Congress Considers STOCK Act Amending Insider Trading Laws

Last Thursday, February 2, 2012, the Senate passed S. 2038 (the STOCK Act) which, among other things:

• confirms that the insider trading ban under Section 10(b) of the Securities Exchange Act of 1934 (’34 Act) applies to congressional members and staff, and executive and judicial branch officials;
• amends the Lobbying Disclosure Act of 1995 (LDA) to cover political intelligence contacts; and
• broadens the illegal gratuities statute.

The above changes are described in greater detail below. Information about the House version of the STOCK Act is provided later in the post.

Insider Trading

The STOCK Act confirms that the insider trading provisions in Section 10(b) of the ’34 Act and Rule 10b-5 apply to congressional members and staff, and federal executive and judicial branch officials. Indeed, the STOCK Act states that these members, employees and officials owe a duty with respect to material, nonpublic information derived from their positions within the federal government.

This raises an interesting question as to the companies with whom these members, officials and employees share the nonpublic information. Do the companies become liable if they act on such information, similar to certain “tipees” in a traditional insider trading case? We believe that the STOCK Act could indeed create liability for a company under certain circumstances that are highly fact-specific. This also raises a question as to how extensive the protection is under the Speech or Debate clause.

Amending LDA to Include ‘Political Intelligence Contact’

The STOCK Act adds to the LDA a new category of activity that is subject to registration and reporting — Political Intelligence Activity, defined as making or preparing for a political intelligence contact (PIC). In particular, to the extent an employee has even one PIC, it triggers LDA registration and reporting. To qualify as a PIC, the communication must be for a client (employer or third-party client) and satisfy all of the following three requirements:

• there must be a communication to or from a covered official (defined the same as in the LDA to include any member or staff in Congress, any White House/Executive Office of the President staff and, in the other agencies, Schedule C political appointees and above);
• the information must be intended for use in analyzing securities or commodities markets or informing investment decisions; and
• it must be with regard to a federal action or decision (e.g., legislation, rulemaking, policy, federal contract, etc.).

Exemption: Any communication made by or to a representative of the media for the purpose of gathering and disseminating news and information to the public (“the media exemption”) is exempt.

Notable Implications: To some degree, PIC activities already are covered under the LDA. Indeed, if a person communicates with a covered official to discuss securities or commodities for the purpose of influencing a federal action, it is considered lobbying under the current LDA. However, there are the following notable differences.

• There is no deminimis exemption — Under the LDA, registration is not triggered unless an employee spends 20 percent of his or her time during a calendar quarter engaged in lobbying activities and has at least two lobbying contacts. The two contact/20 percent lobbying activity threshold does not apply to PICs. Rather, one PIC triggers registration.
• One loses the substantive exemptions — To the extent one engages in a PIC, exemptions that otherwise are available under the LDA no longer apply (e.g., testimony on the public record, responding on the public record to an agency’s request for comments, responding in writing to the government’s request for information, etc.). Rather, the only exemption available for PICs is the media exemption.
• PICs that otherwise would not be considered lobbying under the LDA — As described above, the purpose of the communication must be for informing investment decisions or conducting securities or commodities market analysis, and covers communications not only made to the official but also from the official. This could cover not only attempts to influence federal government decisions (as LDA currently does), but also the securities/commodities market analysis or investment decisions of the company making the contact or the company’s client, or the personal investment decisions of the official. For example, if an employee has a discussion with a covered official regarding federal legislation or action in order to gather information to help inform the company’s own investment decision or market analysis, then the company would have to register and report as an employer of a PIC.

Broadened Scope of the Illegal Gratuities Statute

The STOCK Act also broadens the scope of the illegal gratuities statute. The gratuities statute prohibits any person from giving anything of value to a public official for or because of any official act performed, or to be performed, by the official. The current law defines “official act” as any decision or action on any question, matter, cause or controversy that may at any time be brought or pending before the official in his or her official capacity. Situations that violate the current law include those that may fall short of a quid pro quo exchange, but are rather a payment or contribution that is given as a “thank you” for a person’s prior vote on a particular action.

Under the STOCK Act, the term “official act” is expanded to include any act within the range of the public official’s official duty, and any official decision or action that may be a single act, more than one act, or a course of conduct. The law further provides that it is a violation to give (or for the public official to receive) anything of value of $1,000 or more because of the recipient’s official position.

Notable Implications: Under the proposed amendment, prosecutors need only show that a payment was made because of an official’s course of conduct in his or her official capacity, without having to show any linkage between a payment and any particular decision. Moreover, because the amendment prohibits a payment made because of the recipient’s official position, the law could bring into question most political contributions, which are given because of the position the recipient occupies. To the extent this becomes law, it warrants clarification by the Department of Justice.

House Announces New Version of STOCK Act

House Majority Leader Eric Cantor has announced that the House has introduced its own version of the STOCK Act, which, as you may know from our recent mailing, was passed by the Senate last week as S. 2038. The House version of the STOCK Act is posted on the House Clerk’s website of bills that may be considered this week under suspension of the rules. If the House version passes, the House and Senate versions of the STOCK Act will go to conference.

Among the more notable differences between the House and Senate bills are the following:

• The House version deletes the amendments to the Lobbying Disclosure Act of 1995 to cover “Political Intelligence Contacts.”
• The House version deletes the amendments to the illegal gratuities statute.

Please note that, as in the Senate bill, the House version requires the Comptroller General to submit a report to Congress within 12 months of enactment on the role of political intelligence in financial markets.

Representative Cantor’s press release on the STOCK Act may be viewed here: http://majorityleader.gov/newsroom/2012/02/leader-cantor-statement-on-house-consideration-of-the-stock-act.html.

The text of the House version of the STOCK Act may be viewed here: http://docs.house.gov/billsthisweek/20120206/BILLS-112s2038-SUS.pdf.