Congress has not defined “insider trading” clearly. In reality, insider trading is the situation in which corporate insiders take advantage of the monopolistic information available to them to purchase or sell securities, to gain very high returns (Doffou, 2003). Generally, corporate insiders are the executives, employees, bankers of the company, their stockholders, auditors, and financial advisors. Even the corporate directors, their spouses, and children are considered insiders (Doffou, 2003). These people have access to information that has a substantial impact on the market price of the securities of the company and investors’ security trading decisions.
It is possible for the members of Congress to have direct or indirect connections with a securities company, meaning they can get privileged securities information. The senators and representatives from Congress could be the financial advisors, stockholders, spouses, or children of someone that works for a securities business. Whichever the case, they can receive monopolistic information and should, therefore, act according to Federal laws. Even the Securities and Exchange Commission considers using such private information by insiders to trade stocks a violation of the law.
One factor that proves the lack of clarity in the “insider trading” definition by Congress is people’s realizing that Stock Act is not what they thought. Williams (2020) reported that some individuals that supported the Act actually thought that it fully banned insider trading. The truth, however, is that Stock Act exempted the members of Congress from the Federal securities law by completely legalizing insider trading by this group (Schroeder, 2014). Secondly, Stock Act does not identify the criminal penalty for Congress members that do not perform “their duty to the public” (Williams, 2020). Schroeder (2014) stated that no legal action has ever been taken by the Department of Justice or the Securities and Exchange Commission against insider traders with Congress membership. Senators and representatives are generally difficult to prosecute because of the protection offered under the speech-and-debate clause of the Constitution.
