By Dan Portnov
Occasionally we work on cases or investigations that involve highly wonky subject matter – stuff that only lawyers or legislators would know and care about. One of those recent matters touched on the Stop Trading on Congressional Knowledge (STOCK) Act, a (relatively) recent piece of legislation that attempts to extend insider-trading concepts to elected officials, among other things. Since our interest has been piqued, and the STOCK Act covers a broader swath of conduct than its name implies, we thought it a good idea to explain some of the basics of the STOCK Act, and whom it might affect.
When was the STOCK Act created?
The Act was signed into law on April 4, 2012 by President Obama. It received overwhelming bipartisan support, passing both House and Senate with only a few “Nay” votes.
What exactly does the STOCK Act do?
The STOCK Act prohibits members of Congress and their employees from using for personal benefit confidential information obtained during the course of their duties. Despite the limitation suggested by its name, the Act also applies to all employees of the Executive and Judicial branches. Basically, if you work for the federal government and you learn a piece of non-public information that might be beneficial to you personally, you are forbidden from doing so.
The STOCK Act reaffirms that Congress members are subject to insider trading prohibitions created by federal securities laws (e.g., the Securities Exchange Act of 1934). Under the Act, members and congressional employees owe a duty based on a relationship of trust and confidence to Congress, the United States government and all citizens as to material, non-public information gained from the performance of their official duties. The Act covers securities, commodities and derivatives.
In order to help monitor compliance, federal employees must file reports on trades exceeding $1,000 involving any stock, bond, commodity or derivative, within a short time of the transaction.
What is Material Non-Public Information Under the STOCK Act?
Material non-public information (MNPI) is relatively well-defined in criminal and SEC insider-trading enforcement. (Some might disagree, but that is a discussion for another time). However, the STOCK Act and its legislative history do not offer much in the way of what constitutes MNPI in the halls of Congress. Instead, we have to look to piecemeal rules and guidance.
Senate ethics rules define “material” as information a “reasonable investor would want to know when making an investment decision” and “non-public information” as “confidential or not widely disseminated to the public.” The Government Accountability Office released a report in which it defined “non-public information” as “information that has not been disseminated to the general public or is not authorized to be made public.” However, gaps exist in these definitions – such as what is meant by “wide dissemination” or “not available to the general public”?
But Wait, there is More!
The STOCK Act also requires federal employees to file a disclosure with their agency’s ethics office within three days of commencing negotiation for potential employment or compensation. Following this disclosure, the employee must recuse themselves whenever their official duties might touch upon a matter involving the entity that is subject of the disclosure – i.e., avoid any actual or perceived conflict of interest. In case you are wondering, the definition of negotiation under the STOCK Act is quit broad, although the examples provided in the Code are more illuminating.
Finally,[1] the STOCK Act makes it a crime for a Congress member or certain federal employees to, on the basis of partisan politics, influence or attempt to influence an employment decision or practice of a private entity.
Who Enforces the STOCK Act?
The Department of Justice, Securities and Exchange Commission and Commodity Futures Trading Commission are three of the chief enforcers of the STOCK Act. Investigations concerning alleged violations of the STOCK Act can arise with one of these regulators, or in a completely separate way. For example, various agencies’ Offices of Inspector General may investigate a seemingly routine conflict of interest violation that ultimately makes out elements of a STOCK Act Section 17 violation.
So, Who Should Be Most Worried About STOCK Act Enforcement?
Executive branch employees … strangely enough.
Throughout the six plus years of the STOCK Act, the SEC’s highest profile investigation into a potential violation of the Act by Congressional staffer Brian Sutter quietly petered out in early 2017. At one point, the Sutter investigation boasted of becoming one of the largest ever, with a tip about a change Medicare reimbursements leading to 44 financial firms trading in four of the U.S.’s largest health-care companies. But alas, it ended without the SEC striking a blow against loose-lipped Congressional staff.
Even before that, Congress eased trading disclosure requirements on itself, eliminating the “searchable, sortable and downloadable” requirement and thus making it more difficult for regulators and watchdog groups to spot potential violations by its members.
In the end, the STOCK Act section with the most profound effect was Section 17, which revised the rules on seeking post-federal government employment for executive branch employees. As a result, the U.S. Office of Government Ethics (OGE) directed every federal agency’s ethics office to codify Section 17 in its employee manuals and ethics programs.
Since 2012, ethics departments and OIGs have stood ready to question and investigate federal employees for conflicts of interest stemming from perceived employment negotiations. Federal employees starting to seek outside employment should seek official counsel from their Designated Agency Ethics Official and request that any opinion be in writing, if possible. Finally, federal employees should carefully observe disclosure and recusal guidance as even technical violations can lead to unpleasant OIG investigations.
In sum, the STOCK Act started off with the best intentions and still might prove to be an important piece of legislation. For the near term, however, its chief effect is on federal employees who are thinking about decamping for the greener pastures of the private sector. Go figure.
[1] There are several additional sections of the STOCK Act that help enact its major provisions or provide for further rulemaking. Since these are not the sections that can get an individual in trouble, we will skip over them in this post.