Isn't That Already Illegal? Congressional Insider Trading

"Insider trading" by members of Congress seems to cause similar reactions in most. "Isn't that already illegal?" is the common refrain. And why wouldn't it be, as insider trading lands everyone else in the U.S. -- and most industrialized countries -- in jail and slaps them with huge fines. The fact that a little-known loophole permits members of Congress and their staffs to buy and sell stocks using insider information they might obtain through their official work rightly strikes most citizens as outrageous.

The now infamous 60 Minutes documentary from earlier this month shone a bright light on the obvious opportunities members of Congress and their staffs have to use information gleaned in day-to-day business for personal gain in the stock and commodities markets. The increasing scrutiny seems to be providing the necessary energy to finally spur action on the STOCK Act, introduced in the House of Representatives by Reps. Louise Slaughter (D-N.Y.) and Tim Walz (D-Minn.). This legislation would increase disclosure and highlight conflicts of interests for lawmakers and ensure that they do not benefit from their insider knowledge.

The bill has languished since 2006 due to a lack of attention. However in just the few weeks since this issue was so publicly flagged, the number of co-sponsors in the House on the STOCK Act has grown from nine to 99, and both Sens. Scott Brown (R-Mass.) and Kristen Gillabrand (D-N.Y.) have introduced companion legislation in the Senate that would change Senate rules to ban insider trading. "When members of Congress personally benefit from the legislation that they shape and vote on, there is a clear conflict of interest, and its effect on legislation can be corrosive," Brown wrote in a letter to his colleagues.

With Sen. Joseph Lieberman (I-Conn.) holding a hearing on the measure this Thursday, and a Dec. 6 hearing in the House scheduled by Rep. Spencer Bachus (R-Ala.) (who chairs the committee and was one of the lawmakers who came under scrutiny from 60 Minutes, though he denied improper trading), the attention on the issue will likely continue to grow.

The attention is warranted, as a report released earlier this year by four universities found that on average, stock portfolios held by House members from 1985 to 2001 beat the market average by approximately 6 percent annually. In 2004, the same group of professors found that the average stock portfolios held by members of the Senate beat the market average by about 10 percent.

The issue is drawing the most unlikely supporters, as even former Alaska Gov. Sarah Palin spoke out in agreement in an opinion article she wrote for The Wall Street Journal. "It's an endemic problem encompassing leadership on both sides of the aisle. It's an entire system of public servants feathering their own nests," she wrote.

Regardless of whether the trading is as widespread as some claim, given the political environment and the unpopularity of Washington, members of Congress appear eager to insulate themselves from the mere suggestion that they have some market advantage over other Americans. Members are jumping on the bill and the bandwagon at top speed to show that they are dealing with the possibility of special perks.

This issue is not a partisan one, but one of ethics, and so it seems likely that the bill will continue to garner the momentum it needs to become law. Hopefully more members will join in this bipartisan effort to apply the insider trading laws uniformly across Congress and head off both the perception and the reality of scandals that otherwise may ensue.