It appears that we are very close to outlawing insider trading by members of Congress.

The House and the Senate have both passed versions of the Stop Trading On Congressional Knowledge (STOCK) Act. A final version may be ready as early as this month.

One big difference between the two versions involves "political intelligence." This is the new and more or less unregulated business of attempting to gleen information from lawmakers and staffers, sometimes for investor clients who want to trade on the information.  Often the political intelligence operatives are former members of Congress or former staffers.

The Senate bill would require the political intelligence folks to register as lobbyists. This would force them disclose their fees, their names, and the names of their clients. Eric Cantor had this stripped from the House bill, much to the relief of political intelligence firms in the capital and to the annoyance of the Daily Show's Jon Stewart. (Watch his very funny take on the changes to the bill here.)

"Headless zombies!" is how John Stewart described this business.

"There's a whole industry of parasites just riding on the backs of our Congressmen," Stewart said.

Over the years, a version of the STOCK Act has been frequently proposed and never passed. Perhaps not surprisingly, members of Congress weren’t especially eager to apply securities laws to their own trading.

Academics who have studied the financial disclosure forms filed by House members and Senators found that the portfolios of lawmakers consistently out-perform the market. This suggests that lawmakers have an “edge” because of they are engaging in some form of political insider trading.

Most legal scholars believe that current insider trading rules do not prohibit members of Congress from trading on information learned in the course of their official duties. The loophole exists because there is no clear rule or case law establishing a fiduciary duty on the part of members of Congress with respect to trading, as the SEC’s head of enforcement explained in testimony last year.

The STOCK Act definitely would impose a fiduciary duty and make Congress subject to insider trading rules.

Some believe the law does not go far enough. Although members of Congress will be barred from trading on material, non-public information learned in their official capacity, they are still allowed to trade stocks in economic sectors they influence. A member of the Senate Banking Committee, for instance, would still be permitted to trade bank stocks.

It may prove difficult to prosecute members of Congress for insider trading. Congress, after all, controls the budget of the Securities and Exchange Commission. Are regulators likely to pursue lawmakers who can defund their agency?

This prompted UCLA law Professor Stephen Bainbridge to ask “will the SEC bite the hand that feeds it?”

His conclusion: “I'm not at all sure.”

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