The STOCK Act’s Muzzle — How “Insider Trading” Bill Could Shut Down Grassroots Communication
It’s April 2012. You are a conscientious congressional staffer who still takes seriously the need to be a steward of taxpayers’ money. (Yes, I know for a fact, there are more than a few of these folks around on Capitol Hill.) You are watching closely events surrounding an “omnibus” or “minibus” spending bill deemed even by conservative Republican members as “must-pass” because it funds the military as well as other parts of government.
Suddenly, you hear about an outrageous earmark about to be slipped into the bill that would enrich a Fortune 500 company. You know how these things work; once the bill hits the floor, it’s very hard to excise one provision. So you decide to alert a network of fiscal watchdogs you’ve met with over the years to wage an instant campaign against this piece of corporate welfare.
You have all the information in the e-mail and are about to hit “send.” But then you remember something from a briefing you attended a couple days ago. The subject was the STOCK (Stop Trading on Congressional Knowledge) Act – aimed at stopping “insider trading” by members and employees of Congress – that your boss and nearly every other member of Congress voted into law in February.
At the time, you didn’t think the law would affect you since the only trading you do is indirect, through your mutual funds and pension. You were surprised to learn, however, that you now have a broad “duty of confidentiality” that encompasses not just trading on “material, nonpublic information,” but disclosing information to those who might.
You sit back and think, “It is indeed possible that someone I send this to could buy stock in the company, or could short the company based on the coming outrage.” You stare at the computer screen wondering how virtually no one noticed how this law could have potentially criminalized an act of whistleblowing as abetting “insider trading.”
Such a scenario is almost certain if the House enacts anything similar to the STOCK Act that passed the Senate last week by a whopping 96-3 vote. House Majority Whip Eric Cantor told reporters on Friday that the House plans to vote on a similar measure next week, saying only that “we intend to strengthen” the Senate bill.
The bill gained steam after a series of revelations in conservative author Peter Schweizer’s best-selling book, Throw Them All Out, that pointed out that many members of Congress routinely trade individual stocks and options, sometimes after receiving sensitive information. (Though how “privileged” and “nonpublic” the economic data they had received actually was has been a subject of debate.) A “60 Minutes” report based on some of Schweizer’s findings propelled the issue into the spotlight, with President Obama calling on Congress in the State of the Union to ban “insider trading” among its members and staff.
But lost in the justifiable outrage about politicians’ perks is discussion about how provisions in the Senate bill would actually work. Like the Stop Online Piracy Act (SOPA), another bipartisan bill with aims that nearly everyone agreed on, the proverbial devil is in the details of the legislative language. In fact, if the STOCK Act were in effect, the campaign against SOPA might have failed, because communication between Congress and outside groups would have been severely curbed.
Among the most important things to know about the STOCK Act is that by specifically applying “material, nonpublic information” rules that govern officers and directors of a corporation to Congress, the bill would bar in many instances the disclosure of such information as well as trading on it. In a press release describing the House version of the STOCK Act they sponsored, House Rules Committee Ranking Member Louise Slaughter (D-N.Y.) and Rep. Tim Walz (D-Minn.) declare that the bill “amends House ethics rules to prohibit Members and their employees from disclosing any non-public information about any pending or prospective legislative action for investment purposes.” [emphasis added]
But members and staffers have no practical way of assuring that those to whom they spread information won’t use it “for investment purposes.” As a result, communication about important matters with outside groups may decrease markedly, and the very aim of transparency in government that was an impetus for this bill would be undermined. Slaughter, already a champion of curbing grassroots speech through her call for restoration of the Fairness Doctrine, has actually implied that cutting off communication could be one the results of the law.
In a “fact check” she released on an earlier version of her bill, Slaughter conceded a fact that is often misreported – that there is no congressional exemption from insider trading laws. “Just as anyone else, Members of Congress and staffers are subject to current insider trading laws,” she wrote, giving an example of a CEO telling a member about a product recall that has yet to be announced. If it can be proven that the member sold his or her stock based on this info, this action would be “illegal under current insider trading laws.”
The problem, Slaughter argued, is that “current insider trading laws do not apply to nonpublic information about current or upcoming congressional activity.” A big part of the reason for this, Slaughter acknowledged, is that “insider trading” prohibitions stem from the “duty of confidentiality” in securities laws imposed on executives, directors, and others who deal with information regarding a publicly traded company.
By contrast, she noted, “The work of Congress depends on open lines of communication between Members and constituents and organizations.” Therefore, she concluded, ”we must create a broader prohibition that does not require a duty of confidentiality.”
Yet the Senate bill (S. 2038) would specifically impose a “duty of confidentiality” on members of Congress and their staffs. Section 4(g) of the Senate bill states that “each Member of Congress or employee of Congress owes a duty arising from a relationship of trust and confidence to the Congress, the United States Government, and the citizens of the United States with respect to material, nonpublic information.” [emphasis added]
The term “confidence” in the context of securities law does not mean faith in a particular institution — indeed it would be difficult to legislate confidence in Congress or any branch of government — but rather keeping matters in confidence. And under the “duty of confidentiality” imposed with regard to publicly-traded companies, many have been prosecuted for sharing information as well as trading on it.
A so-called “tipper,” wrote attorney Nelson Ebaugh in the Texas Journal of Business Law, “is exposed to insider trading liability for simply communicating material, nonpublic information even if he did not personally use the information to trade in the company’s securities.” Ebaugh added that courts are split on whether a “personal benefit” is even required for guilt.
Ebaugh and other experts have argued that insider trading rules have been applied so broadly to such “tippers” of corporate information that they inhibit disclosure about corporate wrongdoing. If these rules were applied to information about upcoming congressional action, it would have serious, if not more severe, effects in muzzling whistleblowers.
In addition to the e-mail to activists from the beginning of this article, conference calls and off-the-record meetings with ideological activists, such as the famed “Wednesday meeting” created by Grover Norquist, could also be curtailed. In the corporate word, the Securities and Exchange Commission has cracked down on what it calls “selective disclosure” to analysts. As a result, under Regulation Full Disclosure, most public companies put information about conference calls on their web site and/or post the recorded call for all to hear.
Following this precedent, if the STOCK Act is passed, the SEC may require meetings and calls in which Congress members and staffers participate to be open to the public or not occur at all. The result would be less outflow of information from Congress and a less-informed public.
The exposes of Schweizer and others raise serious issues that about power and privilege need to be addressed. Sensible measures, such as prohibiting members and their spouses from participating in initial public offering (which is not in the STOCK Act) as well as more rapid disclosure of stock trades (which is), should be enacted. Unfortunately, the bulk of the STOCK Act bills currently before the House and Senate would muzzle much of the communication necessary for sunlight and reform.