Eight years ago, a group of academics wondered if lawmakers were using their special access to sensitive information to make money on the stock market. They studied the returns from the common stock investments of members of the U.S. Senate between 1993 and 1998. In December 2004, they reported their findings in the Journal of Financial and Quantitative Analysis:

“Cumulative abnormal returns for the portfolio of stocks bought by Senators…suggest that Senators knew appropriate times to both buy and sell their common stocks…We find that stocks purchased by U.S. Senators earn statistically significant positive abnormal returns outperforming the market by 85 basis points per month on a trade-weighted basis as a further indication that Senators use their informational advantage.”

A year later, during the 109th Congress, Reps. Brian Baird (D-WA) and Louise Slaughter (D-NY) introduced the Stop Trading on Congressional Knowledge Act (STOCK Act) with 14 cosponsors. It would prohibit members of Congress and federal employees from trading stocks based on nonpublic information obtained through official duties. The bill ultimately died in committee without ever getting as far as a full vote, just as subsequent versions of the bill reintroduced in the 110th and 111th Congresses did. The STOCK Act would probably have met with the same fate in the current Congress had it not been for a now-famous episode of “ 60 Minutes ” in which several members, including House Financial Services Chairman Spencer Bachus (R-AL), were scrutinized by the CBS program for connections between their official duties and their investment decisions. Before the “60 Minutes” episode, the STOCK Act had 9 cosponsors: It now has 245.

But if the fact that members of Congress are not subject to the same level of scrutiny for insider trading as average taxpayers is an outrage, then the STOCK Act is a bad joke. Lawmakers have resorted to a tried and true tactic: Make it look like you’re doing something without really accomplishing anything. According to legal scholar Jonathan Macey of Yale Law School, “the proposed rules in the STOCK bill are directed only at information related to pending legislation. It would appear that inside information obtained by a congressman during a regulatory briefing, or in another context unrelated to pending legislation, would not be covered.” That’s a pretty big oversight.

The best and most obvious solution is to prevent members of Congress and other federal staff from acting on insider information gained through their day job by requiring them to put their financial holdings into a blind trust. Right now, there are no restrictions on members or staff owning shares in companies regulated by their committees. Rep. Bachus, perhaps feeling the heat, has introduced legislation that would do just that, in H.R. 3549 .

Congress can’t stop there, however. Not surprisingly, an entire marketplace has developed for insider information that can be legally obtained through Congressional sources immune to the same standards as the general public. So-called political intelligence consultants squeeze Congressional sources for information they can feed back to hedge funds to make better investing decisions. This is as bad as it sounds, and Congress needs to put a plug in that leak, too.

Last year, the same group of scholars repeated their study of abnormal stock market returns, this time for House members. It turns out portfolios of House members also outperform the market by 55 basis points per month or 6 percent annually. We have known insider trading has been going on in Congress for almost a decade. It’s time to do something about it.

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TCS Quote of the Week

“There is so much denial on the left and on the right. The greatest impediment to getting done what needs to get done is public opinion. … When you get up and say what’s actually happening, it’s not really popular.” — North Dakota Democratic Sen. Kent Conrad ( INFORUM )