Louise Slaughter has complained that the bill has been 'hijacked.' STOCK Act limps toward passage

Congress is about to show what happens when it’s pressured into drafting new ethics rules for itself: not a whole lot.

Much ballyhooed by politicians but warped by legislative sausage-making, a bill to ban insider trading by members of Congress appears headed for adoption. But even the authors of the STOCK Act say it won’t do much to curb the rash of bad behavior that’s sullied Congress’ public image and left it limping toward a single-digit public approval rating.


An unethical lawmaker who wants to do bad, experts say, will find a way to do it — law or no law. And those with more honorable intentions won’t be affected.

“I don’t want to certainly leave the impression that it’s an earth-shaking change,” Rep. Tim Walz (D-Minn.), a lead sponsor of the measure, said in an interview. “It doesn’t change the life of most members that are here in any way, shape or form.”

The problem is this: It’s inherently difficult to pursue insider-trading allegations, particularly against members of Congress. Lawmakers are constitutionally protected from certain legal actions. And many are skeptical that the STOCK Act, or Stop Trading on Congressional Knowledge Act, which explicitly bars lawmakers and congressional aides from insider trading – was even necessary in the first place.

“I think there are sufficient holes in the STOCK Act such [that] those who wish to circumvent it will do so,” said Jacob Frenkel, a former enforcement lawyer for the Securities and Exchange Commission.

What’s more, the bill’s most far-reaching provision — to regulate the the flowering industry of consultants who provide inside legislative knowledge to investors was stripped out by House Republicans. That prompted Rep. Louise Slaughter (D-N.Y.), who’s been working on the legislation for years, to complain that the bill had been “hijacked” — a charge parroted by Republican Sen. Chuck Grassley of Iowa.

Frenkel, now an attorney at the law firm Shulman Rogers, said it would be difficult for investigators to determine what qualifies as nonpublic information — particularly information that constantly flows through the halls of Congress. The SEC has never prosecuted a member of Congress for insider trading.

“This looks to me like a public relations solution in search of a problem,” added Karl Groskaufmanis, an attorney at Fried Frank, specializing in securities enforcement and regulation.

SEC Chairwoman Mary Schapiro said last week that the speech or debate clause — a constitutional privilege that shields lawmakers and aides from facing legal problems over official duties — makes it difficult for the SEC to go after insider-trading allegations by members of Congress.

“That’s the Constitution. We can’t ask Congress to fix that with legislation,” Schapiro said in an interview hosted by the Christian Science Monitor.

That’s not to say the STOCK Act is useless: Even skeptics say it would serve as a useful in-your-face reminder to lawmakers who might think about making a quick buck on tips they pick up in in the course of their jobs.

“On balance,” said Schapiro, “the STOCK Act is helpful to us.”

Eager to shore up Congress’ sagging public standing, both the House and Senate early last month overwhelmingly passed the STOCK Act — egislation that President Barack Obama touted in his State of the Union address and promised to sign into law immediately.

But the popular legislation currently is at a standstill as Senate Majority Leader Harry Reid (D-Nev.) mulls whether to take up the House-passed bill without any changes or move into a formal conference to negotiate key differences between the two chambers.

Reid indicated to reporters this week that while he wants to proceed to a conference committee, he doesn’t yet have consent from other senators to be able to do so.

The bill, which focuses on insider trading and financial disclosures, exploded into a wide-ranging package after Reid allowed a freewheeling amendment process, triggering the first substantive ethics debate in the Senate in five years.

Among the amendments to the Senate version: banning bonuses for Fannie Mae and Freddie Mac executives; requiring lawmakers, aides and executive-branch employees to disclose the terms of their home mortgages; and barring lawmakers convicted of certain crimes from collecting federal pension payments. The STOCK Act also requires lawmakers to disclose financial transactions within 30-45 days, rather than the current once-a-year process.

When the bill was sent to the lower chamber, House Majority Leader Eric Cantor (R-Va.) also expanded the legislation’s disclosure requirements to the executive branch and enacted tougher rules on public officials who participate in initial public stock offerings.

But Cantor also dropped two key Senate provisions: an amendment that gave federal prosecutors additional powers to investigate public corruption, as well as a requirement that so-called political intelligence consultants — which track legislative action and subsequently sell the information to investors — register and disclose their activities much like lobbyists already do.

When asked whether the STOCK Act is still a good piece of legislation without the political intelligence provision, Slaughter replied: “Not with the most important part of it gone.”

“It goes as far as it goes, and I think maybe a helpful deterrent, but the political intelligence … nobody knows who these people are,” Slaughter said, who made the same case during a recent appearance a few weeks ago on “The Daily Show” with an outraged Jon Stewart. “I’m really dismayed that any of my colleagues on either side of the Capitol would find that honest.”

The deletion of the provision stoked outrage from many on and off Capitol Hill, and lawmakers are now facing an onslaught of pressure from good-government groups to ensure the political-intelligence provision is included in the bill that is ultimately sent to the White House.

Grassley, who sponsored the political-intelligence provision and has been a harsh critic of House GOP leadership’s efforts to take it out, told POLITICO on Wednesday that he hasn’t decided whether he would withhold consent if the Senate were to move on just the House-passed bill.

“I would vote for the bill either way, but I don’t think we ought to allow a strong, economic interest — that political intelligence is — to get away with not being a part of this bill,” he said.

But skeptics of the political-intelligence provision cautioned against moving forward too quickly with new registration and disclosure requirements on a little-known industry.

Cantor’s office maintained that the provision was too broad as written and could unfairly ensnare anyone from Rotary Club members to news reporters.

“I’m not against it, but I didn’t feel like I was ready to put into law because I thought it might, frankly, be unconstitutional,” Sen. Joe Lieberman (I-Conn.) said Wednesday. “It’s a very strong bill without it. Much stronger than, I think, people thought.”

Frenkel, the former SEC lawyer, also raised concern about the political intelligence provision.

“There is no penalty, not a violation of law, certainly not insider trading, for someone to do their homework and to do it extremely well,” Frenkel said. “And that means that if someone goes to the trouble of sitting in committee hearings … being involved in think tanks or general thought, discussion in halls of the Capitol among groups of people, that should not require either registration or implicate a violation of law.”

Another tricky factor is that those accused of insider trading can almost always produce explanations — such as news articles or other research materials — that could cast doubt on whether the information they were trading on was private, said Robert Heim, a former SEC assistant regional director.

But one way the STOCK Act assists investigators is by codifying that lawmakers and aides have a clear duty to keep certain information confidential, said Heim, who noted that insider-trading cases are generally “very difficult” to pursue.

“That gray area could prevent effective enforcement of insider trading laws against members of Congress,” said Heim, now at Meyers and Heim LLP in New York City. “I think it’s very beneficial.”