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Politics behind the STOCK Act

February 22, 2012

Various members of the media and self-proclaimed ethics "watchdogs" have attacked Majority Leader Eric Cantor and the House Republican caucus this past week for passing -- by an overwhelming 417-2 vote -- a version of the Stop Trading on Congressional Knowledge, or "STOCK," Act.

The legislation is intended to apply federal prohibitions against insider trading to government officials, but a story in Politico ran with a typical headline: "Cantor under fire for STOCK Act tweaks," referring to provisions in the House legislation that departed from the earlier version of the bill passed by the Senate.

Just what were these "tweaks"?

In some respects, the House version of the STOCK Act strengthened rather than weakened limitations on profiteering off of government secrets, relative to the Senate bill.

It's hard to make any objection to extending insider-trading rules to the executive branch and to initial public offerings of securities, apart from the fact that the former would limit Democrats currently in control of the White House and the latter might embarrass former Speaker Nancy Pelosi, who has profited from IPOs of businesses directly affected by House legislation.

But it's similarly difficult to make a strong principled objection to the House bill's two most controversial dilutions of the Senate's STOCK bill.

To begin with, unlike the Senate bill, the House version eliminates sweeping registration requirements for private parties outside the government. The Senate STOCK Act would require registration as a lobbyist for anyone who might be characterized as trading in "public intelligence" -- i.e., facilitating investment-related guesses about the future shape of government policy based at least in part on conversations with government officials.

Such registration requirements clearly affect First Amendment rights to speak and petition the government. Moreover, as legal ethics scholar Richard Painter has suggested, it's perverse to target government officials' leaks of inside information by "requiring people to register before they gather information about their government," rather than by developing "stricter rules for government employees who selectively disclose government information to persons outside the government."

The second way in which the House version of the STOCK Act modifies the Senate bill is by eliminating the latter's provision that would target "undisclosed self-dealing by public officials."

Twice in the last 14 years, the Supreme Court has unanimously rejected prior versions of this rule, largely because the statutory provisions involved were so broad and vague that no one could precisely tell what conduct was actually prohibited.

Unfortunately, the Senate's proposed law would continue to offer little clarity as to what conduct would constitute "self-dealing." It's hard to know exactly what legislation considered by Congress would not affect the interests of, for instance, Sen. John Kerry, D-Mass., who directly and through his wife owns pieces of the Forbes and Heinz family trusts.

Moreover, the Senate bill's self-dealing restriction would reach not only federal officials, but also public servants across state and local governments. The Senate bill would thus impose a new federal mandate, uncertain in scope, which in many cases would depart from states' own disclosure requirements. It's hard to see why the federal government should be the chief ethics enforcer for state governments.

Just as insider trading is a misappropriation of corporate assets -- such that employees profiting off inside knowledge are stealing from the company -- so is government employees' profiting off their inside knowledge a violation of the public trust.

But the fact that we should want our public officials to be bound by the same insider trading laws that govern those in the private sector hardly means that we should support any and all pieces of legislation that would achieve that effect.

The House version of the STOCK Act is an improvement on the Senate version, and its proponents should be lauded, not criticized.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.