Discover more from Popular Information
How to make Congress less corrupt
Under federal law, if a federal government employee owns stock in a company, the employee is prohibited from participating in any matter that may impact the financial interests of that company. It is considered a conflict of interest and the employee must recuse themselves from the matter.
This law applies regardless of whether the employee has any decision-making authority or if the matter can plausibly impact the stock price. The restriction also applies to any stock owned by a spouse or minor child of the employee. The law is not just designed to avoid actual conflicts of interest, but the appearance of conflicts.
Each violation of the law carries a maximum penalty of five years in jail and a fine of $50,000. In other words, it's something the government takes very seriously.
Members of Congress hold exponentially more power than a typical member of the federal bureaucracy. And every member has a direct say on policy issues, like corporate tax rates and environmental regulations, that can have large and immediate impacts on stock prices.
Yet, under the law, members of Congress are not considered employees of the federal government. They are free to actively trade an individual stock while voting on bills that would directly impact the stock's price. And many members of Congress do just that.
Members of Congress are not required to avoid conflicts of interest, actual or perceived, when it comes to stocks.
The only restrictions on Congressional stock trading were put into place in 2012. That law, the Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act), was passed in response to a 60 Minutes exposé that "showed that everyone from [then] House Minority Leader Nancy Pelosi to [then] House Speaker John Boehner… stood to benefit by legislation being considered at the time the investments were made."
The STOCK Act gave the appearance of responding to the controversy while allowing the status quo to continue. The law only prohibits trading stock based on inside information — a term that, perhaps by design, is difficult to pin down. It is very hard to prove that a member of Congress executed a trade based on information the member learned in a confidential briefing as opposed to other information that is publicly available. Even when members trade stocks immediately after receiving non-public information, as several members of Congress did in the early days of the pandemic, the investigations fizzle.
Nevertheless, members of Congress, who are generally not professional investors, seem to have an edge over everyone else. Studies "consistently show that the investments of members of Congress outperform the market." There is a cottage industry of stock analysts who track the trading patterns of members of Congress.
The STOCK Act also required Members of Congress to publicly report any stock trades within 45 days. The bill initially required those stock trades, and existing financial disclosures, to be made publicly available online. But, a year later, Congress repealed the online disclosure requirement without debate. Dozens of members of Congress — Republicans and Democrats — regularly blow through that deadline. The only penalty is a small fine, usually around $200.
Congress has a lot of work to do to restore public trust. A 2021 poll found that 67% of Americans believe that most politicians are corrupt. It's clear that the current system is not working.
That's why there is bipartisan interest in legislation that would ban members of Congress from trading individual stocks once and for all. It's a policy that is supported by 76% of Americans. But, thus far, the legislation is opposed by Democratic leaders in the House and Senate.
Numerous trades raise eyebrows
In recent years, Republicans and Democrats in Congress have found themselves at the center of stock-trading controversies.
In March 2020, the SEC and FBI launched an insider trading investigation into coronavirus-related stock trades made by former Senator Kelly Loeffler (R-GA), Senator Dianne Feinstein (D-CA), Senator Jim Inhofe (R-OK), and Senator Richard Burr (R-NC) after some suspected that they profited off of non-public information about the COVID-19 pandemic they received during the course of their Senate duties. Specifically, these trades came shortly after a January 24 private briefing to Senators on the spread of COVID-19.
Loeffler, who was the richest member of Congress at the time, was “under fire for selling $20 million in stock after a briefing in the weeks building up to the coronavirus pandemic.” Feinstein and her husband sold “between $1.5 million and $6 million worth of shares” of a biotech company before the market crashed. Inhofe sold up to $400,000 worth of stocks on January 27. Meanwhile, Burr, who was one of three senators to oppose the STOCK Act in 2012, sold up to $1.7 million “shortly before the market tanked” in early February. This move came under intense scrutiny after it was revealed that as he was publicly downplaying the impact of the virus in February, he was privately warning others that COVID-19 is “much more aggressive in its transmission than anything we've seen in recent history.”
The Justice Department dropped the probes into Loeffler, Feinstein, and Inhofe. Burr remains under investigation.
And it wasn’t just those four. That month, the trading volume of former Senator David Perdue (R-GA) “increased nearly threefold.” Perdue's purchases included stock from DuPont, a company that produces personal protective equipment, Pfizer, and Netflix –– all companies that benefited from the pandemic. An investigation into those trades — and others that drew scrutiny — did not result in charges against Perdue.
In February 2021, Popular Information also found that Representative John Yarmuth (D-KY), the chairman of the House Budget Committee, purchased several cannabis industry stocks while championing legalization legislation that could increase their value.
The bipartisan push for reform
Multiple bills have been introduced recently that aim to ban members of Congress from buying or selling stocks while in office. In March 2021, Senator Jeff Merkley (D-OR) and Representative Raja Krishnamoorthi (D-IL) introduced the Ban Conflicted Trading Act that would prohibit “a [m]ember of Congress or certain congressional officers from purchasing or selling specified investments.”
The bill would require that members of Congress and senior staff members either sell their “individual holdings within six months of being elected” or transfer their existing investments into a blind trust, with “no option for trading until they leave office.” The bill would allow legislators to hold “widely-held investments, such as diversified mutual funds and exchange-traded funds.” The bill has been cosponsored by 22 members of Congress.
“We need to end the era in which members of [C]ongress buy and sell individual stocks for personal gain,” Merkley said in a statement. “First, it biases the viewpoint of members when working on legislation related to a stock they own. Second, members trade on information they hear that the general public doesn’t. And that’s just wrong. Let’s bring some integrity to Congress and end the trading in individual stocks.”
This January, Senators Jon Ossoff (D-GA) and Mark Kelly (D-AZ) also introduced a bill to “ban members of Congress and their families from buying and selling stocks while in office.” The bill would also require lawmaker’s spouses and dependent children to place their stock portfolios into a blind trust, and members of Congress who violated the act would be “fined in the amount of their entire Congressional salary.” This is similar to a bill introduced by Representative Abigail Spanberger (D-VA), which would also apply to members of Congress as well as their spouses and dependent children.
Senator Josh Hawley (R-MO) also introduced a similar bill in January that would require both lawmakers and their spouses to “divest any prohibited holdings or place those holdings in a blind trust” six months after assuming office. The legislation would also force members and their spouses to “forfeit any investment profits to the American people via the U.S. Treasury if they are found to be in violation of the Act.”
Despite the multiple pieces of legislation being introduced on the topic, House Speaker Nancy Pelosi (D-CA) has already expressed her opposition. “We’re a free-market economy,” Pelosi said in a press conference. “[Members of Congress] should be able to participate in that.” Senate Majority leader Chuck Schumer (D-NY), however, has yet to comment directly on the issue. Schumer has dodged direct questions, stating that he doesn’t “own any stocks.”