Stop Trading on Congressional Knowledge Act

How can you beat the stock market? Become a member of Congress and trade on legislative actions!

You might think that a member of Congress would be prohibited from trading on non-public information that they obtain through their official position. You might be  wrong. Members of Congress and their staff  do not owe any “duty of confidentiality” to Congress. So they can’t be held liable for insider trading based on congressional knowledge. Since they do not have inside knowledge, members of Congress and their staff can share this non-public information with their friends.

Is this a problem? There is a 2004 paper that finds a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month. Federal law does require Senators to disclose their common stock transfers annually in their Financial Disclosure Reports. But that filing is long after the time of the actual stock transactions.

I will not go into the details of the report other than to note that a few Senators are more active than others. You can reach your own conclusions based on the data.

In these days with a greater focus on transparency, risk and governance, you would think that Congress would close this loophole. In January, U.S. Reps. Louise Slaughter and Brian Baird (pictured) introduced the Stop Trading on Congressional Knowledge Act (the STOCK Act)(H.R. 582). Slaughter and Baird also introduced similar bills in 2006 and 2007, without success.

If this bothers you, maybe you should call, email, or tweet your Congressman or Senator.

See also:

• Closing the Congressional Insider-Trading Loop by Bruce Carton
• Senators’ Stocks Beat the Market by 12 Percent by FT.com
• Abnormal Returns from the Common Stock Investments of the U.S. Senate (.pdf) by Alan J. Ziobrowski, Ping Chenge, James W. Boyd and Brigitte J. Ziobrowski, published in the Journal of Financial and Quantitative Analysis (December 2004)
• STOCK Act Text of the Bill
• Insider Trading by Congress – Earlier post on Compliance Building