How Far Should Congress Go to Ban Their Stock Trades?
Bipartisan support for banning individual stock trades grows. But is it really a "no-brainer?" There are many devils in the details
Business Insider an online subscription news service that has been making a name for itself recently with reporting on stock trading by Members of Congress, including their spouses and dependent children. Especially trades that are belatedly reported as required by law.
Their extensive coverage resulted from a five-month review of financial disclosures, which uncovered apparent violations of the STOCK (Stop Trading on Congressional Knowledge) Act. That bill was enacted nearly a decade ago. All but five Members of Congress - three in the Senate, two in the House - rushed a bill to President Barack Obama’s desk after a November 2011 CBS 60 Minutes “Insiders” episode that detailed insider trading by Representatives and Senators - public officials allegedly using non-public information to make profitable stock trades.
Business Insider’s Zeke Miller (now Associated Press White House reporter) in 2011 provided the gory details.
Members of Congress can legally make trades on non-public information they obtain during their official duties, CBS News' '60 Minutes' reported on Sunday night.
Branded 'honest graft,' lawmakers can use market-moving information that they learn in congressional committees to trade on the stock market — actions that likely would carry stiff jail and civil penalties if they did not hold public office.
In one example, Steve Kroft reports that Rep. Spencer Bachus (R-AL), now the chair of the House Financial Services Committee, bet against the market in the days before the 2008 financial crisis hit — after getting 'apocalyptic briefings' from Fed Chairman Ben Bernanke and then-Treasury Secretary Hank Paulson.
Kroft also raises questions about the trading patterns of Speaker of the House John Boehner and House Minority Leader Nancy Pelosi — and the real estate purchases of other senators and representatives.
The report relies heavily on the work of Peter Schweizer, a fellow at the conservative Hoover Institution, whose work '60 Minutes' independently verified.
Schweizer is a storied investigative journalist supported by conservative financiers who has published many books on how politicians profit from their positions. Most (but not all) of his targets have been Democrats, including this book, which focused on alleged corruption by the nation’s “progressive elite.”
His next book, Red-Handed, How America’s Elite Get Rich Helping China Win publishes on January 25th. Schweizer is co-founder and President of the Government Accountability Institute, a non-profit organization called a “conservative think tank” and investigative research organization. Left-wing hit group Media Matters doesn’t like Schweizer very much and works to discredit the best-selling author’s work.
But Schweizer’s work from that 60 Minutes program continues to have bipartisan influence in Congress, with a significant assist from Business Insider. The issue was sparked after questionable stock trades by several US Senators were made as the pandemic blossomed in early 2020. Some were “automatic” trades by their brokers or financial advisors, and subsequent investigations cleared them.
If there is an area that’s a golden opportunity for bipartisan action, banning or curbing stock trades by members of Congress is one. And with her opposition, House Speaker Nancy Pelosi is potentially handing a partisan issue to likely future Speaker Kevin McCarthy.
Pelosi, not someone who many Americans associate with solid support for our free market system, thinks Members of Congress should feel free to take full advantage of it with stock trades.
“We are a free market economy. They should be able to participate in that,” Pelosi said. She now expresses openness to legislation to curb such trades, so there’s that.
But if there’s one thing politicians know how to do, it’s reading polls. One recent poll suggests support of up to 74 percent to curb or ban stock trades by members of Congress.
The US Senate’s youngest Senators, John Ossoff (D-GA) and Josh Hawley (R-MO) have competing bills to ban stock trades. They differ on a couple of things, including enforcement provisions and whether to include dependent children. There are other Senate and many emerging House bills, including a bipartisan bill by Virginia Democrat Abigail Spanberger and Texas Republican Chip Roy. One Democratic US Senate candidate in Missouri wants to jail offending Members.
And wow, do a lot of Members of Congress buy and sell stock, especially in the tech sector.
And it’s not just members of Congress caught up in this issue. So is Energy Secretary and former Michigan Governor Jennifer Granholm. She sold nearly $250,000 in stocks last year and failed to report the transactions on a timely basis.
But it won’t be easy for Congress to act soon on this topic. Not because Members of Congress are greedy and oblivious to the polling and the politics of this issue. It is because it is a challenging issue with many facets for many elected officials who came to Congress in large part due to their financial and business success. How far do they need to go to ensure the public that they’re not profiting from insider information while protecting assets they’ve spent a lifetime to build?
We don’t require our elected officials to take a vow of poverty as a price of public service and a $174,000 annual salary. The concept of “citizen legislators” who remain engaged and in touch with constituents and the “real world” is a hallmark of American society. We can sometimes go too far to insulate our elected officials from interests and constituents back home. Some have suggested as much after Congress passed the Honest Leadership and Open Government Act lobby reforms following the Jack Abramoff scandal of the 2000s. Those reforms included broad and strict gift and privately-funded travel restrictions. Maybe you remember the movie.
We also don’t want politicians who get rich from public service.
Perhaps you remember the late Harry Truman’s warning: “No young man should go into politics if he wants to get rich or if he expects an adequate reward for his services. An honest public servant can’t become rich in politics. He can only attain greatness and satisfaction by service.”
But what does one do about millions in assets, be it real estate or other investments that often originated before public service? And what about spouses or some dependent children, since they may also gain access to “insider information?”
The public deserves to know that their elected officials and senior congressional staff (staff who earn more than $135,000 annually also must file financial disclosures) are not using their positions for personal profit. By comparison, in the world of publicly-traded corporations, many officials are prohibited from trading their employers’ stock except during specific “windows” following quarterly financial disclosures, again to protect against insider trading. Corporate officials caught engaged in insider trading can go to jail. It’s a felony.
Congress can build trust on this issue, starting with a straightforward ban on individual stock trades (buying or selling of stock) by “covered” officials (Members of Congress and senior staff) and their spouses. Let’s talk about including dependent children. I would exempt mutual funds from that ban since they are not “self-directed.” Real estate holdings used for rental income are tricky since there is some potential for abuse when it comes to renters (lobbyists?) and payments for “fair market” value, but what about more robust disclosure requirements? In some cases, strong disclosure requirements remain the best disinfectant. Enforcement tools should include stiff financial penalties.
And who, exactly, will be doing the “enforcing?” Not many Americans have high confidence in Congress’ ability to police itself through their House and Senate Ethics Committees. But “separation of powers” concerns give Congress pause when it comes to handing enforcement powers to the Executive branch agencies.
Sen. Ossoff wants offending congresspeople to forfeit their annual salary. Sen. Hawley prefers any profits from those stock sales be lost. Both, maybe?
Most importantly, these officials should be strongly encouraged to place all their holdings and assets, other than primary and secondary residences they use, into revocable blind trusts.
And if I ever find myself advising a candidate for Congress, I would make that an early campaign commitment. It just makes sense.
We shouldn’t need to impose such new requirements. Voters should be demanding it of their candidates. But sadly, we have elected officials, including a Speaker of the House, who enjoy their and their spouses’ very successful stock trades. In fairness, some transactions are made at the behest of financial advisors, sometimes without the direct knowledge of their clients. But they still have to be reported on a timely basis.
One wealthy businessman and Democratic Member of Congress, Dean Phillips (D-MN), admits it was challenging to place his assets into a blind trust. From the Wall Street Journal:
Rep. Dean Phillips (D., Minn.) signed on to Reps. Spanberger’s and Roy’s legislation after putting his holdings into a blind trust. The former chairman of Talenti Gelato and chief executive of Phillips Distilling Co. said doing so cost him tens of thousands of dollars.
“Little did I know how long it would take, how expensive it would be, but the most important consideration was restoration of faith” in Congress, he said.
Mr. Roy said that members are aware of what is in their portfolios and that congressional action could affect the stock market.
“If they want to day trade, retire,” he said of any colleagues who want to keep actively trading.
Any Member of Congress who finds their service impeded by going the blind trust route or being restrained from individual stock trades should find another line of work.
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