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Taking Stock of the Stock Act: A Side-by-Side Comparison

The Stop Trading on Congressional Knowledge Act, or Stock Act, recently passed in both the House and Senate. The new law would make it easier for the SEC to prosecute federal officials from all three branches who trade equities like stocks based on nonpublic information they receive in the course of their duties. The versions passed in each chamber are similar, but have notable distinctions that will have to be hashed out when legislators from the two chambers eventually meet. We break down the main differences, with a real-life scenarios that illustrate activities the bill targets.

Scenario Senate House
INSIDER TRADING
In the midst of the economic crisis, Congressman Spencer Bachus, R-Ala., a high-ranking member of the House Financial Services Committee at the time, attended several closed door sessions with Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke. They warned that the entire global economy could soon be in rapid decline. The next day Bachus bought options that would gain value if financial markets fell. Bachus has denied any wrong-doing, and points out that there was a press conference after the closed-door meeting.

Both Senate and House versions extend the existing insider trading laws to congressional members and staff, as well as executive and judicial branch officials. All are prohibited from trading on nonpublic information, or revealing any information they suspect will be used for trading purposes. It also requires that they report any securities trade of more than $1,000 within 30 days.

Bachus has denied the insider trading accusations against him and said that the meeting wasn't secret at all – everything discussed was made public in a press conference.

POLITICAL INTELLIGENCE
New York-based broker-dealer JNK Securities organized a private meeting between hedge fund managers and lawmakers on Capitol Hill involved in health care legislation. During their conversation senators revealed that the creation of a government-run insurance plan was unlikely to be part of the final bill (a fact which was not publicly known). After the meeting, the hedge fund managers invested heavily in private health insurance stocks. Days after the public announcement of a deal to eliminate the proposed government plan, those stocks rose more than six percent. The Senate version requires that individuals and firms the collect political intelligence – that is, nonpublic information from government officials that can help decide where to invest – to register and report their activities as lobbyists do now. It also calls for a study on the growing political intelligence industry, which makes an estimated $400 million a year. The House version call for a study of the political intelligence industry, but does not include the registration requirement. Lawmakers and staff are still prohibited from revealing nonpublic information about legislation if they suspect it will be used in stock trades.
IPOs
In 2008, Nancy Pelosi and her husband participated in Visa's initial public offering, buying 5,000 shares of Visa at the initial price of $44. At the same time, a piece of credit card legislation was before the House. A few days later the stock went up to $60. If Pelosi had sold, she would have netted $80,000. No change to existing laws. The House version bans public officials from getting special access to IPO's, which can be very profitable if the stock is in high demand. Democrats have called the amendment the "Pelosi provision," accusing Republicans of targeting Pelosi even though she has repeatedly denied any wrongdoing. (Records show that she continued to purchase Visa stock even after prices rose.)
HONEST SERVICES FRAUD
Kevin Ring, a former colleague of Washington lobbyist Jack Abramoff and central player in the political corruption scandal, was found guilty of providing expensive gifts, vacations, meals and sports tickets to politicians in exchange for favors or actions that would benefit him and his clients. He was charged with "honest services fraud" for conspiring to deprive U.S. citizens of their right to the honest services of certain public officials. After an initial mistrial, Ring was sentenced last year to 20 months in prison. The Senate version would tighten the language of the broadly worded criminal law, which states that public officials and private citizens cannot deny their "honest services" to taxpayers or shareholders. The law was considerably narrowed in 2010 when the Supreme Court deemed it "unconstitutionally vague." No change to existing laws.
ILLEGAL GRATUITIES
Nelson Valdes, a detective at the D.C. Metropolitan Police, received money in exchange for going into a police database, looking up license plate nunbers and providing the information to an undercover FBI informant. Valdes was initially convicted of receiving "illegal gratuities," but the Supreme Court overruled the decision because what he did was not part of an "official act." The Senate version broadens the illegal gratuities statute to apply to any case in which someone receives gifts because of their status as a public official. No change to existing laws.

SOURCES: Citizens for Responsibility and Ethics in Washington, The Campaign Legal Center, Peter Schweizer, author of Throw Them All Out.