Q: I am a lobbyist and I have a question about the insider trading restrictions under the Stop Trading on Congressional Knowledge Act. A friend who is a lawyer told me that restrictions on insider trading by Members and staffers mean that I need to be careful about my communications with lawmakers. But I am pretty sure that the restrictions on gathering political intelligence were removed from the bill before it was passed. This is important to me because I am always discussing potential government action with staffers. I want to make sure my discussions could not somehow expose me to legal liability. There are no new restrictions on such communications, right?
A: Last month, President Barack Obama signed into law the STOCK Act, which “affirms” that Members and staffers have a duty not to trade on material, nonpublic information they learn while doing their jobs.
Before the bill was passed, there was a debate about a provision that would require “political intelligence consultants” to register and publicly disclose their activities, much in the same way lobbyists are required to do. In general, as you probably know, political intelligence consultants are people who gather and exchange information about potential government action that could affect stock prices.
Opponents of the political intelligence provision argued that it would inappropriately chill legitimate communications between lawmakers and lobbyists or employees in the financial industry. Even some proponents of restrictions on political intelligence worried that the provision might be too broad.
For example, the provision would have applied to communications with a Member or staffer where the information derived from the communication is “intended for use in analyzing securities or commodities markets, or in informing investment decisions.” This would have applied not just to people who gather political intelligence for a living, but to anyone who engages in such communications.
The provision was ultimately scrapped before the STOCK Act became law. Instead, the legislation calls for a Congressional study of political intelligence firms, to be completed within one year. Depending on the outcome of the study, restrictions on such firms might follow.
In the meantime, the absence of new restrictions specifically targeting political intelligence consultants does not mean that no risks lie in communications with Members and staffers about potential government activity. The STOCK Act affirms that Members and staffers owe a duty to the public and the government regarding material, nonpublic information they learn on the job. This means Members or staffers could face liability if they trade stocks on the basis of such information or if they disclose such information with the intent to benefit somehow from that disclosure.
It also could mean possible exposure for people who receive material, nonpublic information from Members and staffers. Recipients of such information, or “tippees,” should be careful both about their communications with government officials and about their stock trades. They could face liability if they buy or sell shares in a company after receiving nonpublic information from a government source about government action that could affect the stock value of that company.
A further possible consequence of the STOCK Act is an increase in government scrutiny of communications between the public and Congress. Some scholars and lawyers believe that even before the STOCK Act, laws prohibited insider trading based on information from government sources and have argued that nothing has changed. Nonetheless, the STOCK Act has shone a spotlight on the issue, which could result in a spike in federal investigators’ attention on insider trading based on information from government sources.
Historically, this type of insider trading, to the extent it has occurred, has not often been prosecuted or even investigated. One reason for this might be the constitutional hurdles that make such investigations more difficult. For example, the Speech or Debate Clause provides that “legislative acts” shall not be questioned in any place. The House and Senate have interpreted this clause to mean that prosecutors cannot compel Members and staffers to produce information or documents that concern the legislative process.
In light of this obstacle, government investigators might focus on tippees — people outside Congress who receive inside information from Members and staffers. Such tippees do not enjoy the privilege of the Speech or Debate Clause. The potential for a focus on tippees is further reason to take renewed precautions regarding communications with Members and staffers.
What type of precautions? It might be wise for employers to revisit insider trading policies to make sure they sufficiently address the risk associated with information gained from government sources. In addition, companies with employees who regularly communicate with government officials might consider training those employees about the insider trading restrictions relevant to their communications.
With a renewed focus on insider trading based on information, someone is going to be the guinea pig, i.e., the first to face an investigation under the new law. Take action now in case the guinea pig is you.
C. Simon Davidson is a partner with the law firm McGuireWoods. Readers should not treat his column as legal advice.