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CNN exclusive: Congressional insider trading ban might not apply to families

By Deirdre Walsh and Dana Bash, CNN
updated 10:09 PM EDT, Thu July 19, 2012
STORY HIGHLIGHTS
  • STOCK Act bans members of Congress from insider trading
  • Guidelines for members of the House say spouses and children aren't covered
  • Sponsors of bill say they intended to restore trust in Washington
  • House Majority Leader Cantor's office says it will take steps to close loophole

Washington (CNN) -- It was a rare show of bipartisanship -- President Barack Obama, flanked by Democrats and Republicans in April, signing into law a bill that would ban insider trading on Capitol Hill. The measure, known as the STOCK Act, had passed the House and Senate at warp speed.

"The powerful shouldn't get to create one set of rules for themselves and another set of rules for everybody else," the president said at the time.

Lawmakers proclaimed that the bill, officially called the Stop Trading on Congressional Knowledge Act, would restore trust in government. It also applied new rules to some employees of the executive branch.

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But CNN uncovered that the law that members of Congress thought they voted for earlier this year isn't exactly as advertised. A loophole could still allow family members of some lawmakers to profit from inside information.

The STOCK Act requires that any trades of $1,000 or more made on or after July 3 have to be reported to the House and Senate within 45 days. But the House and Senate have two completely different interpretations of that rule.

In the Senate, the Ethics Committee released one page of guidelines last month ruling that members and their spouses and dependent children all have to file reports after they make stock or securities trades. But the House Ethics Committee disagreed.

Its 14-page memo notifies House members and aides covered by the law that their spouses and children aren't covered. The Office of Government Ethics, which oversees all federal executive branch employees, sided with the House, informing its employees that their spouses and children don't need to file these periodic reports.

Both of the lead sponsors of the Senate bill didn't realize the discrepancy until CNN brought it to their attention.

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Massachusetts Republican Scott Brown, the only Republican senator to attend the White House signing ceremony, said he was "obviously very concerned."

"Say I find out some information, I tell my wife and she goes and trades on it, what's the difference?" Brown told CNN.

Brown, who speaks constantly about this bill in his neck-and-neck race for re-election against consumer advocate Elizabeth Warren, said the whole point of passing the law was to demonstrate that members of Congress weren't held to a different standard.

"I mean, bottom line, we're supposed to have that level of transparency and have us be treated like every other member of the United States and bottom line, if we can't do it, then -- sorry, if they can't do it -- then we shouldn't be able to do it as well."

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Sen. Kirsten Gillibrand, D-New York, also criticized the House decision not to include congressional spouses and children.

"I think it's wrong, and I think it's unfortunate because the reality is the whole point of this legislation is we should play by the exact same rules as every other American citizen, and when all of America looks at Washington, they know it's broken."

"We're trying to restore just a small measure of confidence through this kind of transparency and accountability," Gillibrand said.

After CNN told Brown about the House interpretation, Brown fired off a letter to his GOP colleagues in the House, Speaker John Boehner and House Majority Leader Eric Cantor.

"The House interpretation leaves a loophole and the appearance of an ongoing double standard," Brown said in the letter.

"It is deeply troubling that the House of Representatives and Executive Branch would attempt to operate under a substantially weaker interpretation than the Senate," he added, demanding that the House adopt the Senate's view and require all spouses and dependents to begin reporting stock trades.

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Why the difference?

Robert Walker, a Washington ethics attorney and former chief counsel for both the House and Senate Ethics Committees, explained that the Senate bill did include a provision that covered spouses and children, but when Cantor's office wrote the House version, this language was shifted to a different section of the bill. The change meant that spouses and dependent children weren't subject to the new reporting requirements.

"The House recrafted some of the provisions of it and moved some of the provisions around. In that process, some of the Senate bill that applied to filing of these new reports was moved from one section of the bill to the other," Walker said.

The Senate Ethics Committee decided to stick with the spirit of the law that senators originally intended, but the House Ethics Committee went with the letter of the law, which included the loophole not requiring spouses and children to report financial transactions in a timely fashion.

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Why does it matter?

This so-called "loophole" goes to the heart of what the STOCK Act set out to do.

While there were already laws in place barring members of Congress or the executive branch from profiting from nonpublic information that they learn in the course of their duties, it was extremely difficult for those at the Securities and Exchange Commission to enforce those laws.

The financial disclosure forms House members and senators were already required to file only come out once a year, making it tough to track any relationship between legislative action and a stock trade. That's why the STOCK Act added the rule that after each trade over $1,000 a report had to be filed in a timely manner.

Walker stressed the new law provides "more immediacy, more real time so that the public could have more real-time understanding of what their members, of their senior staff and other high government officials were doing with their finances, what kinds of trades were they making."

The chairman of the House Ethics Committee, Rep. Jo Bonner, R-Alabama, and the ranking Democrat, U.S. Rep. Linda Sanchez of California, defended their committee's interpretation of the law in a written statement to CNN.

"As has been noted by outside experts, the office of Government Ethics and various House offices of expertise, including the Office of Legislative Counsel and the Office of General Counsel, with whom the Committee consulted, the plain language of the STOCK Act and the Ethics in Government Act is unambiguous and beyond dispute and the Committee interpreted it correctly."

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Initially when contacted by CNN, Cantor's office insisted it did nothing to change the intent of the STOCK Act. But when pressed with the new information uncovered by CNN, the majority leader's office conceded it made changes to the House bill that effectively took out the requirement for spouses and children to file these reports.

Cantor's spokesman maintains the change was inadvertent, but told CNN because of our reporting, they're now promising to remedy the problem.

"It was not the intention of the House to differ with the Senate-passed bill with respect to application to spouses and dependent children. We did not believe at the time that we had differed from what the Senate had done," spokesman Doug Heye told CNN.

Heye said after learning from CNN about the difference, they are now looking at ways to fix it.

"Since new information has been brought to our attention with respect to this discrepancy, we are reviewing our options regarding transaction reports in the House of Representatives."

Still, another question is why the House changed the legislation in the first place. A GOP leadership source insists there were no sinister motives, that Cantor and the broader GOP leadership made changes after consulting with Ethics Committee lawyers.

How they will correct it remains to be seen, but the GOP source says however it's done, it will be made clear spouses and children of House members and their top aides, as well as the executive branch all carry out the law the way Senate sponsors intended.

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