The STOCK Act is a pretty quick read. Rapidly passed through both chambers of Congress, the bill does a couple things. First, it makes the SEC's Insider Trading rules apply to members of Congress, their staff, and all other federal employees just like they do everybody else. Second, it makes members of Congress have to report their financial holding transactions every 60-90 days, in an effort to use transparency to make sure the system stays more honest.
I hate this bill -- I think it represents everything that's wrong about the way we legislate ethics and transparency in Washington. I became suspect of it when I saw how quickly this law was introduced and passed. It violates my own litmus test for whether or not an ethics law will be successful in changing behavior:
The more that Congress supports a bill intended to change its behavior, the less likely the bill is to actually change that behavior.
Yes, it's cynical, but this bill gives people the impression that system will be cleaned up when it won't be. It's likely to do more harm than good.
Why does this bill suck so bad? First, and most importantly, because it doesn't take into account how Congress actually behaves. Second, because while the rules may apply to Congress like they apply to everybody else, the punishment doesn't -- this means that it can be used by Congress as a weapon agains the other branches of Government. And third, because it's idea of timely disclosure is not attached to anybody else's idea of timely disclosure.
First let's talk about how members of Congress actually behave. Let's be clear -- a dishonest member of Congress will find another way to execute the trade should they want to leverage their "insider knowledge." Their spouse or daughter will do it. Their accountant or lawyer will do it. Their "blind trust" will do it. They will find a way, and instead of being able to see what they do, the transaction will be pushed further into the shadows.
Second, while we have a Congress that tends to speak in heated tones towards one another, they rarely send each other to jail. Here's a list of people from the Legislative Branch who are now convicted felons. The crimes are egregious violations of the law: manslaughters or superscandals where Congress has its back to the wall -- and usually legions of staff head behind bars before any actual member does. The bill actually carves out some pretty significant exemptions from penalties for members of Congress. While Martha Stewart might have had to spend some time behind bars for insider trading, it's likely that the maximum punishment member of Congress will face is a fine -- one that's significantly less than the value of the investment.
Take Charlie Rangel for example. As chairman of the House Ways and Means committee Rangel used Congressional letterhead to solicit funds from people he was appropriating funds to for a school with his name on it. He carved out tax loopholes for companies that donated funds to the school. He didn't disclose assets properly and dodged taxes. Is he in prison? Nope. He got censured -- a severe punishment to his "honor" as a member of Congress.
Is he alone? Of course not -- though Rangel is one of the few that have been censured, there are many members of Congress found guilty of ethics charges that get no meaningful punishment besides a token reprimand, and even more who manage to evade the public's interest long enough to get away with it. You cannot legislate a criminal out of being a criminal.
The sad part is, because the STOCK ACT holds federal employees accountable to the same standard without the same exemptions from the teeth of the insider trading laws, it's going to be used in a punitive way by Congress against federal employees in the executive branch who probably didn't even understand that they were breaking the law. Are you an Obama supporter who thinks Solyndra was nonsensical? Just wait.
My final problem with this bill is about meaningful disclosure. because meaningful disclosure could have made this whole bill actually meaningful. When I first started at the Sunlight Foundation, we were finishing up a project called Fortune 535 which used Congressional financial disclosure forms to chart the differences between the increase in net worth of a member of Congress since their election, and the increase in net worth of an average american family. The results were sensational: members making millions more after getting elected, whilst the average american's income remained flat.
Of course, the problem was: the data wasn't all that accurate. The lines were blurry about what could be disclosed and what wouldn't be. Sometimes a member would "discover" a holding and add it to their financial disclosure form. Other times, a fair market "assessor" would reduce a member's holdings substantially. The disclosure had data in it, but it wasn't a particularly good way of measuring wealth.
What the bills ask for is that Congress build its own system for electronic disclosure of their financial transactions. According to the law when a member concludes a financial transaction, they'll disclose it electronically in between 30-90 days. The House and Senate bills that I've read don't actually agree on this number but I'll point out that as long as we're debating months rather than minutes, we're not debating about meaningful disclosure. Would March Madness have any credibility if the NCAA decided to only release its scores 30 days after the game was completed?
Meaningful disclosure for financial transactions happens in minutes, not days. And a bill with meaningful, real-time disclosure on financial transactions, without any of the other stuff would be a much better bill. If we just allowed our members to use their knowledge to conduct transactions in the light of day, and disclose that data in real-time, we could at least build an index fund that traded in parallel with them. Instead, CRS projects we'll need to spend about $4 Million Dollars on yet another disclosure system that won't mean anything.
And that's my final point: what's the problem the bill is trying to solve? Is it that the American people are pissed off that their representatives are conducting "insider trading?" or do they want a level playing field?
You tell me what'll work better at leveling that playing field: making it easy to see what Congress is investing in, in real-time, so that people can make similar investments, or legislating that Congress pretend to not know something that it knows, and to act responsibly when vast sums of money are to be made with relatively little punishment?
As long as we're arguing about months rather than minutes, we're nowhere close to the place we need to be to discuss real reform.