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Insider Trading Laws Do Not Apply to Members of Congress. No, Seriously.


And not only are Senators and Congressmen immune, their aides are, too.


A later study by Harvard PhD candidates Andrew Eggers and Jens Hainmueller examined a newer set of Congressional investment data [pdf], covering the years 2004-2007.

"In contrast to the sole earlier study of Congressional investing, we find that members' portfolios on average do not outperform the market," they wrote.

Interestingly, they found "higher returns among members with leadership positions on committees, members with seats on more influential committees, and members who have been consistently identified as corrupt by a watchdog group."

Ziobrowski theorizes that lawmakers may have cleaned up their collective act since he published his findings in 2004.

"I'm very proud of that for that reason alone," Ziobrowski told John Carney of CNBC. "No one went to jail, but that's ok. It was well worth doing the paper."

Carney speculates on some other potential explanations:

  • Legislation over the last six years may have been less effective at moving share prices;
  • Information provided to lawmakers may be less reliable as a guide to the stock performance of companies involved;
  • Outsiders may have become more attuned to the value of political information, and therefore more market participants are using the information to trade;
  • And, finally, its possible that the financial acumen of lawmakers has declined, making them less able to translate their non-public information into tradable ideas.

Public Citizen's Holman asserts that actual financial gain is almost secondary in such cases.

"Whether members of Congress are in fact cashing in on insider information, or coincidence just makes it appear so, the damage to the integrity of the federal government is the same," he says.

In the Yale Journal of Regulation two years ago, Maureen O'Hara, the Robert W. Purcell Professor of Finance at the Johnson Graduate School of Management, Cornell University and Jonathan Macey, the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale University, wondered why no legal framework regarding this had yet been set up.

"The idea that the SEC -- the administrative agency ostensibly in charge of protecting the nation's capital markets -- would not at least attempt to formulate a rule, much less an enforcement strategy, to combat insider trading by federal elected public officials seems particularly strange in light of the clear public policy problems involved in this sort of trading" they wrote. "[N]onpublic information creates perverse incentives for these officials, and introduces innumerable distortions and the potential for immeasurable harm in a legal system in which public trust and confidence is critical. With the SEC unwilling to take any sort of initiative against insider trading by senators and other congressional officers, Congress has been left to police itself. Not surprisingly, this effort has not been a success."

For this reason, Congresswoman Louise Slaughter, along with Congressmen Tim Walz and Brian Baird (who has since retired), has repeatedly introduced the "Stop Trading on Congressional Knowledge Act," or STOCK Act that would make it illegal for members of Congress to trade stocks based on inside information.

Before he left office, Baird told a reporter that no hard evidence exists that insider trading is a widespread problem in Congress.

"But in a town that trades on information," he said, it's "almost a certainty."

Victoria Dillon, Congresswoman Slaughter's press secretary, tells Minyanville that the bill has not garnered much support among lawmakers.

"The first time this legislation was introduced, 14 people endorsed it," she says. "The last time, it got nine," she says. "Congresswoman Slaughter is saying, 'We shouldn't have the opportunity to do this. It shouldn't be legal. This is not one of the more complex pieces of legislation. This is common sense."

Dillon says Slaughter plans on reintroducing the STOCK Act and that it is "still a legislative priority for Congresswoman Slaughter."

Melanie Sloan, executive director of the Center for Responsibility and Ethics in Washington and a former federal prosecutor, doesn't see a bright future for Slaughter's initiative.

"There's rarely support for things that limit lawmakers' behavior," she says.

And Robert M. Stern, president of the Center for Governmental Studies, says, "I don't think I would hold my breath for that one."

Still, it's not as if Congress hasn't instituted any regulations regarding stock ownership in an effort to curtail insider trading. For example, The Senate Armed Services Committee forbids staff and presidential appointees requiring Senate confirmation from owning stocks or bonds in 48,096 companies that have Defense Department contracts.

The Senators themselves?

19 of the 28 senators on the Committee held assets in companies among the prohibited 48,096 between 2004 and 2009, worth a total of $3.8 million to $10.2 million.

Come on now, you didn't think they'd extend the rules to themselves, did you?

No positions in stocks mentioned.
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