If you’re a retail or individual investor you may feel like the little guy can’t win in the stock market.
The individual investor is a little fish in the vast ocean we call the world’s investment market and only the biggest of the investors can actually get ahead.
Many of us have said that in the past but we were hoping that it wasn’t true. The market is supposed to be set up so everybody has the same information and although insider trading is difficult to police, some high profile cases over the past couple of years have made big investors a little less likely to share illegal information when others aren’t looking.
How does it make you feel to know that insider trading was not only legal, but your elected officials were taking part?
Thanks to the recent signing of the STOCK Act, or Stop Trading On Congressional Knowledge Act, members of Congress can no longer profit from insider trading.
If you’re not sure what people mean when they use the term, insider trading, here’s how it works.
Let’s say that you have a corporate position in a major medical company that develops new drugs. Your company recently applied for FDA approval for one of your drugs and sure enough, you got the approval.
You, as a company representative are not allowed to call your best friend who works at a top investing firm and tell him the great news.
That’s inside information because you told him before it was released to the public.
If your friend took your information and purchased 100,000 shares of your company stock the day before the announcement, that’s insider trading.
It’s illegal and if the SEC finds out, you and your friend might be heading to jail.
Legal Insider Trading
Let’s say you didn’t work at a drug company, but instead, you were a member of Congress on the President’s task force for healthcare.
As part of your job, you helped to write the now famous Obamacare provisions.
Through that, you had access to information that could make you a lot of money in the stock market.
If you buy up a bunch of healthcare stocks the day before the bill is announced, that’s insider trading, right?
Congress was not banned from doing this and they did. One of those Congressman was past presidential candidate John Kerry. In fact, the Wall Street Journal found that many members of Congress and their aides traded stocks of companies that they oversaw as part of their congressional committees.
How About Now?
Thanks to the recent passage of the STOCK Act, Congress has to play by the same rules as every other investor.
The law has three provisions.
First, and most important, members of Congress have to keep all confidential information confidential. This may sound like common sense but all of the well paid securities lawyers would tell you that there was nothing that kept them from trading on their non-public knowledge. Now they aren’t allowed.
Second, a member of Congress or senior official can’t use their position as a way to get favorable treatment. Just because you’re a member of Congress doesn’t mean you can move up in line to get some Facebook stock before it hits the open markets.
Last, the Washington elite have to disclose all of their stock trades within 30 days of the trade being executed. It is submitted in electronic form and becomes publically available.
The STOCK Act isn’t perfect but finally, Congress won’t have the ability to make money off of the non-public knowledge they have. Although this does very little for the little fish in the big Wall Street pond, it finally makes everybody subject to the same securities laws.
What do you think of the STOCK Act? Is it long overdue?
I can’t believe it took new legislation to stop this. How can legislators think they are above the law. Didn’t they realize they were privy to insider information and they should not profit from it? Amazing!
Glen Craig says
Oh, I think they realized. The legislation was first introduced in 2006 and took until now to pass.
Credit Card Guy says
It’s such a hard practice to Police. The fact is that insider trading happens in every aspect of life. And what information would class as insider trading? Would it be passing information about government contracts or sharing news about changes to legislation which might then effect businesses? I think that we have to acknowledge that insider trading does happen and that there is little we can do to prevent it. I think it is ethically wrong to share confidential information but the reality is that it occurs everywhere.
Glen Craig says
This legislation won’t stop it all. But at least the shorter reporting period helps keep an eye on what members of Congress are doing.
And really, if your committee has oversight over a particular industry and you’re buying up stock based on potential legislature…well that’s real fishy isn’t it? Some things may not be that hard to look at and go ‘hey, you bought this because you were passing a law that affects this company next week!’
And what is to prevent the spouse, immediate family, and staff of the representative from acting on the knowledge? To whom do they answer?
Glen Craig says
Aides are actually included in this Act as well. I don’t know enough about insider trading rules but I would think it would be very suspicious if close family were trading and profiting on information.
Charlie Foxtrot says
“Thanks to the recent passage of the STOCK Act, Congress has to play by the same rules as every other investor.”
Are you serious? This is the foxes making a rule about not going into the hen-house! The only thing you can say for sure is that since it passed, there’s a loophole in it somewhere and it will be business as usual once people stop paying attention.