Update 632 — STOCK 2.0 Working Group
Offers Principles; Congress Urged to Act
Late yesterday, a bipartisan working group of House members published a letter to House Administration Committee Chair Zoe Lofgren outlining provisions the group seeks in a compromise STOCK 2.0 bill. As the fall legislative session begins in earnest for Congress in the next two weeks, a key ethics reform — banning members of congress from trading stocks — has new momentum.
The Senate formed a similar working group first and continues work on drafting a compromise bill that can get the needed 60 votes. But the House working group called, in the letter, for a vote on the floor by September 30. Chair Lofgren needs to deliver a comprehensive bill that bans members of Congress and their spouses from stock trading with clear enforcement as soon as possible in order to have a floor vote by the end of the month. A midterm message not to be missed.
Happy long Labor Day weekends, all.
Public opinion polls show that prohibiting members of Congress and their spouses from actively trading in the stock market would be one of the most popular legislative accomplishments Congress could achieve, so it is surprising that Congress has taken so long to finalize and pass this legislation. With the midterm elections looming just over the horizon, Congress should not hesitate to pass such a popular ethics restraint on themselves, even if at heart Congress may not really like it.
Catching You Up to Speed
Despite a wave of energy to address Congressional stock trading in the spring, both chambers saw negotiations around the issue drag on through the summer. As we approach the end of the August recess, only so many days remain before the midterms and a possible change of control of either chamber. The countdown to the midterms places even greater pressure on Democrats to deliver; otherwise, Republicans may claim the reform as their own if they are given control of both chambers.
Here’s a recap of Congressional stock trading action over the summer:
- Senate: Despite initially signaling it would be the first of the chambers to lay out a consensus bill, the Senate has hardly moved forward in crafting said legislation. While the working group does seem close to a final product, the trudge to get there has become exhausting for many who want to see reform pass. The working group hoped to release the text of the consensus bill in the summer, but a seismic shift in the Congressional calendar to accommodate big ticket items punted the ethics reform efforts into the fall. Reformers were hoping for an early Senate bill.
The initial principles of a Senate consensus bill seemed to cover most of the points of very sweeping ethics legislation. Furthermore, if the near evenly-divided Senate passed such a comprehensive measure, there would be little standing in the way of a comparable measure in the House. The Senate working group needs to propose their consensus bill soon or risk losing momentum in the Senate.
- House: The House’s efforts are split between the House Administration Committee and a bipartisan working group made up of members who had previously drafted legislation on the subject. The House Administration Committee is getting ready to release its own bill early this month. Press has reported that the House Administration Committee plans to bring a proposal for a vote in September. Members of the bipartisan House working group, meanwhile, released a public letter earlier this week urging Speaker Pelosi and Chairwoman Lofgren to adhere to specific principles in drafting legislation – such as the inclusion of spouses and dependent children in any prohibition and strong enforcement mechanisms for the legislation.
As bandwidth reopens, attention returns to this issue. With Chairwoman Lofgren expected to release a draft soon, eyes will be on her to propose a reform package that can not only pass both chambers but meaningfully addresses the veneer of corruption that comes with members and their close affiliates trading assets while serving in public office. But the Senate needs to act soon. Ideally, both chambers come forward with proposals that are substantially similar and contain provisions that would rein in this self-dealing practice of members with insider knowledge of where the economy is heading, cashing in on the stock market.
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. Our preferred set of policy options (as reflected in our drafted model legislation) are below:
- 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. Given the reluctance to include staff under the ban, more stringent reporting for staff should at least be pursued.
- 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. Managers of the qualified blind trusts should be required to overhaul the portfolio shortly after establishment so that the member no longer has knowledge of what is in the portfolio.
- 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 oversee 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 the disgorgement of profits from any covered transaction. In reality, both are needed. By using a fee-based penalty proportional to the size of the violation, 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, vigorous enforcement through another branch of government, and a penalty structure that is built around justice and deterrence.
Although any legislation needs the support of both parties, Republicans are far less likely to push for the effort and pass a comprehensive package. And with a real possibility Republicans will take control of at least the House come January, we may not get another shot at serious ethics reform in Congress for many years.
Now the pressure is on for Chair Lofgren and the House Administration Committee to deliver a timely yet comprehensive bill that is strong and can pass Congress. The Senate will then need to introduce a similar bill, without major differences to iron out, so there is time for both chambers to pass legislation and send it to President Biden’s desk.
Asking members of Congress to regulate themselves is not an easy lift. But for the many Americans who think Congress is corrupt as it is, a bill worthy of the name reform would address many grievances. By enacting a stock trading ban, Congress can show they are doing their duty of representing their constituents and passing legislation that improves the lives of the American people.
The people popularly support banning members of Congress from trading stocks: 70 percent of voters support a stock trading ban. Enacting this sort of ethics reform would build support for Democrats in the midterms. To build momentum and show support, contact leadership, along with your Representative and Senators today to tell them to publicly endorse banning members of Congress from trading stocks and to support future legislation for a vote. If you don’t know your representative or how to contact them, use the Find Your Representative tool provided by the House. Congress needs to be held accountable to the people, not their wallets.