President Obama signed the Congressional Knowledge (STOCK) Acton Wednesday, effectively making it illegal for members of Congress to trade securities on inside information. Congress people will now be subject to the same insider trading laws as other investors.
The Securities and Exchange Commission defines illegal insider trading as: “buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.”
The law is a very important piece of legislation because members of Congress are often privy to news and/or information that will affect the future prices of securities. In the past, some members of Congress invested based upon this information and reaped significant profits by trading before the information became public.
There is no rationale for allowing any investors to take advantage of insider information or permitting them to pass on inside information to others. These activities impair the free market, giving certain people an advantage over others. As far as Congress in concerned, the benefits of inside information would undoubtedly impact members’ ability to make balanced decisions in the lawmaking process.
The lingering question is why did it take so long for Congress to enact this legislation, how much did members profit from insider trading over the years, and what benefits accrued to the sources of the inside information? Presumably, all this will be swept under the carpet with the signing of the law.
As far as insider trading is concerned for the general public, Ian Yamamoto recently suggested the law be expunged. In a comment, I responded that this suggestion made absolutely no sense and effectively would destroy the entire stock market trading process. Profits would accrue to people with the best contacts, not to those who worked diligently to analyze company performance.
Ultimately, eliminating the law would enhance the already significant advantages of professional traders.