The Poli-Intel Industry: Considering the Common Law's Application in Insider Trading under the Stock Act
Jolly, Ernie C., American University Business Law Review
President Barack Obama signed the Stop Trading on Congressional Knowledge Act ("STOCK Act") into law on April 4, 2012. Congressional silence on the STOCK Act's purview over the political intelligence industry and the lack of guidance from the Securities Exchange Commission ("SEC") have led practitioners and scholars to speculate on the STOCK Act's reach. Due to uncertainty, Congress should clarify its intent behind the STOCK Act, and the SEC should provide further guidance on the proper application of its securities laws while considering fundamental principles of fraud established through common law. Applying common law principles to political intelligence activity would weed out fraudulent behavior without having an overbroad impact, a risk enforcement officials run when applying vague insider trading principles to political intelligence activity. Ultimately, without further guidance, the STOCK Act's applicability to political intelligence activities will remain speculative, discouraging legitimate interactions with the government that may prove conducive to efficient capital markets.
On June 6, 2012, Washington insiders convened for breakfast at Charlie Palmer Steak Restaurant, only a few blocks from the Capitol Building.1 The morning's discussion, titled "Defining Political Intelligence,"2 examined the future of an opaque industry.3 At the event, panelists defined political intelligence as the "process for collecting industry policy research" and "the deliverables of collected information (reports and analysis) sold to customers."4
The panel convened approximately two months after President Barack Obama signed into public law the Stop Trading on Congressional Knowledge Act ("STOCK Act").5 The STOCK Act reinforces the duty of trust and confidence owed by congressional members and staffers to Congress and the American people6 and declares a similar duty within the other branches of government.7 The law explicitly subjects individuals employed by the government to liability for trading securities on the basis of material, nonpublic information obtained through their positions.8
Regarding the political intelligence industry, Section 7 of the STOCK Act merely instructs the Comptroller General of the United States to release a report on the role political intelligence plays in the financial markets.9 Despite the STOCK Act's silence on selling policy analysis based on political intelligence (some of which may be considered "material" and "nonpublic"), Washington attorneys have speculated that the STOCK Act, in conjunction with traditional insider trading principles, may already expose political intelligence professionals to liability.10
This Note examines the impracticality of applying traditional insider trading principles to political intelligence activity. Furthermore, it considers an alternative interpretation of our securities laws' purview over the political intelligence industry, based on common law understandings of fraud, while acknowledging the realities of information sharing in Washington. Finally, it concludes that interpreting the STOCK Act based on fundamental principles of fraud would provide practical standards for political intelligence professionals, many of whom engage in legitimate policy research and analysis that is conducive to efficient capital markets.
I. FROM THE STOCKMARKET'S CRASH TO THE STOCK ACT: AN EVOLUTION OF SECURITIES LAWS
The Securities Exchange Act of 1934 ("SEA") was a political byproduct of the stock market's failure during the Great Depression.11 Concerned with "ineptitude and/or chicanery" among stockbrokers and investment bankers, policymakers passed sweeping legislation to restore confidence within the market.12
Pursuant to the SEA,13 the Securities and Exchange Commission ("SEC") promulgated Rule 10b-5, which prohibits individuals from engaging in deceptive practices in connection with the purchase or sale of any security.14 Although the term "insider trading" is not statutorily defined, the SEC and courts construe Rule 10b-5 to prohibit "insider trading"-a phenomenon not limited to corporate insiders, which is something the term may suggest. …