The House of Representatives has voted to pass the Stop Insider Trading on Congressional Knowledge (STOCK) Act. As I explained in an earlier post here, this bill is an important step forward in government ethics.
Still, I am concerned that the bill does not do enough to stop selective disclosure (“leaks”) of confidential government information by government employees to hedge funds, securities analysts, and other participants in securities markets. I am also concerned with the civil liberties implications of a provision in the Senate bill that would require the registration of “political intelligence” firms that gather nonpublic government information for use in investment decisions. “Political intelligence” is a very difficult term to define and citizens should not have to register before gathering information about their government. The real solution to the selective disclosure problem is to regulate the conduct of government officials who selectively leak nonpublic information without good reason. The government should impose a fair disclosure regime on itself that is similar to the regime that the SEC has already imposed in Regulation FD on private companies. Requiring registration of a poorly defined subset of private actors is no substitute for requiring sound ethics on the part of government officials who create this problem to begin with.
The House of Representatives bill does not have the “political intelligence” registration provision and orders a study of specific proposals to address the broader issue of selective disclosure.
One of the problems with the “political intelligence” provision in the Senate bill is that it is not narrowly tailored to capture only non-public information. Most political intelligence consultants gather and package together pieces of public information that citizens have a right to know from their government. For example, the political intelligence firm knows which Members of Congress are working on which bills and in general who has the power to push through or kill a bill. This is generally available information. Then the political intelligence firm supplements this information by asking questions of Members and their staff that citizens ordinarily have a right to ask of Congress: whether Congressman X has reservations about bill Y, or whether a staff member thinks that bill Y will be called up for a vote before or after the February recess. Much of this information is public in the sense that citizens who want it can get it, but it may not be widely known to traders in securities markets. A person should not have to register before asking government officials such questions simply because that same person has the sophistication and broad knowledge about government to make answers to the questions meaningful.
The political intelligence provision also is not limited to use of “political intelligence” in securities trading but also applies to any investment decision. Yet a business person clearly should be permitted to call, or ask someone else to call, a Member of Congress and ask if the Member thinks health care reform will have a carve out for small businesses. And the business person has the right to make an investment decision in his business based on what he hears. Another business person has the right to ask a Member if he thinks military base X will or won't be closed, and use that information to decide whether to invest in a new store in location a or b.
This amendment thus takes information that the public is entitled to know in a democracy and makes it harder to access by imposing burdens on those who seek it, and it does so without even achieving the desired goal. The registration requirement doesn't even provide real time information to Members and staff about who they are talking to and why. And of course, many people engaged in the political intelligence business will find a way not to register. Washington DC lawyers will be in the vanguard of this evasive effort, both for themselves and their clients.
Once again, the real answer is for government to regulate itself and the way it disseminates information. Making as much information as possible public would be a good start (a Member should to the extent possible discuss his views on potential legislation with all of his constituents on his web site and his constituents should ask that he do so). Care should be taken when nonpublic information is disclosed (no private briefings for hedge funds and no discussion of nonpublic information with anyone at a political fundraiser are two of many rules that government could impose on itself).
But meanwhile the public should be nosing around the government as much as possible, and people should be free to act on what they find out. If someone is lucky enough to find some nuggets of information and make money by starting or closing a small business, or perhaps even making a securities trade that otherwise complies with insider trading laws, that person is not the wrongdoer. If we don’t like the fact that some people get certain information early, we should turn our attention back to the government official who gave it to them.
My previous post is here:
And coverage of this issue on Minnesota Public Radio here: