Is the STOCK Act a Shadow of Its Former Self?
The past few weeks have seen a flurry of activity around the STOCK Act. The congressional insider trading ban, which languished in the House for nearly six years, passed the Senate with a 96-3 vote a mere three months after it had been introduced. Buoyed by the success in the Senate, House Majority Leader Eric Cantor scheduled a vote, and the act also passed the House by a vote of 417-2.
Now, the two bills must be reconciled and presented to President Barack Obama, who pledged during the State of the Union to pass such a bill without delay.
Such progress could not have been made without our Foolish community. You all wrote, tweeted, posted, called, and nudged the members of Congress and demanded that this act be passed. It has not gone unnoticed. Rep. Tim Walz, one of the original sponsors of the act, told me, "We will do everything in our power to bring it. The real power lies with the media and the public bringing pressure on it."
That's you, Fools. Thank you.
But like every act of Congress, amendments will make or break the STOCK Act. One large discrepancy between the Senate and House versions could undermine the effectiveness of the act and all the amazing progress we've seen to date.
The road from Wall Street to Capitol Hill is a short one. As government regulation changes, it affects the markets. Knowing what's coming down the pike can be a huge boon for portfolios. If you know, for instance, that credit card companies are about to be hit with swipe fee limits or financial companies are about to get a bailout, how and when you use that information can be lucrative. Since individuals with this knowledge aren't trading on inside corporate information, but rather inside information on actions of the government, it's perfectly legal. Shady, but legal.
Termed "political intelligence," this industry makes about $100 million and employs 2,000 people a year in Washington, D.C., alone.
One key component between the Senate and House versions of the act has been the regulation of the political intelligence industry. The House STOCK Act, as written by Reps. Louise Slaughter and Tim Walz and former Rep. Brian Baird, called for regulation of the political intelligence industry akin to that of the lobbying industry. The Senate version, introduced by Sen. Scott Brown, called merely for a study of the industry.
Sen. Chuck Grassley added an amendment to the Senate bill, requiring disclosure of political intelligence activities under the Lobbying Disclosure Act of 1995. In an interview with Bloomberg, he called the industry, "economic espionage between Wall Street and Washington D.C."
"If somebody on Wall Street is trying to make money off of conversations they have with senators or staff, we should know who they are representing," Grassley said in his floor speech introducing the amendment. "It's just that simple."
Grassley's amendment passed with 60 votes in the Senate.
Cantor, who has received harsh criticism for his delay of the vote, is under fire once again for stripping the Grassley amendment from the version he introduced to the House, instead calling for a study of the industry.
"It's astonishing and extremely disappointing that the House would fulfill Wall Street's wishes by killing this provision," Grassley said in a statement. "The Senate clearly voted to try to shed light on an industry that's behind the scenes. If the Senate language is too broad, as opponents say, why not propose a solution instead of scrapping the provision altogether?"
Also notable is Cantor's removal of another popular amendment; one that gives federal prosecutors the power to pursue corrupt officials. Although Cantor claims he worked with several members of the House, Politico reports that he consulted neither Walz nor Slaughter during the process. Cantor's changes have critics up in arms.
When making the revised House act available, Cantor called it "a strengthened and expanded STOCK Act" that removed "provisions that would have made the bill unworkable or raised more questions than they answered."
White House spokesman Jay Carney discussed the act in a briefing. "I am struck by the effort to water it down behind closed doors, presumably because of objections by financial organizations and their lobbyists."
The two passed bills now must go to committee to be merged into one, which will be presented to Obama. Slaughter says she will continue to fight for the inclusion of industry regulation in committee to merge the two passed bills.
The revised House act included another Cantor-introduced nugget, to restrict public officials from participating in initial public offerings. It's a move directly aimed at House Minority Leader Nancy Pelosi, whose husband participated in a Visa IPO at the same time the House was considering new regulations on the credit card industry. Pelosi has issued a staunch defense, claiming there was nothing irregular or preferential in the transaction.
When I spoke with Walz about the House act, I asked him whether he thought IPOs should be restricted. This was before the Senate or House votes, and before Cantor had introduced what has since been dubbed the "Pelosi Provision." At that time, Walz said that while the IPO issue wasn't included in the act he introduced with Slaughter, the idea that members of Congress could participate in an initial public offering made him "uncomfortable."
"I just know from talking to my friends, who are average people on the street, that the chance of participating in an IPO as a school teacher in Mankato, Minn., is virtually zero. And with that being said, if I would have a chance at an IPO because of this job, that's wrong."
Slaughter, however, has stated on the record that the IPO inclusion was purely a political play. "I think the fact that they put this in was strictly to cause grief to [Pelosi]," Slaughter told Politico, "and I resent it."
These issues cloud the larger one, which is the passing of a comprehensive act to ban trading on nonpublic information by both elected officials and an unregulated industry.
In 1999, The Motley Fool and the Foolish community put pressure on the SEC to pass Rule FD, aimed to prevent companies from passing nonpublic information to Wall Street analysts. It required companies to end selective disclosure, to make information public or not issue it at all.
Foolish colleague Bill Barker (TMFMax) urged readers to contact the SEC, and reported that several hundred did so. The attention grew, the media picked up on the unprecedented number of public comments, and pressure to pass the fair disclosure rule grew. The SEC passed the rule in August 2000 with a 3-1 vote.
Twelve years later, we're still fighting for fair disclosure and a level playing field for individual investors.
Foolish colleague Rich Smith sounded the bell on insider trading in Congress nearly two years ago. Now, the acts have passed both the House and the Senate. We're close, but we're not done. We won't stop until a fair, comprehensive STOCK Act is signed into law. It must not only prevent members of Congress from profiting from nonpublic information, but regulate the industry that traffics in ill-gotten knowledge. It must include rapid, and easily accessible, disclosure. And it must happen now.
Call or email your representative, senators, and Eric Cantor to insist that the STOCK Act include the Grassley amendment to regulate the political intelligence industry. We know Congress is listening. Hold Congress accountable and help make the passing of the STOCK Act another victory for Fools and individual investors everywhere. You can find their contact here:
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