Taking STOCK of Congressional Trading.

Practically every law has some winners and losers in the marketplace.  Some laws, for example the recent congressional battle on debit card swipe fees, involved billions of dollars.  There are also winners and losers as programs are expanded and cut back, contracts awarded, etc.  By their nature Senators, House Members, and their staff have an insider’s knowledge of how things are going to happen.  Earlier this year it was revealed that House Majority Leader Eric Cantor had an investment in an ETF that was highly sensitive to the results of the debt ceiling negotiations and that he was one of the half dozen most inside players.

Because of a recent 60 Minutes report on the subject, Republican Senator Scott Brown of Massachusetts introduced the Stop Trading On Congressional Knowledge bill, or STOCK.  (Compared to some of the other tortured anagrams coming out of Congress recently, this one is better than average.)  Senator Kirsten Gildibrand of New York introduced similar legislation and there is another bill in the House.  The measure would make it illegal for Senators, House Members, and their staff as well as employees of the executive branch to trade on nonpublic information.  It also requires reporting within 90 days of any trading on financial markets in addition to the current annual financial disclosure forms.  It would also make trading on nonpublic information a violation of House and Senate ethics rules.  Similar prior bills have died in committee.

So how much insider trading on nonpublic information is actually occurring?  A report released earlier this year from four universities found that between 1985 and 2001 the personal stock portfolios held by House Members beat the overall market by an average of six percent per year.   A 2004 study from the same group showed Senators beating the general market by ten percent.

There is a reasonable concern regarding the enforceability of the act.  Insider trading is a tough thing to prove in business and may be even harder to do in in the hallways of Capitol Hill.  I previously proposed that Senators and Members of the House be required to have their assets in a Blind Trust , as Presidents since Lyndon Johnson have done.  That seems like a simpler and more effective approach.

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