|September 25, 2012|
Previously published on Fall 2012
On April 4, 2012, President Obama signed the Stop Trading on Congressional Knowledge Act (the STOCK Act), which imposes new fiduciary obligations on members of Congress, congressional staff and certain other federal government employees with respect to material, nonpublic information received by such persons through government channels.
Prior to the passage of the STOCK Act, the U.S. federal securities laws were unclear as to whether members of Congress, congressional employees and certain other government employees who receive material, nonpublic information through the official performance of their duties would be subject to insider trading laws. The STOCK Act clearly affirms that such government persons owe fiduciary obligations to the U.S. government and U.S. citizens with respect to material, nonpublic information derived from their governmental positions or gained from the performance of their official responsibilities. As a result, such government persons cannot trade in securities of a company about which they are aware of material, nonpublic information obtained in their official capacities without violating federal securities law.
U.S. federal securities laws also impose potential liability on “tipees” who knowingly trade on material, nonpublic information that was provided in violation of a fiduciary duty. Accordingly, private fund advisers that directly or indirectly receive information from members of Congress, congressional staff or other government employees can be held liable if the adviser to the private fund knew or should have known that the information was disclosed by the government employee in breach of such duty.
Advisers to hedge, private equity and other private funds should be wary of potential insider trading issues when receiving information from congressional members, congressional staff, government employees and other potential Washington insiders (such as lobbyists and consultants). Private fund advisers should also consider amending their compliance policies and procedures related to insider trading in order to remind employees of these obligations and to address how employees should interact with government insiders.