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FAQ: the crackdown on insider trading in Congress

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Despite, the partisan gridlock that plagued Congress for most of 2011, legislators are making progress on at least one issue: cracking down on insider trading within the two chambers. On Monday, the Senate overwhelmingly agreed to move the Stop Trading on Congressional Knowledge Act closer to a final vote. Here’s a closer look at the bill and why it’s on the front burner: SOURCE: AP Sens. Kirsten Gillibrand ( D-N.Y.) and Joseph Lieberman (I-Conn.) are sponsors of the STOCK Act, along with Sen. Scott Brown (R-Mass.).

1) What would the STOCK Act do? The Senate version of the bill would prohibit members of Congress from using nonpublic knowledge they acquire as legislators to buy or sell stocks, swaps, commodities or other publicly traded financial products. They would also be prohibited from tipping off other people with the purpose of making such trades or otherwise influencing a stock’s price based on such information.

The measure would beef up reporting rules for such financial transactions, requiring members to file monthly instead of yearly reports and to post the reports online. Finally, it would mandate an investigation into firms and consultants that meet with members of Congress and their staffs in order to gain “political intelligence” to influence trading behavior. The STOCK Act would also apply to upper-level Hill staffers who are already required to file financial disclosure statements.

2) Isn’t there already a general ban on insider trading? Why would we need a separate law for Congress? In practice, the federal ban on insider trading has generally applied to “insiders” within a private firm who use nonpublic information for investment purposes. No member of Congress has ever been prosecuted for insider trading based on knowledge gleaned from the legislative process, although federal authorities once investigated Sen. Bill Frist (R-Tenn.) for selling stock of a hospital company founded by his father. The STOCK Act amends the law to make it explicit that inside congressional knowledge that could affect the price of a stock is also illegal and subject to enforcement by the Securities and Exchange Commission, among others.

3) Why is this coming up now? Concerns about congressional insider trading have been around for decades, and the STOCK Act itself had been languishing in Congress since 2006. But the recent flurry of activity began after “60 Minutes” aired a program in November that accused powerful individual lawmakers of insider trading, including House Minority Leader Nancy Pelosi and Rep. Spencer Bachus of Alabama, GOP chairman of the House Financial Services Committee. The news report sparked a public outcry for action that has drawn major bipartisan support in the House and Senate.

There’s conflicting evidence from academics who’ve tried to determine whether congressional insider trading is a serious concern. The Atlantic’s Megan McArdle highlighted the two most prominent studies in a November story. Alan Ziobrowski, now a Georgia State University economist, examined the stock records of members of Congress between 1993 and 1998 and found that the Senate outperformed the market by 12 percent and the House outperformed it by 6 percent. The second study, released in December, looked at more recent data, from 2004 to 2008, which showed that Congress actually underperformed the market by about 2 to 3 percent a year. The paper, authored by Andrew Eggers of the London School of Economics and Jens Hainmueller of MIT, noted that members on powerful committees tended to do slightly better than their peers but concluded that “the best-performing subgroup appears to be members who owned businesses before entering Congress.”

Eggers and Hainmueller warned against using anecdotal information from media reports as primary evidence that insider trading in Congress is a widespread problem, concluding that the phenomenon was “more myth than reality.” As McArdle explains, there are ways to reconcile the two studies: They could mean that insider trading has gotten harder as the financial system has gotten more complex, and/or that members have changed their behavior since the issue has attracted more attention.

4) What will happen next? The Senate appears likely to pass the STOCK Act, and the White House supports it. As for the House, Despite pushing back against the “60 Minutes” allegations, Republican Majority Leader Eric Cantor signaled his openness to the bill during a press appearance Tuesday but insisted that it didn’t go far enough. The House will likely make a number of changes to the bill, with proposals to extend the same restrictions to the executive branch and to expand the ban to land deals and other types of financial transactions.

In addition, the House bill is likely to place actual restrictions on visits from “political intelligence” consultants rather than simply order the government’s watchdog to investigate the problem, per the Senate’s bill. There’s also some interest in both chambers in forcing members of Congress to use blind trusts to invest while they’re in office and otherwise divest themselves from holdings that their work could directly affect. A number of these amendments, however, could also complicate the bill’s chance of passage.

5) If the STOCK Act passes, will members of Congress just stop trading altogether? Some think it could happen. About one-third of the Senate and half of the House actively trade stocks, and the STOCK Act could potentially discourage members from personally trading altogether, according to Craig Holman, government affairs lobbyist for Public Citizen, which supports the bill. “Disclosure requirements can raise suspicion, and many members just don’t want to go there,” he said.

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