Bipartisan support for stock-trading bans on members of Congress has risen in the last year, largely due to the several violations of the Stop Trading on Congressional Knowledge (STOCK) Act just weeks before the COVID-19 pandemic hit the United States. Insider trading is illegal, and the STOCK Act prohibits members of Congress from utilizing “nonpublic information derived from” their position to trade stocks.
Former Sen. Kelly Loeffler, R-Ga., as well as Sens. Richard Burr, R-N.C., Dianne Feinstein, D-Calif., and James Inhofe, R-Okla., were accused of insider trading in early 2020. Even before this, an investigation by The Wall Street Journal yielded hundreds of instances in which “(federal judges) or their family members owned shares of companies that were plaintiffs or defendants in the litigation” over which they presided.
Public backlash stemming from this show of government corruption has given rise to widespread agreement within Congress to restrict legislators’ trading, particularly with individual stocks. Just last week, House Speaker Nancy Pelosi’s, D-Calif., flippant dismissal of any restrictions was met with both public and professional backlash before she reluctantly agreed to further action to stronger regulations.
As we approach congressional elections this November, the incentive for many elected officials to address the issue of stock trading restrictions is becoming apparent. A ban on members of Banning lawmakers from trading stocks has the support of around three-quarters of the electorate, making it an easy political victory to support it. Naturally, legislators must now address how these restrictions will be put into place, what they will restrict and whom they will impact.
A proposition embraced by Rep. Alexandria Ocasio-Cortez, D-N.Y., calls for assets to be set aside into blind trusts to be managed by a family member or friend. Unfortunately, blind trusts have not historically done a great job of preventing conflicts of interest, with possible loopholes for active trading influenced by congressional business. Perhaps the most prominent example of the dangers of blind trusts came with President Trump, who repeatedly came under fire for the unlikelihood of wholly unbiased decision making when he generally knew what the assets in his blind trust were composed of.
A more tenable framework might be found in the Federal Reserve regulations released following recent trading scandals that led to the resignation of multiple Fed governors. By banning the trading of individual stocks, bonds and cryptocurrencies, the updated standards limit governors to index funds and diversified equities. By restricting investments to highly diversified positions, even members of Congress who take an active role in the management of their investments will be mostly unable to act in ways that bolster their portfolio.
By extending this ban to the spouses and direct dependents of members of Congress, most direct conflicts of interest will be covered under new legislation. While by no means comprehensive, such regulations would be a tremendous step towards accountability and restoration of trust in Congress.
With this framework in mind, another major consideration in any new legislation is enforcement, which remains poorly addressed by existing regulations.Although public backlash can incite change on multiple levels in the behavior of individual members of Congress, much more must be done at the legal level in terms of “punishment” for insider stock-trading offenses.
The goal of the 2012 STOCK Act was to increase transparency between the public and members of Congress, requiring officials to file disclosures concerning their trading activities. Under this law, members of Congress are banned from gaining any “nonpublic” information when it comes to stock trading, as they are public citizens in their roles as elected officials. Still, politicians continue to ignore these rulings, rather unashamedly using private information to trade and keeping their trade maneuvers out of the public eye. Change is needed in terms of transparency and efficacy.
Multiple plans of action have been introduced in the Senate surrounding punishment for insider trading offenses, ranging from economic punishment (such as paying a fine similar to or more than your salary in Congress), to criminal punishment (like jail time). In the middle is a proposition introduced by Sen. Sherrod Brown, D-Ohio. Brown’s bill, the “Ban Conflicted Trading at the Fed Act”, would fine offending members of Congress at least 10% of the value of the stock.
This measure, among others concerning enforcement of said law, seems like an acceptable middle ground when it comes to punitive action against insider stock trading. It puts a heavier burden on those wealthy politicians who do not rely solely on the benefits of the stock exchange and does not significantly harm those middle-class representatives who rely on smaller, less frequent investments. In the end, no politician is seriously fiscally damaged, but they are taught a lesson: their insider trading is recognized, and a fine establishes that this is not acceptable to the general U.S. population.
The issue of insider stock trading by members of Congress is a bipartisan one, both in terms of offenders and opposition. These investments are the antithesis of the role of “public servant” these officials serve. Offending politicians are profiting off of their position of political power. In banning representatives and their immediate dependents from such investments, and taxing direct offenders, there may be better financial transparency and trust amongst the people and their government. Public service is what we have elected them to do, not a private smoke-filled-room business. There need to be consequences.