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Insider Trading is Illegal…Except for Congress

Wall Street is corrupt. Politicians are corrupt, too. But the rules for Wall Street and the rules for Congress are totally different.

Insider trading is defined as buying or selling a security while in possession of material, nonpublic information about the security. It’s illegal…but until just a few months ago members of Congress were allowed to get away with it, because insider trading laws didn’t apply to nonpublic information about congressional activity.

A recent analysis by the Washington Post found that between 2007 and 2010, 130 members of Congress (68 Democrats and 62 Republicans, or their families) traded stocks in companies that were lobbying on bills before congressional committees.

Lawmakers bought and sold as much as $218 million in 323 companies…almost 1 out of every 8 trades intersected with legislation, according to the report.

And 34 members of Congress (19 Democrats and 15 Republicans) restructured their portfolios a total of 166 times within two days of meeting with officials from the Federal Reserve or the Treasury.

The solution: this spring, the Stop Trading on Congressional Knowledge (STOCK) Act was passed and signed into law. It was meant to “prohibit members of Congress and employees of Congress from using nonpublic information derived from their official positions for personal benefit”.

But the STOCK Act may not do much to change the status quo on Capitol Hill (the transactions uncovered by the Washington Post would still have been allowed under the act). It might stop members of Congress from trading on private ‘insider’ information…but technically it doesn’t stop them from trading on stocks of companies while they are creating laws that impact those companies. And it doesn’t stop them from modifying their portfolios after meeting with Federal Reserve and Treasury officials. They might not be guilty of insider trading in a definitive sense…but trading based on their knowledge of upcoming legislation or policy moves looks suspect to me.

A university study last year showed that from 1985 to 2001 members of the House of Representatives beat the market by an average 6% annually. Senators outperformed by 10%. There are two conclusions we can come to: either members of Congress are investment market geniuses, or they have an informational advantage.

It all comes down to one question: can we assume our elected officials are serving the interests of the public when they have a financial stake in legislation on the sidelines?

We should also question the fact that Congress imposes stricter rules on others while relaxing the standards for themselves. The sort of eyebrow raising transactions that are permissible under the STOCK Act would be prohibited for Federal Reserve or Treasury officials.

Trading with information that the public doesn’t have would put someone on Wall Street in prison. But when it happens on Capitol Hill, it’s apparently not even considered a conflict of interest.


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