The STOCK Act prohibits Congress members from making investments based on nonpublic information, giving you (somewhat) of fair ground.
As an individual investor – whether you are managing your own money, or having someone else invest it for you – it is important for you to understand how your financial future is affected when the playing field is not level.
In February, The STOCK Act (Stop Trading On Congressional Knowledge) was passed by both the House & Senate, theoretically banning members of Congress from using nonpublic information to make their investments. As it stands without the law, many members of Congress are multimillionaires – not because of their $174,000 per year salary, but because of previous wealth, plus the inside knowledge that they use to make money in the stock market, in sweetheart land deals, etc. Up to this point, the insider trading ban in federal law, like so many other statutes, has not really been applicable to members of the federal government. If anyone in this country is, our “representatives” are truly the one percent.
If you are questioning the need for legislation, these numbers may shock you. Between 2004-2009, the average American had no real increase in net worth. During this same time, one in every four members of Congress had their net worth at least double, and one in three had an increase of at least 50%. The members who doubled their net worth went from an average of $850K in net worth to $3.6M in five years, on a $174,000 salary. These gains are directly related to trading on material, nonpublic information, land deals, having lobbyists for relatives and more.
Conceptually, this bill prohibits members of Congress from trading stocks and other securities using the confidential information that they receive as lawmakers. In addition, the bill requires all members of Congress to disclose the purchase or sale of stocks, bonds, commodities futures or other securities within 30-45 days of transactions.
Unfortunately, the STOCK Act does not do as much as the federal government would like us to believe. In fact, once this is act is signed by President Obama, it may make it even harder for the SEC to prosecute members of Congress, because they have narrowly defined inside information. In addition, enforcement by the SEC may become problematic since their budget is overseen by Congress, and there will be extreme pressure on them not to rock the boat.
This law is a half-hearted step in the right direction to protect individual investors and traders who are not privy to the information that Congress has, but we still have a long way to go to level the playing field. The simplest answer is to prohibit all members of government from owning stock in any individual company. If they would like to invest, they can put their money in the S&P 500 so that they only profit if the overall economy does well, not just when their hand-picked and protected favorites flourish
Always remember, even if others have an informational advantage over you, you can still profit if you have the right skills. The key to winning starts with understanding the game you are playing.