Imagine, for a moment, that you're on the board of a major company. Let's make it fun and give you a seat on the Apple board of directors. As you know, each quarter, Apple announces its earnings to the public and, if you knew them ahead of time, you could make some major money. The good news is that you do know them ahead of time, so why not cash in, right?

SEE: Top 4 Most Scandalous Insider Trading Debacles

You know that Apple will announce earnings to the public in two days, so you call your broker and purchase 5,000 shares, because you already saw the report and it's pretty amazing; however, your plan has a minor flaw. That kind of activity is illegal and you would be busted for insider trading, joining the likes of Bernie Madoff, Raj Rajaratnam, Allen Stanford and the many other Wall Street investors who tried to get around the laws.

So, let's put you in another role. Now you're a high ranking Congressman who sits on the committee that drafted the Obama healthcare law. Knowing that the law would soon be unveiled, you talked to the people who managed your investments and told them to buy 10,000 shares of a certain drug company. A few days later, that company saw a big stock gain, as a result of the newly unveiled Obama healthcare plan.

Doing something like will land you in jail with Washington's white collar inmates, right? Up until recently, that action was completely legal and not only would you still be a Congressman, you would be a lot richer than you were only days before. Certainly that didn't happen, right? A 2011 report found "… strong evidence that Members of the House have some type of nonpublic information which they use for personal gain."

SEE: No More Insider Trading For Congress


Yes, it's true. Congress was permitted to trade on insider information, but Wall Street investors were not, and although the issue had been raised in the past, as far back as 2006, legislation to make that illegal was never voted into law until recently. The STOCK Act was passed to place everybody under the same rules. Here's how it works.

First, the law makes it mandatory that a Washington official hold confidential any information that is not public knowledge. To make it simple, the first part of the Act now makes all SEC insider trading laws applicable to Congressional members, as well as other high ranking Washington officials.

Second, the Act prohibits Congress and high ranking public officials from getting preferential treatment from investment bankers. Therefore, when Facebook shares were available to the big investors, Washington lawmakers couldn't receive first access to these shares, because of their position of power.

Finally, any stock trade or other transaction must be disclosed to the public within 30 days of the transaction. This will be reported via electronic systems and rapidly available to the public. This part of the bill is meant to keep Washington officials honest by putting their activities on display.

The Bottom Line
Although a big leap forward, there are still at least two areas of leakage that weren't plugged. First, hedge fund managers can still pay Washington officials for "political intelligence." This is a legal way to purchase insider information in order to make their fund more profitable. Second, members of Congress can still draft and vote on legislation that could positively affect their stock holdings. If they own a large amount of Exxon stock, they could still draft and vote on legislation that would benefit the oil industry.

The STOCK Act isn't perfect, but it goes a long way in holding Washington officials accountable for the same insider trading rules as Wall Street investors.

Related Articles
  1. Insurance

    Medicare 101: Do You Need All 4 Parts?

    Medicare is the United States’ health insurance program for those over age 65. Medicare has four parts, but you might not need them all.
  2. Economics

    Understanding Donald Trump's Stance on China

    Find out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
  3. Economics

    Will Putin Ever Leave Office?

    Find out when, or if, Russian President Vladimir Putin will ever relinquish control over the Russian government, and whether it matters.
  4. Markets

    Will Paris Attacks Undo the European Union Dream?

    Last Friday's attacks in Paris are transforming the migrant crisis into an EU security threat, which could undermine the European Union dream.
  5. Investing Basics

    What are the fiduciary responsibilities of board members?

    Find out what fiduciary duties a board of directors owes to the company and its shareholders, including the duties of care, good faith and loyalty.
  6. Budgeting

    How Much Will it Cost to Become President In 2016?

    The 2016 race to the White House will largely be determined by who can spend the most money. Here is a look at how much it will cost to win the presidency.
  7. Investing News

    What Affirmative Action Means for Businesses

    A look at what Affirmative Action means for your business.
  8. Economics

    Current Probability of Donald Trump as President

    Predict the current odds of a Donald Trump presidency, and understand the factors that have kept him on top and the looming challenges he faces.
  9. Investing

    Protect Your Creations--Register Your Trademark

    Federally registering your brand name or logo offers the broadest protection against potential trademark infringement.
  10. Professionals

    What Financial Advisors and Brokers Need to Know About Rule 407

    Learn about NYSE Rule 407 and how it may impact you as a financial advisor or investment broker. What you don't know about this regulation can hurt you.
  1. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
  2. Can the IRS audit you after a refund?

    The U.S. Internal Revenue Service (IRS) can audit tax returns even after it has issued a tax refund to a taxpayer. According ... Read Full Answer >>
  3. How does escheatment impact a company?

    In recent years, state governments have become increasingly aggressive in enforcing escheatment laws. As a result, many businesses ... Read Full Answer >>
  4. What happens if property is wrongfully escheated?

    If your financial accounts, such as bank, investment or savings accounts, are declared dormant and the managing financial ... Read Full Answer >>
  5. How do financial advisors help you avoid escheatment?

    Financial advisors can help you avoid the escheatment of your financial assets by regularly reviewing all of your accounts, ... Read Full Answer >>
  6. Are 401(k) accounts escheatable?

    Typically, 401(k) plans are not subject to state escheatment laws because they are covered under the Employee Retirement ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center