Back in the dark days of the Great Recession, when we cringed at the gallows humor of our 401(k)s becoming 201(k)s, wouldn’t it have been nice if our retirement plans could have avoided the hits they took in the market?
Few of us possess the stock prowess of Warren Buffet, though, so we could only weep when our quarterly statements arrived. But what if we had been privy to warnings of an impending global economic collapse, as some members of Congress were in September 2008? Could we rightly have acted on that “insider” information to protect our investments? The quick answer is no, as evidenced by the inquiry now under way into the trading activity of Rep. Spencer Bachus, R-Ala., in the days following those closed-door briefings by the Federal Reserve and Treasury Department.
Insider trading — buying or selling securities using information that few have access to — is illegal for many parties associated with public companies: officers, directors, brokers, even spouses. But no such prohibition has existed for members of Congress, who often deal in issues that can move the market. That now has changed.
Last week, President Obama signed into law the STOCK Act, which stands for Stop Trading on Congressional Knowledge. It bars members of Congress, their staffs, their families, federal employees and judges from trading on — or tipping others to — non-public information. Violations will be investigated by the U.S. Securities and Exchange Commission, as is done for other insider-trading cases, and by the ethics committees of Congress.
The legislation, which had been stalled in Washington for years, was championed by two New York Democrats, Sen. Kirsten Gillibrand and U.S. Rep. Louise Slaughter of Rochester. Slaughter was an original 2004 sponsor of the bill in the House; Gillibrand’s interest was more recent, sparked by a “60 Minutes” segment on insider trading in Congress that CBS aired in November. The program, which covered a range of ways members of Congress benefited financially from their time in office, contended that Bachus used the 2008 closed-door briefings to arrange trades in option funds that allowed him to “profit at a time when most Americans were losing their shirts.” The Washington Post credited the segment with giving the STOCK Act momentum for passage this session.
Also putting the legislation on the front burner was a 2011 book, “Throw Them All Out” by Peter Schweizer, a research fellow at the Hoover Institution at Stanford University, that looked at “soft corruption” and stock trading in Congress, which “60 Minutes” said was the genesis for its story. And Alan Ziobrowski, an associate professor at Georgia State University, concluded last year that House members did as well as their Senate counterparts in picking stocks that outperformed the market. His 2004 study of senators had suggested that insider information aided their above-average trading performance; the 2011 study offered a similar conclusion for the House.
Proving insider trading isn’t easy: Was the information behind the trade really non-public? And did it have a “material” effect — meaning market-moving — on a stock? Nevertheless, STOCK Act supporters such as Gillibrand backed the bill as a way to make clear that “members of Congress must play by the exact same set of rules as every other American,” the senator said in a statement released on the day President Obama signed the bill. “It is simply the right thing to do.”
So the next time the markets swoon, rest assured that members of Congress, too, share your portfolio pain.