The STOCK Presents Pitfalls for the Private SectorMay 17, 2012 – Articles Westlaw News & Insight Securities Blog
The Stop Trading on Congressional Knowledge, or “STOCK,” Act was clear in as much as it now forbids members of Congress from trading on inside information. The open issue that will surely lead to litigation is the potential impact of the STOCK Act on the private sector. Stated differently, what happens if the public trades on information gleaned from a Congressman or their staff.
The potential risk to the private sector is for tipee liability even if the private sector does not know what they learned was material confidential information. Commentators have argued that a member of Congress, including staff members, who are prosecuted under the act may invoke the Constitution's Speech or Debate Clause as their defense, which provide protection for "legislative acts". The question becomes whether this protection will apply to the private sector who obtained the information from a member of Congress of their staff. The only way this question will be answered is through litigation after there is an effort to enforce the STOCK Act against the private sector.
What can the private sector do to avoid exposure under the STOCK Act short of not engaging in discourse with members of Congress. In this day and age, that is simply not a practical solution. The best course of conduct may be to treat all non-public information learned from a member of Congress or their staff as material confidential information subject to the restrictions of the act. This will require the firms learning this information to be ever vigilant about what is learned from meetings with Congress. The private sector must ask itself: Is the information available to the public and is it material? If the answer is no and yes, then your course of conduct is clear. The problem will come when there are no definitive answers to these questions. Unfortunately, the private sector will likely be forced to litigate to get the answer to the questions, notwithstanding the most vigilant insider trading compliance program. The private sector has to look before it leaps and, if it decides to leap, be prepared to defend yourself in court under the STOCK Act.