1. Insider trading definition

Insider trading is illegal when someone trades a security based on material, nonpublic information (MNPI) in violation of a duty of trust or confidence. For corporate insiders, that usually means acting on confidential company earnings, merger plans, etc.

2. Congressional loophole (until recently)

For decades, there was a gray area because members of Congress weren’t explicitly bound by insider trading laws in the same way corporate insiders were. The assumption was that their “official duties” weren’t considered the same as fiduciary duties in a company.

This changed with the STOCK Act of 2012, which clarified that members of Congress, staff, and federal employees are not exempt from insider trading laws. They can’t trade on material, nonpublic info gained through their position.

3. Why it still looks like insider trading happens

• Public vs. nonpublic info:

  • Legislation itself is public record (e.g., a bill under consideration).

  • But behind-the-scenes knowledge (timing of a vote, likelihood of passage, committee discussions, industry testimony, or amendments not yet disclosed) can still be considered material nonpublic info.

  • That gray area makes it hard to prove intent.

• Disclosure rules:

  • Under the STOCK Act, members must disclose trades over $1,000 within 45 days.

  • But enforcement has been very weak, and many file late without penalty.

• Difficulty of proving “intent”:

  • To prosecute insider trading, you must prove the lawmaker knowingly used nonpublic info to make a trade. That’s incredibly hard when they can claim:

    • “I just have a general view of the economy.”

    • “My advisor made the trade without my input.”

    • “I read about that sector in the news.”

• Enforcement reality:

  • No sitting member of Congress has ever been successfully prosecuted under insider trading laws.

  • Even when trades look suspicious (e.g., senators selling airline stocks before COVID lockdowns), investigations usually fizzle because proving intent is nearly impossible.

4. Why people get frustrated

Congressional members arguably have better access to market-moving information than anyone else — not because the laws don’t exist, but because the combination of:

• Vague definitions of “nonpublic info” in policymaking,

• Weak enforcement of disclosure, and

• The difficulty of proving intent,

…means they can trade in ways that look like insider trading but rarely result in punishment.

---

 In short: They can’t legally trade on insider information — the STOCK Act makes it illegal — but proving it in practice is nearly impossible, which is why so many people feel Congress plays by a different set of rules.

 

Mike

About the Author: Mike Mickels is the President and Chief Compliance Officer of CochranMickels Retirement Specialists, LLC, and an avid sporting clay competitor. Our firm provides personalized planning and investment services to individuals approaching and in retirement. Disclaimer: This content is intended solely for informational purposes. CochranMickels Retirement Specialists, LLC and its representatives are only authorized to offer advisory services where properly licensed or exempt from licensure. Investing carries risks, including potential loss of principal capital. Our firm does not endorse external links, nor is it responsible for third-party content