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Insider Trading Crackdown on Congress- STOCK Act | H.R. 1148 S.1871

The Stop Trading on Congressional Knowledge Act (STOCK) has now passed both the U.S. House and Senate and should be signed into law by the president very soon. (Actual Text | Bill Summary & Status) H.R. 1148 or Senate Version S.1871 is the bill that seeks to impose heavier restrictions on insider trading that is done by or is connected to members of congress, federal employees, or employees of congress. Insider trading is covered by the Securities Act of 1934 and other related federal legislation and rules by the SEC and CFTC. It occurs when someone uses inside information as a basis to trade in stocks, commodities, or other types of securities. Inside information is defined as material non-public information. An example would be someone who works for a public company, gains information about something about to happen with that company that has not been disclosed to the public (e.g. significantly increased profits, new products about to be launched, etc.), and trades based upon that information.

This can also be extended to include what is referred to as “tipper-tippee” insider trading where the insider tells their friend or some other outside person about this inside information for them to use to trade a make a gain. The famous example is Martha Stewart who received insider tips from brokers or other people with knowledge in order to trade and make money before the public knew about the inside information. The point is to level the playing field so that well connected people can’t gain an advantage over the average public to get in prior to news being released.

STOCK seeks to extend specifically liability for insider trading to inside information obtained: “(1) knowingly from a Member or employee of Congress, (2) by reason of being a Member or employee of Congress, or (3) from other federal employees and derived from their federal employment.” It also “amends the Code of Official Conduct of the Rules of the House of Representatives to prohibit any Member, officer, or employee of the House from disclosing material nonpublic information relating to any pending or prospective legislative action relating to any publicly-traded company or to any commodity if such person has reason to believe that the information will be used to buy or sell the securities of that publicly traded company or that commodity for future delivery based on such information.” It also extends certain required disclosures regarding lobbying activity under the Lobbying Disclosure Act of 1995 to include more information about legislative contacts and activities.

I don’t know that the SEC and the government didn’t already have the tools necessary to indict and prosecute members of Congress under things like “tipper-tippee” liability, but this expands things and makes it clear the intent to crack down on this type of unfair activity.