'Stock Act' Has Major Flaws
"Send me a bill that bans insider trading by members of Congress and I will sign it tomorrow," President Obama loudly proclaimed in his State of the Union on January 24, 2012.
After receiving a rousing applause and many many days later after that speech – a little over two months to be exact – Obama finally signed the STOCK Act into law on April 4. (STOCK is an acronym for "Stop Trading on Congressional Knowledge Act.")
The STOCK Act is supposed to prevent Members of Congress from trading stocks (NYSEArca:VTI - News) based on the nonpublic information they obtain in their dealings with business leaders. But the guts of the Act left out some major things.
A Day Late and a Dollar Short
Interestingly, the original STOCK bill was first introduced back in 2006, during the Renaissance period, by Rep. Louis Slaughter (D., N.Y.). The only reason it was even resurrected from way back then was because of a CBS 60 Minutes news report that exposed House speaker John Boehner (R-Ohio) and Rep. Nancy Pelosi (D-Calif.) over trading in their personal investment accounts.
The investment portfolios of congressmen and senators, according to academic research, consistently beats stocks indexes like the Dow (NYSEArca:DIA - News) and the S&P 500 (NYSEArca:SPY - News).
"We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain," found a 2011 report titled "Abnormal Returns from the Common Stock Investments of Members of the U.S. House of Representatives" by Alan J. Ziobrowski, Ping Cheng, James W. Boyd and Brigitte J. Ziobrowski.
Under the new STOCK Act, Members of Congress, their aides and many members of the executive branch cannot use inside information they learn on the job to trade stocks or other securities. The law requires public disclosure of any trades within 45 days and reports to be made available online in a database that anyone can search.
The new STOCK Act law also limits members of Congress and executive employees to participating only in those initial public stock offerings that are available to the general public. Why this rule wasn't already a law is closely being studied by legal students who are planning to be divorce attorneys.
Disturbing Omissions
What's most disturbing about the STOCK Act is not so much what it contains, but what it omits.
When a hedge fund or an influence peddling individual wants inside information, they can still buy it – by paying members of Congress or other high level officials for something called "political intelligence." This rogue but still legal practice of gathering information from lawmakers and Hill aides is regularly used by Wall Street to steer money into profitable investments. It's nothing more than legalized cheating, because he with the most money and political influence wins.
CASE STUDY: Former US Treasury Secretary, Henry Paulson sold political intelligence when he tipped off hedge funds about Fannie Mae's rescue in 2008 while he was serving as the U.S. Treasury Secretary. Paulson's hedge funds pals made billions in illicit profits. That type of unethical conduct is still legal under the "new and improved" STOCK Act.
Here's another gaping omission: The STOCK Act still allows elected officials to own stock in industries they can affect with their political power. For example, a senator that owns an energy stock (NYSEArca:XLE - News) can still draft and pass laws that benefit his investment holdings. Isn't it obvious that allowing this kind of seedy behavior badly waters down the effectiveness of the STOCK Act?
Weak Execution, Weak Legislation
In summary, don't be hoodwinked by news headlines proclaiming the STOCK Act will end Congressional insider trading. Lying, cheating, and stealing are still legal and the latest legislation is weaker than previous versions. Worse yet, it still doesn't stop the sale of political intelligence.
Maybe the real reason the STOCK Act was even passed, was so that political leaders can make themselves look good when fall elections take place. No doubt, they'll be using the STOCK Act promote the misleading idea they are doing everything in their power to stop high level corruption.
Ron DeLegge is the Editor of ETFguide.com and Author of "Gents with No Cents: A Closer Look at Wall Street, its Customers, Financial Regulators and the Media." (Half Full Publishing Group, 2011)
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