Andrew Harrer/Bloomberg News

The House and Senate passed versions of the STOCK Act – short for Stop Trading on Congressional Knowledge – to clarify insider trading laws to prevent members of Congress and their staff from buying and selling securities based on confidential Congressional information. The two bills are identical in prohibiting insider trading based on government information, and apply not just to Capitol Hill but extend to all federal employees.

While the prohibition on insider trading has garnered the most attention, the two bodies must still agree about whether to regulate so-called political intelligence activities, which would require disclosure of efforts to learn information from the government. If the House and Senate can reconcile differences in the legislation, President Obama promised in his State of the Union address to sign it into law immediately.

Bills prohibiting insider trading on Capitol Hill had languished until a “60 Minutes” story last September highlighting well-timed investments by members of Congress galvanized support for the legislation. One criticism that spurred Congress to act was the claim that its members were somehow “exempt” from the insider trading prohibition and so could trade with impunity.

That is a questionable proposition because the laws regulating insider trading have been developed by the courts and the Securities and Exchange Commission, and the issue of their application to Congress had never been explicitly raised. Nevertheless, both versions of the STOCK Act provide that “members of Congress and employees of Congress are not exempt from the insider trading prohibitions arising under the securities laws.”

A more difficult issue in pursuing a case involving members of Congress and their staff concerned whether they owed a fiduciary duty to not benefit personally from confidential information. An insider trading violation requires proving the defendant breached a duty of “trust and confidence” by misusing the information for personal gain or tipping others. Whether such a duty applied to those working on Capitol Hill was unclear, according to testimony by Robert Khuzami, the director of the S.E.C.’s enforcement division.

The bills passed by each house address this issue by explicitly establishing a “duty of trust and confidence” to not trade on “material, nonpublic information derived from such person’s position as a member of Congress or employee of Congress or gained from the performance of such person’s official responsibilities.” Another provision in both bills extends the fiduciary duty to all employees of the executive and judicial branches.

A significant change mandated by the STOCK Act will speed up the reporting of trading by members of Congress and their staff. The current rules only require filing of disclosure forms on an annual basis, but the bills require that all “financial transactions” be reported within 30 days, and the forms must be made available online. Prompt disclosure along with easy access to information can have a salutary effect by allowing the S.E.C. and the media to monitor trading by government employees to see whether there are any links to market-moving news.

A particular bone of contention between the House and Senate concerns regulation of so-called political intelligence activities that seek information from government sources to aid investment advisers and hedge funds. The House version requires a one-year study by the Government Accountability Office, which would effectively bury the issue. The Senate bill would require firms and consultants that engage in political intelligence gathering to disclose their activities in the same way lobbying firms must.

The Senate version defines a political intelligence contact as “any oral or written communication (including an electronic communication) to or from a covered executive branch official or a covered legislative branch official, the information derived from which is intended for use in analyzing securities or commodities markets, or in informing investment decisions.” This broad definition appears to cover a lot of ground, including private meetings with legislators and agency officials and telephone calls checking on the status of a rule or regulation.

Issues related to lobbying and reporting contacts with public officials raise concerns because of the First Amendment guarantee of the right “to petition the government for a redress of grievances.” If the bill is adopted, there will be concerns in the investment community about being drawn into new regulations covering murky issues about what might constitute political intelligence activity.

One provision added to the House bill is reported to aim at a type of investment made by Nancy Pelosi, the California Democrat who served as House speaker and is the current minority leader, who received shares in the initial public offering of Visa that were not otherwise available to individual investors. It provides that senior federal officials “may not purchase securities that are the subject of an initial public offering in any manner other than is available to members of the public generally.”

The securities laws generally do not regulate individuals buying shares in an I.P.O., only how the investment banks can dole them out. So this provision would be a first by prohibiting government officials from receiving special treatment in an I.P.O. distribution.

Whether passage of the STOCK Act triggers new investigations remains to be seen. The Office of Congressional Ethics is said to be looking at the trading of Representative Spencer Bachus, Republican of Alabama, although it is not clear whether the S.E.C. is pursuing information about his trading.

One issue the STOCK Act does not address is the application of the constitutional protection afforded by the Speech or Debate Clause, which prohibits questioning a member of Congress about legislative activities. As I noted in an earlier post on the legislation [link below], the new law would do little good if the S.E.C. and the Justice Department were stymied by the Speech or Debate Clause.

By passing the STOCK Act, Congress can proclaim that the federal government is covered by the insider trading laws to the same extent as everyone else is, and that it has taken steps toward greater transparency about the investment decisions of its members and employees. Whether that improves the image of Capitol Hill among the electorate remains to be seen.

STOCK Act House Version

STOCK Act Senate Version