Today, U.S. Senator Scott Brown (R-MA) will introduce the Stop Trading on Congressional Knowledge (STOCK) Act of 2011, which would prohibit members or employees of Congress, as well as Executive Branch employees, from using nonpublic information obtained through their public service for the purposes of investing or otherwise making a personal financial gain. Senator Brown issued the following statement on the introduction of the STOCK Act:
"Members of Congress should live under the same laws as everyone else. If they trade on inside knowledge to line their own pockets, they should be punished. Serving the public is a privilege and an honor, not an opportunity for personal gain. I hope every Senator will join me in this effort to lend greater credibility to our work and restore trust in this institution. We serve the public, not our bank accounts, and no one should be allowed to enrich themselves based on inside government information that is not available to the general public."
Senator Brown's STOCK Act would prohibit members or employees of Congress and Executive Branch employees from buying or selling stocks, bonds, or commodities futures based on nonpublic information they obtain because of their privileged status. The Act would also prohibit Members and employees from disclosing any non-public information about any pending or prospective legislative action obtained from a member or employee of Congress for investment purposes. Members of Congress and employees would also be required to report the purchase, sale or exchange of any stock, bond, or commodities future transaction in excess of $1,000 within 90 days.
Similar legislation, H.R. 1148, has previously been introduced in the House of Representatives by Representatives Louise Slaughter and Tim Walz.
Congress and the Supreme Court are the only two out of 975 federal entities that have no rules or laws prohibiting them from trading securities based on nonpublic information. According to a study by economist Alan J. Ziobrowski, between 1993 and 1998, the common stock investment portfolios of U.S. senators beat the market by 12% a year, on average. In sharp contrast, the common stock investment portfolios of U.S. households as a whole underperformed the market on average by 1.4% a year during the relevant period. And corporate insiders investing in their own company"s stock only beat the market by about 6% a year on average during that period.
Under current law, insider trading regulations do not clearly define whether government officials trading on inside government information is considered illegal insider trading. In terms of congressional insider trading, legislative information can be "nonpublic" and "material," giving it the potential to affect stock prices. But members of Congress are not considered corporate insiders, temporary insiders, or tippees when they trade securities based on their knowledge of pending legislation. They are also not considered to be "misappropriating" information because it is unclear whether or not they have a "fiduciary duty" or other "relationship of trust or confidence" to Congress.