If the rule holds schools to a strict standard, it could be absolutely devastating to for-profit colleges—which is why they have been throwing everything from charges of racism to insinuations that short-sellers influenced the Department of Education at the rule. Some for-profits could even be put out of business by a very strict rule.
If the rule is very lenient, however, shares of the for-profits could soar. Piper Jaffray analyst Peter Appert said today that when investors can see the final form of the rule, the for-profit education stocks should get a lift.
A government official with access to the final form of the rule could go long or short the stock—depending on whether it is strict or lenient—and potentially make a fortune. It has to be tempting for some with access to the confidential rule.
Would it be legal? That might depend on which government officials do the trading. Members of Congress who might have seen the final rule probably can trade with impunity. They simply lack the kind of legal duties that can give rise to insider trading charges.
But staffers inside the Department of Education, the Office of Management and Budget and on Capitol Hill probably can be held liable for insider trading. They don’t have the blanket immunity that members of Congress do. An FDA chemist, for instance, was recently charged with trading based on information he had about government drug approvals.
Is insider trading occurring with respect to the gainful employment rule? Most likely. One study found that, on average, Senators during the 1990s beat the market by 12 percent a year, while ordinary investors underperformed by 1.4 percent.
That could mean that Senators are just really great stock pickers—but it probably means they are trading based on access to superior information. A recent Wall Street Journal investigation found that at least 72 Capitol Hill staffers traded shares of companies that their bosses help oversee.
For some in Washington, DC, the gains from trading on the gainful employment rule are probably too great to pass up.