On April 4, 2012, President Obama signed the Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act) into law. While the STOCK Act’s provisions aimed at precluding members of Congress and other government officials from trading on the basis of material non-public information derived from their government positions or from the performance of their official responsibilities have received the most attention, the STOCK Act is much broader in scope.
- Section 12 of the STOCK Act, which adds new subsection (i) to Section 12A of the Exchange Act, prohibits individuals subject to the Ethics in Government Act of 1978 (Ethics Act) from purchasing securities that are the subject of an initial public offering in any manner other than is available to members of the public generally. “Available to members of the public generally” is not defined. As it is often very difficult for members of the general public to obtain shares in “hot” IPOs (such as the anticipated Facebook IPO), it will be interesting to see how availability to the general public is interpreted.
- Section 13 of the STOCK Act revised Section 102(a)(4)(A) of the Ethics Act to require certain members of the federal government, including the President, Vice President, members of Congress and, subject to a host of exceptions, persons who have been nominated for appointment as an officer or employee of the executive branch, to report mortgage debt on personal residences.
- Section 17 of the STOCK Act provides that all individuals subject to the reporting obligation of the Ethics Act are prohibited form directly negotiating or having any agreement of future employment of compensation, unless the individual files with the appropriate supervising government ethics office a statement regarding such negotiations or agreement within three days after the commencement of the agreement or negotiations. The statement must include the name(s) of the other party or parties involved.
In addition, the STOCK Act may expose those interacting with governmental officials to potential liability for insider trading. The STOCK Act provides that specified members and employees of the federal government owe an affirmative duty of trust and confidence to U.S. citizens, among others, regarding material non-public information derived from the performance of their official responsibilities. As such, if a person receives any material information from a member or employee of the federal government subject to the STOCK Act on a confidential basis, that information may not be used to trade in securities until the information is public or no longer material. As such, trading on the basis of any information gained from any member or employee of the federal government, unless it has been publicly disclosed or is clearly not material, potentially gives rise to liability.