According to today’s Wall Street Journal, it appears that Congress will agree on a version of the Stop Trading on Congressional Knowledge Act of 2012 (the “STOCK Act”) in the next week. So far, each of the House and the Senate has passed a version of the STOCK Act, with one of the most notable differences in the Senate and House versions centering around the treatment of “political intelligence firms,” which gather information about pending legislation for their clients, typically hedge funds and other market participants. The Senate bill requires political intelligence firms to register and report on their activities in a manner similar to lobbyists but the House bill does not. According to The Wall Street Journal article, the Senate intends to pass the House version of the bill, which means that the political intelligence firm registration provisions will not make it into the final bill.
The STOCK Act establishes that members of each branch of the federal government and their employees owe a duty arising from a relationship of trust and confidence to the Congress, the United States Government, and the citizens of the United States with respect to material, non-public information derived from such persons’ position or gained from the performance of such persons’ official responsibilities. The STOCK Act clearly subjects those covered by the act to the “misappropriation theory” of insider trading liability under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. So, it is very possible that the STOCK Act will change the way political intelligence firms operate, even if the act does not include the reporting regime for political intelligence firms.
So what happens when a member of Congress or his/her employee passes along material, non-public information to others? Under the STOCK Act, the member or employee of Congress would be considered a “tipper” and could be liable for insider trading if the person who received the material, non-public information (the “tippee”) traded based on that information. Assuming the STOCK Act is passed and implemented, members of Congress will presumably be reluctant to pass along any information to political intelligence firms unless they know that such information was either not material or publicly available.
While it may be the case that the political intelligence firm reporting regime may make it easier for the SEC to connect dots in an insider trading case, it is not clear that passage of the STOCK Act without the reporting regime is a “win” for political intelligence firms, since the STOCK Act certainly has the potential to result in significantly less information flowing to such firms. The development of what constitutes material, non-public information in this context and how non-public information becomes public (which are not addressed in either version of the STOCK Act) will drive if and how political intelligence firms stay in business.