The Stop Insider Trading on Congressional Knowledge Act (STOCK Act) passed the Senate today, but only after the Senate approved an amendment by Senator Chuck Grassley that would require firms that gather so called “political intelligence” to register under the Lobbying Disclosure Act (LDA).
As explained below this amendment was ill advised.
The principal purpose of the bill was to clarify what is probably already the law – that Members of Congress and their staff cannot legally use nonpublic information they learn in the course of their government employment for trading in securities markets. The same insider trading laws that apply to everyone else also apply to them.
There is, however, another more difficult problem that Senator Grassley’s amendment purports to solve: some hedge funds and other investment firms learn nonpublic government information before the rest of the investing public. Sometimes this is done through “political intelligence” firms that arrange meetings and conference calls with government officials and use other techniques to obtain nonpublic information which is then made available to clients for a fee. As I told the Wall Street Journal last year, gathering and selling confidential government information is a very good business model, if you can get away with it. This isn’t fair and something should be done about it.
The Grassley amendment responds to this problem by requiring firms that gather political intelligence to register under the LDA. The problems with this approach are many. First, persons who do not fit the definition of a “political intelligence” firm in the statute will not be required to register and will continue to gather nonpublic government information and use it for securities trading. Second, a definition of a “political intelligence” firm will need to be exceedingly broad if it hopes to include a significant portion of the persons and entities that use nonpublic government information for securities trading. Drafting such a definition is nearly impossible. Third, a broad definition of “political intelligence” firm that is coupled with a registration requirement imposes an undue burden on persons who seek to gather information about what their government is doing, a critical function in any democratic society.
Assume a bank, a corporation, a private foundation, a labor union, a church or some other organization is interested in what government is doing that affects business or societal interests that are vital to the organization. Assume the organization also invests in the securities markets. If the organization hires a political consultant to gather information about government action the consultant would have to register. While the Senate definition of “political intelligence” focuses on information gathered for the purpose of investment decisions, the political consultant may have no idea how the information will actually be used. To be on the safe side, a political consultant or any other person who is hired to gather information about the government for any client will have to register if the client trades in the securities markets. The client could be Warren Buffet, George Soros, or Michael Bloomberg, or it could be a person of more modest means who wants to participate both in our capital markets and in our democratic form of government.
The potential effect of such a regime on the balance of power between the government and its citizens is obvious. Government officials don’t have to “register” to gather information about us, but if we trade in securities markets someone we hire to gather information about government will have to register. This is not George Orwell’s 1984, but it is closer than many of us would want.
The answer to selective disclosure (“leaks”) by government officials of nonpublic government information is not requiring people to register before they gather information about their government. The answer is stricter rules for government employees who selectively disclose government information to persons outside the government without disclosing the same information publicly. As I pointed out in a chapter on insider trading in my 2009 book on government ethics, selective disclosure by government officials needs to be regulated just as selective disclosure by officials in public companies is regulated by the SEC’s Regulation FD (“Fair Disclosure”). Donna Nagy and I are presently writing an article on how the executive and legislative branches could adopt and adhere to a Regulation FD regime. In short Congress should consider imposing on government some of the rules it imposes on the private sector, rather than trying to solve a problem in government ethics by enacting yet more regulation and a burdensome registration requirement for the private sector.
Senator Joseph Lieberman and many of his colleagues urged passage of a version of the STOCK Act that would have banned Members of Congress and their staff from insider trading and called for further study of the more complex problem of selective disclosure and a workable solution. The quick solution embodied in Senator Grassley’s amendment does little to solve the problem and will likely create other problems the he and his Senate colleagues did not intend.