Democrats press legislation to ban ‘insider’ trading

Democrats are moving forward with legislation to impose stricter rules on stock purchases by lawmakers and their aides as Washington considers rewriting regulatory rules for Wall Street.

A bill sponsored by House Rules Committee Chairwoman Louise Slaughter (D-N.Y.) and Rep. Brian Baird (D-Wash.) also would extend “insider trading” rules on nonpublic information obtained through government work.

Specifically, the bill would make it a crime for members of Congress and federal employees to use non-public information gained through their jobs to inform stock decisions or those of friends and families.

The bill also would bar investors from trading in securities based on tips flowing from Congress or the executive branch if they know the information is nonpublic, which likely would deal a blow to the growing political intelligence industry.

Financial industry legal experts said the bill is even more important at a time when Congress is considering legislative proposals from the Obama administration on regulatory reform for Wall Street.

“Congressional information has such an impact on the markets now — especially at this point in time, it has to be made clear that you cannot use this information to benefit yourself or tip others,” said Peter Henning, a professor at Wayne State University Law School and a former Securities and Exchange Commission (SEC) enforcement lawyer.

He said most U.S. corporations and law firms require their employees to sign a pledge not to use any nonpublic information from their position to profit from stock purchases or inform others about them.

There’s no hard evidence that members of Congress or their staffs have engaged in the inside-the-Beltway version of insider trading, but supporters of the bill note there’s also no way good way to track and monitor if they have.

“I am not a lawyer, but I know what smells bad,” Baird said at a Financial Services Subcommittee on Oversight and Investigations hearing Monday.

“The American people expect members and staffers to work on their behalf and to represent their interests, not to increase the returns on our investments and fatten their stock portfolios.”

The Slaughter-Baird bill is named the Stop Trading on Congressional Knowledge, or STOCK, Act. It would impose fines or criminal penalties for trading in “nonpublic material information” coming from the legislative or executive branch.

The measure is similar to one introduced last year after news reports surfaced that a one-time staffer to former House Majority Leader Tom DeLay (R-Texas) day-traded on the job using his congressional computer.

In addition to trying to put a stop to leaks of lucrative information, the bill would require congressional employees to disclose any trade in a stock, bond or commodities future greater than $1,000 within 90 days. Political intelligence firms would have to disclose their clients to the House and Senate just as lobbying firms do.

Some witnesses at Monday’s hearing said the system now employed by Congress to monitor lawmaker and staff stock holdings is insufficient.

“Financial disclosure reports are often difficult to read and erroneous,” said Alan Ziobrowski, an associate professor at the Robinson College of Business at Georgia State University. “The current system fails to link financial disclosure to any kind of legislative behavior.”

The public, Ziobrowski argued, would have to have an intimate knowledge of pending legislation and changes to it, as well as its impact, to figure out if any improper trading were taking place.

He also said current ethics rules should be tightened to make sure that blind trusts indeed remain blind.

He cited the incident involving former Senate Majority Leader Bill Frist’s (R-Tenn.) 2005 sale of stock in HCA, the nation’s largest for-profit hospital company, when it was near a 52-week peak. Frist’s sale occurred at the same time HCA insiders were selling off shares.

HCA was founded by Frist’s father and his brother was formerly its CEO and chairman and remains on the board of directors.

Frist was accused of having personal insider knowledge — not congressional information — that affected the stock sale. For years, Frist was criticized for holding HCA stock while directing legislation on Medicare reform and patient issues.

The SEC looked into whether Frist had insider knowledge that prompted the sales. His office said he traded using only public information, and only to eliminate the appearance of a conflict of interest.

At the time, documents from the investigation showed that Frist was updated several times about his investments in HCA and other transactions. However, he insisted in public statements that he didn’t know what was in the trusts, and specifically denied knowledge of his HCA holdings.

The investigation was closed with no action taken.