The STOCK Act could spell trouble for investors who rely on the political intelligence industry, according to panelists at a recent ABA event. Stephen Cohen of the SEC’s Enforcement Division warned that the Act, by imposing a fiduciary duty on members and employees of Congress, further exposes investors to insider-trading liability. Even those recipients two or three times removed from the original source invite the SEC’s scrutiny.
But no one knows how rigorously the SEC will enforce the Act. Cohen noted several challenges in defining: (1) fiduciary duty, (2) material non-public information, and (3) what role scienter plays in the analysis. Even in an atmosphere of uncertainty, however, investors can avoid the SEC’s gaze by taking reasonable precautions. Careful vetting, internal training, and a few additional contractual obligations could save an investor from a costly SEC investigation and hefty insider-trading penalties.