For one, what counts as material information about a company’s stock? To be material, must the information specifically relate to the company? Or, can general information about legislative action affecting a company’s entire industry be sufficient?
Sen. Scott Brown (R-Mass.), one of the act’s sponsors, appears to believe the latter is the case. “A Member of Congress hears during a meeting that a program is going to be cut the next day,” Brown said in Senate testimony last year. “That Member could then sell his or her stock in that sector and score a profit — or avoid losses — when the news breaks.” The act, Brown suggests, would make this illegal.
But, what does it mean for a company to be in a certain sector? And, what about companies that are not in that sector but in a related sector whose businesses might indirectly benefit from the cutting of the program? Would Members and staffers be prevented from trading those companies’ stocks as well? It is not an overstatement to say that every piece of proposed legislative action affects at least some businesses in some way.
Further complicating the materiality issue is how likely legislative action must be for knowledge of that action to qualify as material. Suppose, as chief of staff for a Member, you learn that your Member is considering introducing legislation that, if passed, would negatively affect a company whose stock you own? Would that knowledge alone mean that you should not sell your shares of that company’s stock?
The difficulty of answering questions like these means that compliance with the STOCK Act will not be easy. As you point out, many companies take a proactive approach to compliance by designing and implementing insider trading policies and also training employees. Congressional offices might be wise to do the same.
C. Simon Davidson is a partner with the law firm McGuireWoods. Click here to submit questions. Readers should not treat his column as legal advice. Questions do not create an attorney-client relationship.