During the last few days, there has been much media attention on sales of stock by members of Congress. The media scrutiny has centered on whether those individuals sold stock after becoming privy to information about the worsening condition of the COVID-19 pandemic, and whether that conduct could constitute insider trading under the Stop Trading on Congressional Knowledge Act, or the “STOCK Act.”
The STOCK Act has only been in existence since 2012. Prior to its enactment, some people took the position that congresspersons and their staffers who traded on information learned in connection with their jobs were exempt from federal insider trading laws because they had no duty to shareholders or a corporation. The STOCK Act clarifies that members of Congress and other congressional employees do, in fact, have a duty of trust and confidence to the Congress, the United States Government, and US citizens. As a result, they may not use material, nonpublic information obtained through the performance of their official duties for their personal advantage. That means they may neither trade on such information nor “tip” others as to the information such that those other individuals may profit from the information.
Thus, the proscriptions of the STOCK Act are similar to the elements of insider trading under the federal securities laws, and the myriad of defenses available in typical insider trading cases – including whether the relevant information was actually material or nonpublic – remain available to members of Congress and their staff as well. Below are the highlights of the Act:
- Members of Congress and employees of Congress are prohibited from trading on material, nonpublic information gained in the performance of their official capacities. Such persons are not exempt from the insider trading prohibitions arising under the securities laws, including Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5. Section 10(b) and Rule 10b-5 generally prohibit trading securities based on material, nonpublic information in breach of a duty of trust and confidence owed to the source of the information.
- Members of Congress and employees of Congress are prohibited from passing such material, nonpublic information on to others who may profit themselves or help the “tipper” to profit.
- Public reporting is required of certain covered financial transactions in income-producing property by all legislative and executive branch personnel who are required to file the annual public financial disclosure reports under the Ethics in Government Act of 1978.
Employees of Congress include any “officer or employee of the legislative branch.” According to the Senate ethics rules, “material information is what a reasonable investor would want to know when making an investment decision” and “nonpublic information means confidential or not widely disseminated to the public.” In the context of information provided to members of Congress and their employees, the concepts of what is “confidential” and “not widely disseminated to the public” may be subject to debate and argument.
While the STOCK Act unequivocally clarifies that members of Congress and their staff can be charged with insider trading, in the few instances of insider trading prosecutions involving Capitol Hill, the fact patterns regarding sources of information used for the alleged trading permitted prosecutors to utilize the more established theories of insider trading under Section 10(b) and Rule 10b-5 rather than the STOCK Act. However, the recent public scrutiny regarding stock sales by members of Congress may embolden government prosecutors to consider exploring the boundaries of the STOCK Act.