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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36 Comments

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anniec18ma

All of your comments on INSIDER TRADING( Congress & others included) are much appreciated. We have all been
asleep I see as to how our Sentors,Justices, as well as others , have gained their weatlh. The only one that will
bring this to light is RON PAUL. Oh yes, that is the man that many choose to ignore and not held in high esteem.
The younger generation are listening to Ron Paul, just maybe they will turn things around for us all. Federal Reserve,
printing money which has nothing behind it, WE the citizens will pay for this big scam, meanwhile, they are taking
our freedom and using it for their advantage. OH WELL maybe someday things will go in the right directions
after there are no loop holders voting in secret to acquire their weatlh and leave the people behind.

January 24 2012 at 3:58 PM Report abuse rate up rate down Reply
Mjames

Whats good for the goose is good for the gander. Hell if I did this insider trading I.d never see the lite of day again
But then some nuts are above the law.

January 24 2012 at 1:48 PM Report abuse rate up rate down Reply
lohman446

Of course it should be a law. A government "of the people, for the people, and BY the people" demands that those making the laws do not allow themselves loopholes. They should be under the same mandates the rest of us our and governed by the same laws, rules, and regulations. There was no intent to create a ruling class that both of the two parties eem intent on creating.

January 24 2012 at 11:24 AM Report abuse rate up rate down Reply
ghenderson83

don't we already have that law, insider trading , hmmm I'll ask Martha Stewart.

January 24 2012 at 11:01 AM Report abuse rate up rate down Reply
manmi1

Why does anyone think the republicons are so intent on privatizing everything they can get their hands on? You can ask the mutli-millionaires in the con party.... do they stand to make profits on any of the privatizations?

January 24 2012 at 10:21 AM Report abuse -1 rate up rate down Reply
bill

A bill of this nature should be put to vote by the people same as health care should. By doing it this way, the voice of the people will be heard and we won't have to depend people that only seem to vote when it is in their favor. Just ask Obama how many bills of legislation he voted on.....present does not count.

January 24 2012 at 9:19 AM Report abuse +1 rate up rate down Reply
jkaley

Mr. Smith, perhaps a better middle premise would have been to report on the average congressional pension. That number would show a more accurate depiction of the people who are the problem, the members of Congress.

Regular federal employees can and have been disciplined (including prosecuted) for insider trading. Additionally, as I am sure you know, the Civil Service Retirement System has not had a new member since 1983. This is significant because the new system pays less. As written your humorous "sylogism" leaves open the possiblity of someone concluding that regular federal employees are exempt from this as well. However I certainly agree with your underlying position that Ms. Pelosi failed to drain the swamp.

January 24 2012 at 8:53 AM Report abuse rate up rate down Reply
ccurt78

A lot of things must be changed, this is just one, make it a law and put them in jail ! Next ban lobbist, dismantle PACs, one term limit for politicans, stop giving money to other countries, it is time for change ! A country by the people and for the people ! That means US not politicans,corporate amercia,military complex or the 1%.

January 24 2012 at 6:45 AM Report abuse +2 rate up rate down Reply
wwkenwayne

Martha Stewart goes to Prison for selling a stock from information. Our Congress gets rich! What is wrong with America, is everybody asleep? We need Term Limits! that is the only way we can stop this.

January 24 2012 at 6:03 AM Report abuse +2 rate up rate down Reply
morphiss7

Scumbag congress members. The only thing they care about is themselves, obviously not the citizen.
We need to be careful who we vote in and vote out, obviously most of the current members need to be voted out !!!

January 24 2012 at 12:15 AM Report abuse +3 rate up rate down Reply