Spring 2012 saw the enactment of the “Stop Trading on Congressional Knowledge Act of 2012” or “STOCK Act.” It supposedly repealed an exemption from the federal securities laws that made insider trading by members of Congress “totally legal.” As every securities lawyer knows, however, there never was such an exemption. Representatives and Senators have always been subject to the same rules as the rest of us. It is just that insider-trading law is so incoherent that legal scholars sharply disagreed as to when, or even if, trading by government officials on the basis of material nonpublic information gleaned from their positions would be unlawful. It clearly would not constitute “classic” insider trading, and it was not clear if it constituted “misappropriation” or “outsider” trading. Consequently, despite circumstantial evidence that such trading is not unusual, neither the Securities and Exchange Commission nor the Department of Justice has ever brought an insider trader action against a member of Congress.
The STOCK Act was adopted to address a public relations problem. It does not solve the real legal problem—the incoherence of insider-trading case law that had resulted from the fact that the securities laws neither expressly prohibit insider trading generally nor define what it might be. It is unfortunate, therefore, that Congress ducked this golden opportunity to amend the law. Consequently, we are left with the jurisprudential scandal that insider trading is largely a federal common-law offense.
Even after the STOCK Act, it will continue to be difficult to curtail undesirable Congressional trading through insider-trading law. All the STOCK Act does is to try to shed some light on one element of a potential Congressional insider trading case—namely the nature of the relationship of members or employees of Congress to the source of certain nonpublic information. It does not, however, address the numerous other reasons why it is difficult to charge them with insider or outsider trading. Ironically, the most important legacy of the STOCK Act might be that it could be construed as an implicit endorsement of a controversial SEC regulation applicable to other persons.