Update 600 — MOC Stock Trading:
Public Trust and the Public Interest
Voters say, overwhelmingly, that members of Congress should be banned from trading stocks while in office, as MOCs receive privileged and tradable information that average Americans don’t. The policies currently in place to provide transparency regarding MOC stock trading get inadequate compliance and provide penalties that don’t deter insider trading by MOCs, family, and staff.
Yesterday’s House Administration Committee hearing, “Examining Stock Trading Reforms For Congress,” made clear the need for revamped rules, adding momentum to the legislative push in the House and Senate. No single bill has a consensus. But to try to regain the lost trust of the American people, Congress should pass a ban outright or disclose trading and penalize it seriously. Though the issue is bipartisan, Democrats should recognize the problem and address it in a way that says “We are cleaning House and Senate of insider trading.”
Good weekends, all…
Ten years ago Monday, President Obama signed the Stop Trading on Congressional Knowledge (STOCK) Act into law. It clarified that members of Congress were subject to the insider trading law and required online disclosure of any securities transaction within 45 days. While this system has led to more transparency and scrutiny over members who practice dubious trading techniques, we are still seeing lawmakers and their spouses buying and selling stock in corporations in which they have confidential information about or directly oversee from their congressional perches.
Committee Hears Case
Chairwoman Zoe Lofgren (D-CA) opened the hearing by proclaiming, “A public office is a public trust,” an idea dating back to the Founders. A public servant is not just any private individual; they must be held to a higher standard in order to best serve the public. This is certainly true when it comes to stock trading by members of Congress.
The witnesses made it clear they were supportive of reform, and almost all – with the notable exception of the key Republican witness, Jennifer Schulp from CATO – were supportive of a ban on ownership of individual stocks. They generally liked the idea of extending this ban to lawmakers’ spouses and dependent children and senior congressional staff. Meanwhile, many of the committee members made clear there is still no consensus bill among the many legislative measures introduced so far and were open to various proposals. Nevertheless, the need to improve trust among the American people appears to be a motivating factor for the committee and Congress as a whole.
Some had questions about the proposal to require lawmakers to transfer their stock investments into qualified blind trusts, including whether such trusts are indeed “blind” and the cost to administer them. While disinvestment is perhaps the ideal method of avoiding conflicts of interest, transferring the stock investments into qualified blind trusts is a good option that reduces conflicts of interest if the trusts are administered correctly.
There was also a discussion about other branches having stricter requirements. Political appointees to the executive branch, for example, are required either to divest of conflicting stocks and investments or recuse themselves from issues where they have a financial interest. There is no similar conflict of interest requirement for members of Congress, on the presumption that a lawmaker’s constituents would not be represented in Congress if the lawmaker does not vote on legislation. Professor Donna Nagy pointed out that under current law, members can be on a health committee and own health care stock, which is a clear conflict of interest. If it is legal for a committee member to write legislation that helps a company in which they own stocks and personally enrich themselves, the law must be changed.
There are concerns that such a ban would turn away those who might run for Congress or limit members’ access to the free market economy. Serving in Congress is a unique job that comes with unique responsibilities. Passing a law to regulate a company and then turning around to buy stock in said company is a clear conflict of interest that is not addressed by a disclosure requirement. To remedy concerns about turning people away from running for Congress, the proper reform may be to increase Congressional compensation, not allowing them to play in the stock market while in office.
Since members have the power to move markets by legislating, it is important that Congress approves legislation that addresses conflicts of interest by mandating divestiture from individual stocks and enforces adequate penalties to ensure compliance.
The Ideal Reform
The ideal reform must be both strong and clear in how it works and is enforced. While ending ownership of financial products while serving in Congress would put an immediate end to these conflicts of interest, there are reforms that would further ensure accountability and transparency. Incorporating the various provisions of different bills, we drafted model legislation as follows:
- Covered Assets and Persons: Ideally, covered investments include any security, commodity, future, or any other comparable financial product — such as cryptocurrencies and derivatives — with limited exceptions. Members of Congress, their spouses and dependents, and senior Congressional staff should all be covered by these reforms to minimize potential conflicts of interest.
- Divestment: Covered persons should have a range of options for divestment; complete divestment of the covered asset (with tax deferral for any gains); moving assets, or their equivalent, into a qualified blind trust or qualified diversified trust; or exchanging assets for a diversified mutual fund. The range of options allows the member to choose what is best in terms of administrative costs, ease, and transparency.
- Enforcement: In order to ensure stringent compliance and enforcement, multiple law enforcement agencies should be granted authority over enforcement. By allowing law enforcement agencies to enforce the reforms, checks and balances are brought into the equation and competition among agencies promotes accountability. Fundamentally, Congress cannot be trusted to enforce itself on this matter given the widespread violations of the STOCK Act.
- Penalty: Without the proper penalty mechanisms, the rest of the reforms may be moot. While multiple proposals call for a flat fee penalty, sometimes tied to Congressional pay, others call for disgorgement of profits from any covered transaction. Both are actually needed. By using a fee-based penalty, a front-end deterrence is created. And by seizing profits from covered transactions, justice is enacted.
The ideal legislative package incorporates all of these elements. We need broad coverage of what a covered asset is, many options for divesting as a means of encouraging compliance, strong enforcement through another branch of government, and a penalty structure that is built around justice and deterrence.
Why Reform Right Now?
The specific reforms outlined above would prevent members from owning individual stocks and trading while in public office, holding them accountable to the American people instead of their stock portfolio. Congress is not popular, with a dismal 11 percent approval rating. Banning stock trading by members of Congress would be a bipartisan solution likely to boost congressional approval and trust. Banning stock trading by lawmakers is well-supported by voters, with 74 percent of likely voters in favor.
Nearly Three-Quarters of Voters Support Banning
Members of Congress from Trading Stocks
At the time, the STOCK Act was an achievement in itself, it made it clear that members of Congress are subject to the law against insider trading. Former Rep. Brian Baird alluded to Georgia’s former Republican Senators who lost their seats due to allegations of insider training when he said: “the STOCK Act is why the Democrats have the Senate right now.” Former Georgia Senators Kelly Loeffler and David Perdue made suspicious stock transactions immediately after private briefings on the onset of the COVID pandemic. Georgia voters replaced them with Democratic Senators Warnock and Ossoff in part due to their trading practices.
After the pandemic congressional stock scandals over the last two years, here is an opportunity to improve upon the existing standards for conflict of interest this Congress, as shown by the fact that 59 members did not correctly report their transactions in the past couple of years. Current standards that only impact insider trading and transparency do not address conflicts of interest in holding individual stocks.
Congress needs to move quickly to pass comprehensive legislation that bans individual stock trading coupled with sufficient enforcement and penalties. In doing so, members of Congress can better represent their constituents and improve their trust with the American public.