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. Investing

    Which GOP Candidate Brings What to the Table?

    What are the major GOP presidential candidates' economic plans and how do they differ?
  2. Investing

    Asset Manager Ethics: Rules Governing Capital Markets

    The integrity of the capital markets needs to be kept at utmost importance for all investors. This article shows how to maintain the integrity while investing.
  3. Economics

    The 5 Countries That Produce the Most Carbon Dioxide (CO2)

    Learn about the top five countries, China, the United States, India, Russia and Japan, that are the largest contributors to carbon dioxide emissions.
  4. Economics

    Benefits of China Changing It's One Child Policy

    China's one-child policy is changing, and investors are looking for ways to cash in. The reform might not have the effects that many anticipate, however.
  5. Entrepreneurship

    START-UP NY: How a Tax-Free Zone Would Work

    START-UP NY is an initiative designed to attract companies to New York State by giving them 10 years of tax breaks. Sounds good, but is it a success?
  6. Economics

    Explaining Economic Integration

    Economic integration reduces or eliminates trade barriers among nations, and coordinates monetary and fiscal policies.
  7. Investing

    How Much Money Will It Take to Become President in 2016?

    Learn why the 2016 presidential election is likely to be the most expensive race ever, and estimate how much it is going to take the eventual winner to prevail.
  8. Investing

    Will Donald Trump Be Able to Fund His Entire Campaign?

    Discover why Donald Trump's extravagant wealth and vast net worth may still not be sufficient to self-finance a successful presidential campaign in 2016.
  9. Economics

    Explaining the Tier 1 Leverage Ratio

    The Tier 1 leverage ratio measures a bank’s core capital against its total assets.
  10. Investing Basics

    What Is Schedule 13G Used For?

    Schedule 13G is an SEC form an investor must file upon taking ownership of 5% or more of a company’s outstanding shares.
  1. How often do mutual funds report their holdings?

    The Securities and Exchange Commission (SEC) requires mutual funds to report complete lists of their holdings on a quarterly ... Read Full Answer >>
  2. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>
  3. Where are the Social Security administration headquarters?

    The U.S. Social Security Administration, or SSA, is headquartered in Woodlawn, Maryland, a suburb just outside of Baltimore. ... Read Full Answer >>
  4. Is the Social Security administration a government corporation?

    The U.S. Social Security Administration (SSA) is a government agency, not a government corporation. President Franklin Roosevelt ... Read Full Answer >>
  5. How does the role of Medicare/Medicaid affect the drugs sector in the U.S.?

    Medicare and Medicaid have enormous influence on the pharmaceutical, or drugs, sector in the United States. For instance, ... Read Full Answer >>
  6. What are the ethical arguments against government subsidies to companies like Tesla?

    The ethical argument behind government subsidies is that they should be put into place to help industries that will, in turn, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!