The Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act), which was signed into law on April 4, 2012, makes clear that members and employees of Congress, as well as other officials and employees of the xecutive and judicial branches of the federal government, are subject to insider trading prohibitions arising under Rule 10b-5.
Among other things, the STOCK Act imposes a duty of trust and confidence on all of these governmental persons with respect to material, nonpublic information derived from their positions or gained from the performance of their official responsibilities. Accordingly, these governmental persons may be liable if they trade on the basis of any such information.
It is important to note an additional risk: any person in the private sector who trades on information learned from persons in the federal government will be exposed to “tippee liability” under Rule 10b-5. Tippee liability can be imposed on recipients of material non-public information who engage in securities trading based on that information despite their knowledge that it was improperly disclosed by the tipper.
Therefore, companies, trade associations, lobbyists, and others who interact with persons in the federal government should exercise care, and consider adopting procedures to control the risk of tippee liability. Although both the application of the STOCK Act to the private sector and the scope of tippee liability are still unsettled, the STOCK Act has the potential to significantly increase the risk of serious legal consequences for trading on information learned from persons in the federal government.