Why Is Insider Trading Legal for Congress? An Analysis

Why Is Insider Trading Legal for Congress An Analysis


When people who have access to non-public information about a company trade the stock or other securities of that company, they are engaging in insider trading. Since it is believed that this practice gives some people an unfair advantage in the stock market, it is illegal in the United States and other countries. Although it is against the law, insider trading is still a major concern because it can cause market distortion and unethical financial gains. In particular, the question of whether or not insider trading by members of Congress should be legal has been the subject of heated debate. This paper will examine the current law surrounding insider trading from a Congressional perspective, and analyze why insider trading is legal for Congress. 

Historical Overview of Insider Trading Laws

Congress can legally trade inside information because the legislation does not specifically forbid it. Other financial regulators, including the Securities and Exchange Commission (SEC), have not taken any steps to put a stop to it. As a result, Congressmen and Congresswomen now have access to information that is not available to the general public and can be used to make personal investments. Congress members have also been able to use websites to facilitate this type of activity

Members of these sites pay a fee to gain access to unavailable information and make trades based on it. There are a lot of moral problems that have been raised about this kind of behavior. Members of Congress may have an unfair advantage over regular investors, according to critics. Members of Congress are obligated by law to report any financial dealings they make with foreign entities or individuals. The general people must ultimately decide whether or not they find this kind of behavior to be acceptable.

Regulation of the Stock Market Before 1934

There were no insider trading regulations in the United States before 1934. During this historical period, investors could conduct trades on the stock market with little to no oversight because of the lack of government intervention. The lack of oversight allowed those with insider knowledge to generate massive profits with no fear of repercussions, creating a climate ripe for exploitation.

Act of Exchange of Securities in 1934

Insider trading was first heavily regulated by the Securities Exchange Act of 1934. The Securities and Exchange Commission (SEC) was founded and given jurisdiction to regulate the stock market and enforce insider trading prohibitions by this act. The term insider, defined by the act as an individual having access to material non-public information about a firm, was also coined. Any person who could be considered an insider under this law would be barred from profiting from insider information.

A landmark Supreme Court ruling from 1958

In the decision of Cady, Roberts & Co. v. SEC from 1958, the Supreme Court found that insider trading is not always prohibited. This ruling clarified that outsiders are not prohibited from profiting from publicly available information so long as they do so in a lawful manner. Many people felt the SEC’s capacity to regulate insider trading had been severely weakened by this ruling.

Insider Trading and the Law in Congress

Insider trading is a widely discussed issue in the context of Congress. This is because members of Congress have access to non-public information that can be used to gain an unfair trading advantage.

The Securities and Exchange Commission (SEC) has regulations in place that prohibit the use of non-public information for insider trading. These regulations apply to all public companies as well as members of Congress. In addition, the Stop Trading On Congressional Knowledge (STOCK) Act was passed in 2012 to further restrict members of Congress from using non-public information for trading purposes.

The STOCK Act requires members of Congress to publicly disclose their stock transactions within 45 days and to not use non-public information to gain an advantage in their trading. It also requires members of Congress to certify that they have not used non-public information for trading purposes.

Additionally, the STOCK Act requires members of Congress to make a financial disclosure to the public. This includes information about their financial holdings, investments, and other financial interests.

In addition to the STOCK Act, members of Congress are also subject to criminal penalties if they are found to have engaged in insider trading. If a member of Congress is found to have used non-public information for their own benefit, they may face a fine, up to five years in prison, or both.

Although insider trading is illegal for members of Congress, it is still a problem that needs to be addressed. The STOCK Act is an important step in helping to prevent insider trading in Congress, but it is only one piece of the puzzle. Further action needs to be taken to ensure that members of Congress are held accountable for their actions.

Analysis of Why Insider Trading Is Legal for Congress

Conflict of Interest

The primary reason why insider trading is legal for Congress is because of a conflict of interest. Since they are the ones responsible for writing the laws that regulate the stock market, members of Congress occupy a special position. Members of Congress have a conflict of interest since their votes on legislation can affect the stock market. So, it is argued, if Congress were allowed to trade on non-public information, it would have an unfair edge over other dealers.

Political Influence

Another reason why insider trading is legal for Congress is because of political influence. In many cases, members of Congress have access to information that is not made public. They can use this information to their benefit by gaining a competitive edge in stock trading. They can utilize their political clout to acquire an unfair edge in the market, which provides them a significant leg up on other dealers. 

Complexity of Laws

The final reason why insider trading is legal for Congress is because of the complexity of the laws governing insider trading. Insider trading regulations are notoriously confusing and convoluted. Hence, it is asserted that the SEC has a hard time enforcing the laws against members of Congress. Because of this, Congress has been granted an exception from the law, which is widely considered a measure to safeguard legislators from legal liability.


As a result of these and other considerations, Congress has determined that insider trading is acceptable. Members of Congress are in a special position to affect the stock market through legislative actions, which creates a conflict of interest. Members of Congress have an additional advantage over other investors since they have access to information before the rest of the public does. 

Lastly, an exemption for Congress was created because of the intricacy of insider trading regulations, which made it impossible for the SEC to enforce the laws against members of Congress. A big worry despite insider trading’s legal standing for Congress is the potential for market manipulation and unethical financial benefits it might bring about. Hence, authorities must keep an eye on the stock market and respond as needed.

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