CONGRESSIONAL INSIDER TRADING - By Ethan Jasny - HMC San Francisco
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CONGRESSIONAL INSIDER
TRADING
By Ethan Jasny
INTRODUCTION
On January 24, 2020 the Senate Health and Foreign Affairs
Committees held closed-door briefings on the emergence of the novel
coronavirus. Later that day, Sen. Kelly Loeffler (R-GA) and her
husband began selling off stock holdings that would significantly
decrease in value after the stock market plunge caused by the
pandemic. In sum, Loeffler and her husband sold stocks estimated to
Sen. Richard Burr, be worth between $1,275,000 and $3,100,00 (Bredderman et al.,
implicated in the 2020).
2020 insider Loeffler was not the only member of Congress who appeared to
trading scandal sell off stock in advance of the stock market crash. On February 13,
Roll Call 2020, Sen. Richard Burr (R-NC) and his wife unloaded between
$628,000 and $1,700,000 — including stocks in hotel companies,
which fell precipitously in value less than a month later. Around the
same time, Burr privately expressed concerns about the
transmissibility of the virus (Evers-Hillstrom, 2020).
Sen. Jim Inhofe (R-OK) and Sen. Dianne Feinstein (D-CA) were
also found to have sold off stock shortly before the crash (Faturechi
and Willis, 2020). Furthermore, Sen. David Purdue (R-GA)
purchased stocks in a company that manufactures personal
protective equipment (Sheth, 2020).
Ultimately, after conducting investigations into these senators’
Insider Trading personal transactions, the Department of Justice decided not to
– the act of buying or charge any of them with illegal insider trading (AP, 2021). But the
selling a company’s scandal brought the personal finances of members of Congress into
public stock based on the limelight–raising questions about widespread conflicts of
insider, nonpublic interest. To address these recent revelations, members of Congress
information about the must prioritize considering the views of their constituents while
company taking into account their own financial interests.
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EXPLANATION OF THE ISSUE
Historical Development
In the corporate world, insider trading has long been prohibited.
The Securities Act of 1933 and the Securities Exchange Act of 1934
outlawed various forms of securities fraud and became crucial for
prosecuting cases of illegal insider trading. The Insider Trading
Sanctions Act of 1984 and the Insider Trading and Securities Fraud
Enforcement Act of 1988 further defined insider trading and
introduced new stringent penalties for illegal behavior (“A History of
Insider Trading,” 2016).
While Congress has been relatively successful at curtailing insider
trading on Wall Street, it has been less successful at regulating the
practice among its own members. A 60 Minutes segment in 2011
revealed the extent of potential conflicts of interest on Capitol Hill —
among both political parties. In 2008, House Speaker Nancy Pelosi
Initial Public (D-CA) and her husband Paul invested in an initial public
Offering (IPO) – a offering (IPO) from the credit card company Visa at the same time
process through that a controversial piece of legislation that would have regulated
which a private credit card companies was being considered. Just two days after
company “goes purchasing the shares, the value of the Pelosi’s investment had
public” by issuing new increased by roughly 45%. Meanwhile, in 2009, then-House
stocks that can be Minority Leader John Boehner (R-OH) purchased stocks in health
traded on the market insurance companies just before the public option health care reform
was defeated in Congress. The public option would have created a
new government-funded health insurance program that could
compete with private insurance companies. When the proposal
failed, the insurance stocks Boehner had invested in increased in
value (“Insider,” 2011).
Insider trading with political information extended beyond just
members of Congress themselves; an entire industry formed around
the exchange of political intelligence. Former political insiders would
collect information on the prospects of legislation and emerging
economic issues and sell this information to traders on Wall Street,
The STOCK Act who could then anticipate changes in the market (“Insider,” 2011).
passed Congress In response to these revelations, Congress passed the Stop
with near- Trading on Congressional Knowledge (STOCK) Act in 2012, which
had originally been introduced back in 2007. The bill was approved
unanimous, with near-unanimous support in Congress: 96-3 in the Senate and
bipartisan 417-2 in the House. The law prohibits members of Congress,
agreement: 96-3 in congressional staffers, and employees of the executive and judicial
the Senate, 417-2 in branches from using “nonpublic information derived from such
the House person’s position … or gained from the performance of such person’s
official responsibilities as a means for making a private profit.”
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Scope of the Problem
While the STOCK Act was a significant step toward ensuring that
members of Congress and congressional staffers are held to the same
financial scrutiny as regular Americans, there are significant gaps in
its provisions and methods of enforcement. The STOCK Act’s
weaknesses have allowed for congressional conflicts of interest to
persist.
Weak Enforcement Mechanisms
The STOCK Act relies on the transparency of financial transactions
to hold members of Congress and their staffers accountable.
Members of Congress and staffers who make more than $132,552
annually are required to report stock transactions worth over
63 members of $1,000 within 45 days of the exchange. If members of Congress or
Congress and 182 staffers fail to report their transactions within this timeframe, they
congressional are subject to a $200 fine — which increases in value upon repeated
staffers violated offenses.
the STOCK Act by But these penalties have been shoddily enforced. According to
reporting from Business Insider, in 2020 and 2021, 63 members of
missing financial Congress and 182 congressional staffers violated the STOCK Act by
disclosure reporting stock exchanges after the maximum 45-day deadline
deadlines (Levinthal, 2022). But there are no public records to show that
those in violation of the Act paid their fines. According to a former
counsel in the Office of Congressional Ethics, “The enforcement of
the financial-disclosure requirements is virtually nonexistent.” The
lack of transparency surrounding the enforcement of a law whose
main goal is to promote transparency renders the legislation futile.
Disclosure of stock transactions allows the Department of Justice
and government watchdogs to closely monitor for signs of insider
trading and other financial malfeasance. If members of Congress
are able to report exchanges months after the set deadlines without
significant penalties or public accountability, illegal insider trading
may go unnoticed (DeChalus et al., 2021).
Even when there is public outcry over congressional insider
trading, such as the scandal surrounding stock sales during the early
Former President days of COVID-19, investigations into these incidents may not be
Barack Obama fruitful. Since its passage, no one has been prosecuted under the
signs the STOCK Act STOCK Act. The Act designates the executive branch to enforce its
on April 4, 2012 provisions. However, the executive branch is constitutionally limited
NPR in its ability to investigate and prosecute members of Congress due
to concerns over the separation of powers. Barring the most flagrant
cases, members of Congress are thus unlikely to face criminal or civil
penalties for insider trading (Fodor 2014).
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Delineating Between Public and Nonpublic Information
Another problem with the STOCK Act is definitional: it is difficult
to determine what constitutes “nonpublic” information. Burr argued
that he sold stocks in advance of the COVID-19 market crash based
“solely on public news reports” rather than confidential briefings. It
can be hard to conclusively determine whether financial decisions
were made based on nonpublic information — or whether the
information is nonpublic in the first place (Gellasch, 2o2o). Did Burr
trade stocks because of congressional briefings or because he was
closely following the news? Should it even matter? Should members
of Congress have the right to make private financial decisions
relating to issues they are addressing as representatives of public
offices–even if they have no greater access to information than
regular citizens?
Copycat Investments
An increasingly common tactic among savvy investors is to copy
the disclosed exchanges of members of Congress — particularly those
who have historically beat the market. Betting on the assumption
that these members of Congress indeed have access to nonpublic
A Reddit post information, these investors attempt to piggyback off of potential
reporting on a insider trading. This means that congressional disclosures effectively
recent stock trade become self-fulfilling prophecies: if enough investors buy a stock
by Speaker Nancy after a member of Congress does so, that member of Congress’ stock
Pelosi, enabling will now be worth more. Members of Congress can thus make
copycat investing positive returns on investments not by acting on inside information
Reddit but simply by having their exchanges disclosed through the STOCK
Act (Payne, 2022).
Congressional Action
Several proposals that would expand upon the STOCK Act were
recently introduced to Congress — many of them bipartisan. The Ban
Blind Trust – a
Conflicted Trading Act, introduced by Sen. Jeff Merkley (D-OR),
financial
would issue a flat-out ban on members of Congress and high-level
arrangement under
congressional staffers trading stocks and most other financial
which an asset-holder
products. The Ban Congressional Stock Trading Act, introduced by
gives an independent
Sens. Jon Ossoff (D-GA) and Mark Kelly (D-AZ), would force
trustee control over
members of Congress, their spouses, and their dependent children to
their financial assets
place their financial assets in a blind trust while in office. Members
and loses the right to
of Congress who violate the law would be fined their annual salary.
interfere in the
Sen. Josh Hawley’s (R-MO) Banning Insider Trading in Congress Act
trustee’s actions
would also require the creation of blind trusts but does not apply to
the dependent children of representatives. Sen. Ben Sasse’s broad
Ethics Reform Act includes provisions to ban stock trading among
members of Congress but does not place restrictions on their spouses
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or children. Finally, the Bipartisan Ban on Congressional Stock
Ownership Act, introduced in the Senate by Sen. Elizabeth Warren
(D-MA) and Sen. Steve Daines (R-MT) and introduced by Reps.
Jayapal (D-WA) and Rosendale (R-MT) in the House, is probably the
most sweeping of the proposed reforms. The legislation would
require members of Congress and their spouses to fully divest from
stocks and most other financial products while in office (Rainey,
2022).
Other Policy Action
Given that this topic deals with insider trading and conflicts of
interest solely among members of Congress and their staffers,
outside policy action is not particularly relevant to the committee.
Congress must decide whether to restrict its own members and
promote financial transparency and accountability.
The office of the IDEOLOGICAL VIEWPOINTS
Congressional
Ethics Committee, Unlike most contentious issues facing Capitol Hill, congressional
which overseess stock trading reform seems to transcend partisan and ideological
financial disclosures divides. The Ban Conflicted Trading Act, for example, was sponsored
The Hill by both Reps. Alexandria Ocasio-Cortez (D-NY) and Matt Gaetz (R-
FL), representing the exact opposite ends of the political spectrum.
When Burr was accused of using insider knowledge to sell off stocks
in advance of the COVID-19 market crash, both Ocasio-Cortez and
right-wing Fox News commentator Tucker Carlson called for him to
resign (Shepherd, 2020).
The stock trading debate thus provides a unique opportunity for
members of Congress to consider different proposals on their merits,
without the fear of partisan squabbles. Partisanship may still inform
the bill-drafting process (i.e., Republicans may feel more
comfortable working with other Republicans on writing legislation,
and vice-versa), but there has been fairly widespread bipartisan
support for action on this issue.
Perhaps the more important consideration for members of
Congress is their personal financial interests. For instance, Speaker
Pelosi was initially resistant to calls for further regulating insider
trading or even banning members of Congress from trading stocks.
“We are a free market economy. [Members of Congress] should be
able to participate in that,” Pelosi told reporters in December 2021.
Pelosi’s husband owns an investment firm and holds millions in
stocks and other financial instruments (Slodysko, 2021). Although
Pelosi has backtracked these statements and has suggested she
would be open to reform, members of Congress who have significant
financial investments may hesitate to support more comprehensive
limits on personal finances, such as complete bans on stock trading.
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Meanwhile, members of Congress from both parties who
campaigned on weeding out government corruption in the political
establishment may be supportive of stronger measures to combat
insider trading. On the Democratic side of the aisle, politicians like
Warren and Ocasio-Cortez have prioritized placing tighter
restrictions on Wall Street and would support holding members of
Congress to the same rigid standards. On the Republican end,
members of Congress who campaigned on “draining the swamp,”
such as Rep. Chip Roy (R-TX), support sweeping government
reform. In short, representatives who have expressed opposition to
establishment politicians and corporate elites are likely to be the
most avid proponents of insider trading reform.
AREAS OF DEBATE
Although there is bipartisan support for actions intended to limit
insider trading in Congress, a wide range of proposals are being
considered. The most extreme of these proposals would ban
members of Congress and their families from owning stocks. Smaller
reforms involve strengthening the enforcement mechanisms of the
STOCK Act and increasing penalties for violating its provisions.
Members of Congress must consider which policies will be most
effective at deterring financial malfeasance while also considering
their own financial interests.
Complete Ban on Stock Trading
The most radical solution currently being considered is banning
members of Congress from owning, buying, or trading individual
stocks and other financial instruments. Under this proposal,
Mutual Funds – members of Congress would have to sell off their stock holdings and
investment vehicles invest the money in mutual funds. New members of Congress
through which money could be given a grace period in which they would have to divest from
is pooled from a their individual stocks. This solution would preempt most of the
variety of investors problems mentioned previously: without owning stocks, members of
and collectively Congress would be unable to conduct trades on nonpublic
invested in stocks and information and make a private profit. Copycat behavior would be
other financial impossible because the investments of members of Congress would
products be held in larger mutual funds.
Proponents of this solution argue that it is a simple yet
comprehensive method for eliminating conflicts of interest in
Congress. Not only does it effectively preclude insider trading, but it
also prevents members of Congress from making decisions based on
their current stock investments. When members of Congress own
individual stocks, they can make legislative decisions that benefit the
companies that they are invested in. Even if representatives do not
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trade these stocks based on inside information, simply owning
certain stocks can lead to conflicts of interest.
Opponents of this solution contend that it is an unnecessarily
extreme measure. As participants in the economy, members of
Congress should have the right to own stocks. Moreover, opponents
argue, the central ethical problem is not that members of Congress
own stocks but that they can trade them on nonpublic information.
An all-out ban on stock ownership unnecessarily restricts members
of Congress.
Another criticism of a ban on congressional stock trading is that
it could deter strong candidates from running for Congress.
Businesspeople may be discouraged from running for Congress if
they would have to sell off their entire stock portfolios, thus
disincentivizing individuals with a strong understanding of the
economy and financial markets from pursuing public office. If stock
trading bans are applied to the spouses of members of Congress, a
candidate could also be deterred from running if their spouse works
in investment banking; the spouse would effectively be forced to quit
their job if the candidate is elected (The Wall Street Journal
Editorial Board, 2022).
Blind Trusts
A similar proposal would require members of Congress to place
their assets in blind trusts rather than mutual funds. Members of
Congress could still own individual stocks and other financial
Trustees – products but would not have the ability to buy or sell them while in
individuals or firms office. Trustees would control these assets and make financial
that manage the decisions independently from members of Congress. This solution
assets of a third-party would neuter most of the gaps in the STOCK Act — if members of
Congress cannot buy or sell their stocks, they will be unable to make
illegal trades based on insider information.
Supporters of this approach contend that it eliminates the
possibility of congressional insider trading while still allowing
members of Congress to maintain ownership over stocks. For some
members of Congress, creating blind trusts might be more feasible
than completely divesting from entire stock portfolios.
Opponents of this solution argue that using blind trusts would be
unrealistic for many members of Congress. Compliance costs for
blind trusts can be quite expensive. And many financial firms require
Under the STOCK significant initial investments to qualify for a blind trust —
Act, members of potentially as much as $500,000. For many members of Congress,
Congress have up to these costs would be unworkable.
45 days to disclose Another flaw in this solution is that members of Congress would
trades likely still know the assets initially placed in the trust, creating
conflicts of interest unless all of the initial stocks are sold off by the
trustees (Marquette, 2022).
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Tightening Disclosure Requirements
Under the STOCK Act, members of Congress have up to 45 days
to disclose their trades. This reporting timeframe could be shortened
to further promote transparency. Alternatively, members of
Congress could be required to pre-clear stock transactions with the
House or Senate ethics committees before finalizing a trade.
Members of Congress could also be required to disclose the exact
value of trades. Currently, transactions are only reported in ranges
(e.g., $50,001-$100,000).
Proponents of these reforms argue that they would boost
transparency and accountability. With more up-to-date and precise
disclosures, it may be easier to determine when members of
Congress are engaging in insider trading. Greater transparency
surrounding disclosures may also deter members of Congress from
making illegal trades in the first place.
Critics respond that these incremental reforms would not do
enough to discourage insider trading. Given the difficulty of proving
that trades were made based on nonpublic information, it would still
be extremely difficult to charge members of Congress under the
STOCK Act–even with greater transparency. And unless
enforcement mechanisms are improved, members of Congress may
continue to blow past disclosure deadlines without significant
penalty, rendering changes in the disclosure timeframe useless.
Currently, the Increasing and Enforcing STOCK Act Violation Penalties
initial fine for Members of Congress who fail to meet STOCK Act disclosure
violations of the deadlines are only charged $200 on first offense. This small fine is
STOCK Act’s likely not enough to deter late disclosures, especially when stock
disclosure period is trades are often worth hundreds of thousands of dollars. Financial
$200 penalties for violating STOCK Act provisions could be increased to
discourage delayed disclosures.
Furthermore, congressional ethics investigators could be
empowered to better enforce the STOCK Act by establishing a unified
procedure for responding to violations. For example, members of
Congress could be required to publicly provide proof of paying fines
for violations. STOCK Act disclosures could also be made more easily
accessible to the public so that government watchdogs and
journalists can easily monitor records for signs of suspicious
financial activity.
Increasing penalties for STOCK Act violations—and publicly
documenting the payment of these penalties—will increase
transparency and deter lawbreaking, proponents of these reforms
argue. The STOCK Act is designed to prevent insider trading, in part,
by increasing public access to the financial records of members of
Congress. Strengthening the Act’s public accountability mechanisms
will allow it to work as intended.
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Detractors contend that the STOCK Act was never enough. Even
if these reforms increase compliance with the Act’s provisions, it is
still exceedingly difficult for the executive branch to investigate
insider trading incidents. Furthermore, public accountability
measures are reliant on outside organizations closely scrutinizing
congressional financial records.
Spouses and Dependent Children
For all of the proposals outlined previously, an important
consideration is whether the spouses and/or the dependent children
of members of Congress should be included. Under the STOCK Act,
members of Congress have to disclose stock trades made by their
spouses and dependent children. If stock ownership was to be
banned outright, should spouses and dependent children also be
prohibited from owning stocks? Should members of Congress and
their spouses be held to different standards for the purposes of
financial disclosures and penalties?
Some argue that insider trading legislation is toothless if it does
not also apply to spouses: members of Congress could transmit
nonpublic information to their spouses, who could then make trades
with this insider advantage.
But critics maintain that it is unfair to restrict the financial
activity of spouses and dependent children, who should not be held
to the same public accountability standards as public officials.
BUDGETARY CONSIDERATIONS
Budgetary considerations are not hugely important for this topic
given that most proposals consider how best to regulate the financial
actions of members of Congress. However, some spending may be
required to empower the congressional ethics committees to enforce
new stock trading regulations or bans.
CONCLUSION
Only 37% of
Americans have a Congress is facing a crisis of public trust. According to public
“great deal” or a opinion polling from Gallup from 2021, only 37% of Americans have
“fair amount” of a “great deal” or a “fair amount” of trust in Congress (Brenan, 2021).
trust in Congress The perception that members of Congress are able to use their
positions to gain unfair advantages in the stock market only serves
to further undermine this trust. It is no surprise, therefore, that
movements on both the far-right and far-left of the political spectrum
have aimed at increasing government transparency and limiting the
power of elites.
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Congress must take steps to ensure that its members are held to
the same standards as regular Americans—whether by strengthening
the STOCK Act or introducing new legislation. But members of
Congress must also consider whether proposals are financially
feasible and can reasonably be enforced. It can be tempting to pass
sweeping legislation, but if enforcement mechanisms are not clearly
defined, these proposals may suffer the same fate as the STOCK Act.
Moreover, members of Congress must consider how their own
finances and families will be affected by different proposals. This is a
rare topic in which Congress is attempting to regulate itself, meaning
that representatives must balance their personal interests with the
will of their constituents.
In responding to this issue, delegates are encouraged to be
creative: consider how the proposals explained in this briefing can be
combined and explore other potential solutions not mentioned
above.
GUIDE TO FURTHER RESEARCH
You are encouraged to look through the sources cited in the
bibliography for more details on the issues and proposals discussed
in this briefing.
It is recommended that you research whether your assigned
representative has cosponsored any of the recent STOCK Act reform
bills or made statements on congressional insider trading. You can
search your member of Congress on congress.gov to see if they
sponsored bills addressing the topic (Beckler et al., 2021).
Finally, you should have a sense of your representative’s personal
finances. Research whether your member of Congress has been
implicated in any insider trading scandals. For more detailed
financial information on individual representatives’ finances,
Business Insider created a series of databases based on STOCK Act
financial discourses.
GLOSSARY
Insider Trading – the act of buying or selling a company’s
public stock based on insider, nonpublic information about the
company
Initial Public Offering (IPO) – a process through which a
private company “goes public” by issuing new stocks that can be
traded on the market
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Blind Trust – a financial arrangement under which an asset-
holder gives an independent trustee control over their financial
assets and loses the right to interfere in the trustee’s actions
Mutual Funds – an investment vehicle through which money
is pooled from a variety of investors and collectively invested in
stocks and other financial products
Trustees – individuals or firms that manage the assets of a
third-party
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