Invest now: The “Inside the Beltway” fund

We were reminded again this month of the sinister role that insider trading has played in our markets. In two totally different contexts, we meet head-on with the reality of this practice, both the advantage it provides to the person trading on such information and how unfair it is to everyone else participating in such markets.

Recently, more news has broken on the nearly two-year ordeal of insider trading allegations in the so-called “Raj Raj” case involving a vast network of experts, insiders, and investors, all in the know about the latest earnings figures for various companies.

The problem: they were in the know hours before everyone else. They acted on this so-called material, non-public information prior to its public release and before anyone else had a chance. Shame! This is as clearly and blatantly illegal as it gets. Additional people connected to the wide-ranging case were charged and sentenced this week. Even Raj himself made news, seeking a quick appeal and reversal of his guilty verdict.

In a less clear circumstance, the insider information alarm was sounded recently in the context of Congressional service. While we agree it is an entirely different situation from “Raj Raj,” it nonetheless raises a string of concerns over political hair-splitting and rationalization around the use of information that comes from privileged access.

Consider this: if a few key members of Congress had access to early Fed data or interest rate decisions, Department of Labor employment statistics, or Department of Agriculture crop reports, we would all consider that improper. At least we expect this is the way Congressional ethics rules work.

What if the same key politicians had the opportunity to hear inside conversations from the Treasury Secretary about how dire and broad the economic situation was that triggered the TARP? What if they had early information about the vast set of government actions planned to prevent systemic meltdown or knew the first TARP vote would fail or that a key piece of legislation would narrowly pass and impact profits for drug companies? Where do we draw the line? If we are content to make excuses or split hairs, there really is no line and Congress has free reign. We are certain that the queue would be long to subscribe to a new Congressional insider fund.

CFA Institute operates in more than 130 countries and territories around the world. A number of these jurisdictions have not yet outlawed or otherwise prohibited trading on inside information. Indeed, in some of these developing markets it is almost a badge of honor that you are crafty or connected enough to get access.

However, when viewing insider trading in the context of our own ethical standards as professional investment analysts, these people are either bandits or cheats, and probably both.

For CFA Institute, it is cut and dried. We are passing no judgments on the virtues of any particular member of government and appreciate that Congress has at least reacted to the concern with this week’s hearing on the STOCK Act. It gives us hope that members are taking the insider issue seriously. Yet, it would seem that holding Congress, and anyone in government with privileged access, to a standard of responsibility higher than is expected of third-world markets is not something to aspire to, it is something to immediately guarantee.

Kurt Schacht is the managing director of standards and financial market integrity at CFA Institute.