STOCK Act

What Is the STOCK Act?

The Stop Trading on Congressional Knowledge Act, or "STOCK Act" for short, made it illegal for members of Congress to engage in insider trading. The act was passed in April 2012, during the presidency of Barack Obama. In April 2013, Congress amended the STOCK Act, loosening its financial disclosure requirements and making it more difficult for members of the public to access the required filings.

Understanding the STOCK Act

Many people may be surprised to learn that until recently, trading based on material nonpublic information — otherwise known as insider trading — was both legal and commonplace among members of Congress.

The STOCK Act was introduced into Congress in January 2012 and was passed in April 2012 with substantial bipartisan support. The purpose of the STOCK Act was to ensure that the general prohibition against insider trading applies to members of Congress and other federal employees, including the president, vice president, and certain other members of the executive branch.

Bipartisan Support

The STOCK Act was passed with overwhelming bipartisan support. In the Senate, it passed by a 96-3 vote. Its support in the House of Representatives was even more widespread, passing with a margin of 417-2 votes.

To achieve this, the STOCK Act mandated increased levels of financial transparency, requiring high-ranking officials to file detailed financial disclosures. This included mandating filings within 45 days of any material gains, as well as the disclosure of home mortgage terms. It also forbade officials from participating in initial public offerings (IPOs).

The STOCK Act was structured as an amendment to a pre-existing law, namely the Ethics in Government Act of 1978, which was passed in the wake of the infamous Watergate scandal. This law created standards relating to the disclosure of financial information by government employees and created websites and other mechanisms to permit public oversight of that information. As such, the STOCK Act built upon this legal foundation.

Congress, however, has since taken steps in the opposite direction. Nearly one year after the passage of the STOCK Act, Congress passed an amendment to the STOCK Act that weakened the act's financial disclosure requirements.

STOCK Act Example

Unfortunately, instances of insider trading by members of Congress are not difficult to find. For example, in 2008, then-Congressman Spencer Bachus shorted the U.S. stock market one day after attending a confidential meeting with Henry ("Hank") Paulson and Ben Bernanke, who at that time were the secretary of the Treasury and chair of the Federal Reserve, respectively.

At this meeting, which took place on Sept. 18, Bachus and other members of Congress were given material nonpublic information about the extent of the risks that were facing the financial system at that time. John Boehner and Dick Durbin, both Senators at the time, also attended that closed-door meeting. Both of them placed orders selling shares in mutual funds the following day.