Ethics Showdown on Insider Trading

The issue of banning insider trading has been before Congress since 2006. Finally legislators took action.

Starting in 2006, Rep. Louise Slaughter has tried four times to get her colleagues to pass a bill banning insider trading. But she could never get more than a handful of cosponsors. Why would a member of Congress, privy to secret information about how companies operate and are regulated, want to give up the power to pad his or her bank account with that information?

Because it looks bad, that’s why. And after high-profile reports by both Newsweek and 60 Minutes, the public scorn finally got the better of both chambers. Thursday morning, the House passed a bill banning congressional insider trading by, stunningly, a nearly unanimous margin of 417–2. The optimistic headline: Congress polices itself with strict regulations and restores some of America’s lost trust with the institution.

But not entirely. The broad idea of the Stop Trading on Congressional Knowledge (STOCK) Act is largely agreeable, although when the idea initially came up in November, more than a few people said, “Wait, why isn’t that already illegal?” But the process to bring the bill to the floor has been riddled with industry influence, and along the way some of its toughest provisions were weakened.

To see the influence, consider what both parties did to the simple idea of prohibiting insider trading. Sen. Scott Brown and several colleagues introduced a bill that would unleash the full authority of the Security and Exchanges Commission to investigate any member accused of acting for personal benefit on nonpublic information. As a safeguard, all members would be required to report stock, bond, or commodity transactions every few weeks. Influence holders outside the Capitol were also included to be covered under the bill’s “political intelligence” provision—effectively stipulating that any lobbyist or advocate who works with Congress can’t turn around and sell secret information about that bill to their clients, such as hedge funds or other investors.

The Senate passed a bill with those major components. But when it got to the House, the teeth were whittled down. The “political intelligence” component was completely stripped out, granting K Street lobbyists a free pass. Majority Leader Eric Cantor argued that including private citizens in the bill could bring up “broad constitutional questions,” related to freedom of speech. But behind the scenes, dropping the provision appeared to be a direct result of Wall Street lobbying. The powerful Securities Industry and Financial Markets Association put heavy pressure on top Republicans to strip the measure, which could have cost them up to $100 million each year. (SIFMA spokesman Andrew DeSouza had “no comment” about the bill).

The Beast has learned that there were other discussions in the Republican caucus about potentially scuttling the measure entirely, perhaps by adding a so-called poison pill to the broader bill. Increasing penalties or making rules overly stringent, for instance, would have allowed members to vote down the bill for being too heavy-handed, protecting the broad abilities of members of Congress and lobbyists to pad their pockets with government knowledge.

But after the Senate passed its bill, Republicans rallied around the idea, noting its popularity with an outraged electorate. They even offered to strengthen the bill in other ways. One amendment included 30,000 members of the executive branch in the same prohibitions on trading with government knowledge. They also stipulated that any member caught in violation, aside from facing prosecution, would also lose his or her federal pension.

The Senate- and House-passed bills will now be merged by a conference committee, where Democrats hope they can restore the lobbying component. Considering lobbyist pressure, there’s little confidence the intelligence provision will return to a final law. But the entire issue goes back to the shock of Americans, which originally spurred Congress to act. “People are so fed up and widely believe true or not that members go to Washington to pad their own pockets,” says Melanie Sloan, who heads Citizens for Responsibility and Ethics in Washington,” a nonpartisan watchdog. “It’s no wonder there’s a huge level of public outrage there.”