Q: I am the chief of staff for a Member of the House with a question about the new law against insider trading by Members and staffers. I used to work in the private sector at a Fortune 500 company, and I remember a big focus on compliance with insider trading laws. We had a company policy, and many employees received frequent training. Now that Members and staffers will be subject to insider trading laws, do Congressional offices need similar policies and training?
A: The Stop Trading on Congressional Knowledge Act, passed by Congress last week, has been described as a new prohibition on insider trading by Members and staffers. President Barack Obama stated, “After I sign this bill into law, Members of Congress will not be able to trade stocks based on nonpublic information they gleaned on Capitol Hill.”
But some have questioned how much the act really changes. Some legal scholars believe that pre-existing federal insider trading laws already applied to Members and staffers. Others have suggested that those laws might have somehow exempted Members and staffers. Whoever is right, passage of the STOCK Act removes any doubt over whether Members and staffers should be concerned about insider trading.
In general, pre-existing federal law prohibited what the Securities and Exchange Commission calls “illegal insider trading.” This, the SEC says, means buying or selling a stock “in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information” about the stock. In short, you may not trade stocks on the basis of material, nonpublic information that you receive from someone to whom you owe a duty of confidentiality.
The federal government spends a great deal of time investigating potential violations of insider trading laws. These investigations often begin after the government learns that a company’s senior employees have bought or sold shares of the company’s own stock shortly before publication of significant news about the company. Such trades can raise the eyebrows of government officials, which can lead to investigations.
This is significant not only because of the stiff penalties for illegal insider trading but because investigations themselves are costly. Even where the timing of trades of company stock in relation to the publication of company news is purely coincidental, employees and companies can still face investigations and are often forced to devote significant funds and resources to responding. Companies under investigation typically must provide the government with all documents relating in any way to the investigation. Identifying responsive documents often requires long hours by expensive attorneys who specialize in such investigations.
To reduce the likelihood of such an investigation, many companies have insider trading policies restricting the extent and timing of employees’ trading of company stock. For example, many companies prohibit employees from trading company stock altogether other than during certain safe “windows” that are established with help from company legal counsel.
The STOCK Act directs the SEC to make a rule prohibiting Members and staffers from buying or selling a company’s stock while in possession of material nonpublic information about prospective legislative action relating to the company obtained by reason of being a Member or staffer. This raises all sorts of tricky compliance questions.
Vice President Joe Biden waits to conduct a mock swearing-in ceremony with Sen. Brian Schatz, D-Hawaii, in the Capitol's Old Senate Chamber, December 2, 2014. Schatz was sworn in to serve the remainder of his term since he was appointed to the seat after Sen. Daniel Inouye, D-Hawaii, passed away.