan. 30, 9:30 p.m. EST): Earlier this evening, the Senate voted 93-2 in favor of allowing debate to go forward on the STOCK Act.According to ABC News, the Senate could approve final passage of the bill as early as this week. Then it will be up to the House to consider the legislation. In a statement after the Senate vote, House Majority Leader Eric Cantor, R-Va., vowed that the House will "ensure action on legislation that meets the underlying goals of the STOCK Act in the most timely manner possible."

The Motley Fool will continue to follow this legislation as it makes its way through both houses. Now is the perfect time to let your representatives know what you think of the STOCK Act.

Today, shortly after the stock market closes, the Senate will convene for a cloture vote on the STOCK Act. By calling for a cloture vote, the Senate will begin debate on the legislation, thereby fast-tracking an actual vote on the Senate floor.

The legislation's full name makes plain its intentions: Stop Trading on Congressional Knowledge (STOCK). It is designed to make it illegal for members of Congress to trade stocks and bonds using nonpublic information to which only they, as the men and women who make our country's laws, are privy.

It's a law to restore fairness in Washington and protect the integrity of the stock markets.

Wait -- there's no law for that already?
Today's vote is the closest this legislation has come to becoming law -- by far.

The STOCK Act was first introduced in the House of Representatives in 2006, but that year -- and in two subsequent versions of the bill in 2007 and 2009 -- it suffered a quiet death, never even making it out of a committee.

The origins of the Act date back to 1995, when an ABC news magazine called Day One aired a report highlighting certain suspect financial transactions by members of Congress, and suggested the legislators may have been trading on information learned in the course of their work as lawmakers.

Professor Alan Ziobrowski of Georgia State University set out to prove Day One wrong, thinking Congress was "getting a bum rap." He dug through a massive amount of disclosure records to review some 6,000 stock transactions reported by members of the Senate.

Completely contrary to what Ziobrowski expected to find, the data revealed a trend of remarkable market outperformance: On average, U.S. senators outperformed the S&P 500 by an astonishing 12 percentage points, achieving some of "the highest excess returns ever recorded over a long period of time, significantly outperforming even hedge fund managers."

Why it matters
A later study disputed some of Ziobrowski's conclusions, finding that lawmakers did not achieve superior investment returns. Such ambiguity, though, hardly matters -- in this case, perception really is reality.

As my colleague Molly McCluskey writes later in this series,

We have to feel that our representatives truly represent our best interests, that by making the easy decisions we can trust them to make the hard ones. We have to know, without a shadow of a doubt, that when they make those hard decisions, they won't also be trading defense stocks right before voting to go to war or not, or shorting education stocks in the midst of a debate over the future of school funding.

And thus, while this legislation seems like a no-brainer to the vast majority of us, only now does this bill actually have a chance of passing.

Here at The Motley Fool, we've been advocating for this legislation for nearly two years now; we have even amassed almost 4,500 signatures in a "Pass the STOCK Act" petition drive.

As we detail later in this series, we believe the final version of the STOCK Act must contain at least three provisions:

  • Illegality: "Members must not use material nonpublic information that they receive by virtue of their congressional positions, or gained from performing their duties, for personal benefit."

  • Enforcement: "Members owe a duty of trust and confidence to Congress, the United States government, and the American people. Consequently, their use or disclosure of Congressional information is subject to the provisions of Section 10(b) of the Securities Exchange Act of 1934 and the SEC's Rule 10b-5."

  • Disclosure: "Members must report their transactions in publicly traded securities within 48 hours of executing each transaction. Congress shall develop a standard means of reporting such transactions electronically to ensure that this requirement not place an undue burden upon those who must report the transactions. This system shall require Members to accurately disclose the date of each transaction, its amount, and the security being traded."

Today we are very close to declaring victory in the battle for the STOCK Act. But as always, we need your help. We ask that you contact your congressional representatives -- House and Senate -- and let them know that you support the STOCK Act. Call, email, tweet (hashtag: #PasstheSTOCKACT), post on their Facebook pages -- just send the message. Here's how to find their contact information:

Over 200 years ago, James Madison argued that Congress must abide by the same laws as the citizenry, since that had "always been deemed one of the strongest bonds by which human policy can connect the rulers and the people together." We couldn't agree more. Let's do whatever we can to make sure the STOCK Act becomes law.

At the time thisarticle was published

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