Randomness (r_ness) wrote,

Insider Trading Inside the Beltway

From Prof. Bainbridge's article abstract:
A 2004 study of the results of stock trading by United States Senators during the 1990s found that that Senators on average beat the market by 12% a year. In sharp contrast, U.S. households on average underperformed the market by 1.4% a year and even corporate insiders on average beat the market by only about 6% a year during that period. A reasonable inference is that some Senators had access to – and were using – material nonpublic information about the companies in whose stock they trade.

Under current law, it is unlikely that Members of Congress can be held liable for insider trading. The proposed Stop Trading on Congressional Knowledge Act addresses that problem by instructing the Securities and Exchange Commission to adopt rules intended to prohibit such trading.
The Financial Times Alphaville blogpost Insider Trading: go for it, Senator comments and quotes from the body of the article:
As reported by the Wall Street Journal in May, a bill that would require faster disclosure on lawmakers’ trading activities and prohibit them from trading in the securities of companies that have “pending or prospective legislative action”–the unimaginatively named Stop Trading on Congressional Knowledge Act–has been held up in Congress for years. No surprise, really, as it is the lawmakers themselves who would be burdened by it.

But Bainbridge argues that even this bill, though a step in the right direction, would not go far enough. First, it is restricted to punishing abuses that fall within the narrow framework of the “pending or prospective legislative action” provision. Bainbridge writes:
As to the former condition, it is unclear how broadly “legislative action” will be interpreted. As to the latter, it fails to account for the fact that information about one issuer may often allow one to profit by trading in the securities of another company.
It would also rely more on the willingness of the SEC to go after congressman. With equal parts hope and pessimism, Bainbridge writes (our emphasis):
To be sure, as already noted, the SEC to date has been “unwilling to take any sort of initiative against insider trading by senators and other congressional officers.” It is plausible that this failure is an intractable one. Any government agency is likely to be reluctant to bite the budgetary hand that feeds it. To the extent the SEC’s failure stems from a recognition that current law does not reach Members of Congress, however, a clear statement of the SEC’s authority to regulate Congressional insider trading could prompt a more aggressive enforcement stance on the SEC’s part.
Regardless, we are left with the current situation, which requires that congressmen police themselves and that the public trust them to do so. That is probably asking too much of everyone.
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