Insider Trading

The Congressional Conflict of Interest

Trevor Macdonald

22 June 2024

Introduction

In late January of this year, Senator Thomas Tuberville [R-AR] sold up to $50,000 in Intel stock options months before news was publicly available that the Department of Defense was canceling a lucrative contract with Intel. 

In 2020, Representative Nancy Pelosi’s [D-CA-11] husband, Paul, sold 30,000 shares of Google stock mere weeks before the Justice Department filed an antitrust lawsuit against Google. 

In 2019, Representative John Rose [R-TN-6] sold over $100,000 worth of Wells Fargo stock before the House Committee on Financial Services, which he sits on, issued a critical report about the bank that tanked its stock price. Between 2019 and 2021, one New York Times analysis found that 13 lawmakers or their immediate family members bought or sold shares of companies that were under investigation by committees. 

The politicians that work in our nation’s capital have access to all kinds of private, confidential, and classified information that the rest of us don’t. However, over the past decade there has been an increase in people raising questions about lawmakers making stock trades that seem a bit too perfectly timed. Current transparency regulations are a step in the right direction, but these questions of potential financial corruption that can erode Congress’ public image continue to linger, and wavering confidence cripples the legislative process. 

Congressmembers’ ability to trade stocks has become a contentious issue, sparking debates about ethics, transparency, and the potential for conflicts of interest. Critics argue that, given their access to privileged information, allowing lawmakers to engage in stock trading undermines public trust and can open the door to insider trading. Consequently, this issue often receives significant bipartisan support to push for a ban from trading altogether, yet, despite multiple propositions, very few have been fruitful. 

These well-timed trades that coincided with major legislative actions or economic developments demonstrated the potential for abuse and have fueled calls for reform. Potential alone does not necessarily indicate corruption and selecting individual cases cannot empirically prove foul-play, but even the appearance alone of impropriety damages the credibility of Congress. Trust is a foundational requirement in our legislative system, and supporters of stricter regulations argue that they are necessary in order to prevent conflicts of interest and restore public trust. This paper will examine what previous attempts to curb Congressional insider trading can teach us. After this, it will explore what can be done to restore the public's trust in Congress's financial integrity. 


What Current Legislation Teaches Us

With all of that said, are the current regulations enough? 

In 2012, President Barack Obama signed the STOCK act which sought to address the perceived conflicts of interest in stock trading by Congressmembers as well as other federal officials by requiring them to make public all securities transactions with a value above $1,000 within 30 days of receiving notice of the transaction and within 45 days of the transaction date. This legislation aimed to promote transparency and restrict blatant insider trading, and is the reason why Congressmembers’ trades are publicly documented and accessible today.

For what it’s worth, throughout the 1990s stock trading senators outperformed the markets by an average of 12% points per year, while US households underperformed by 1% point. Between 2004 and 2010, one analysis of over 60,000 stock trades showed that politicians outperformed by 20%, and in early 2023, an ETF tracking stock trades of Democrats in Congress (trading under the name “NANC” in a nod to the aforementioned Nancy Pelosi) outperformed the S&P 500 by 6% over the same duration. 

Now, it’s important to acknowledge other factors at play here before jumping to hasty conclusions. Many of these politicians were already wealthy, and it’s much easier for people who are already wealthy to outperform the market because they have access to far more resources than the average person, which is still true today. However, while Congress members outperforming the market is not proof of insider trading, it does highlight how before and after the STOCK Act, trading with potential conflicts of interest has always been allowed – we just know more about it today. 

Even with the current transparency in place, there’s still things that seem concerning that are not illegal under current regulations. The challenge of the STOCK Act is that members are still able to trade every day if they want, provided they disclose it, and the disclosure itself is a month too late. Furthermore, although there is punishment for failing to file transaction reports on time, the penalty ranges between just $200 to $500. 

The STOCK Act is a welcome step in the right direction towards transparency, but the current requirements seem to only draw more attention to congressional trading activity in more recent history, with the 2020 COVID-19 Pandemic serving as a notable example. In fact, many of these trades became catalysts for public interest in how potentially problematic it seems for Congressmembers to invest in individual stocks, and pretty soon, multiple politicians were introducing bills of their own to ban trading individual stock: Jon Ossoff’s [D-GA] 2023 Congressional Stock Trading Act, Ro Khanna’s [D-CA-17] Political Reform Resolution of that same year, and Abigail Spanberger’s [D-VA-7] 2021 Trust in Congress Act, co-sponsored by Scott Perry [R-PA-10]. Each of these propose various, but overall similar, solutions to the issue. 


A Modest Proposal

According to the general consensus of the aforementioned bills, if someone already has stock holdings when they first arrive to Congress, they would have a few options. First, they could put their money into a blind trust, in which you give your stock holdings to an independent and regulated trustee. In this trust, you don’t know what’s in there or how it’s managed. The second option is a diversified trust. This trust option makes a Congressmember give an independent manager control of their portfolio, where it is then diversified under strict government oversight. Third, they could simply divest and dump all of their individual stock holdings. Outside of these specific cases, regulations have been supported across the aisle by legislators such as Alexandria Ocasio-Cortez [D-NY-14], Matt Gaetz [R-FL-1], Elizabeth Warren [D-MA], and Josh Hawley [R-MO]. 

However, this seems to leave a larger question: if these four Members, of all people, can get on the same page to support legislation like this, then why hasn’t Congress passed anything substantial? If 87% of Republicans and 88% of Democrats all agree on something for once, shouldn’t banning individual stock trading be a rare opportunity to actually do something that would make the vast majority of the constituents happy? 


Conclusion

When you add up the overwhelming public opinion and unprecedented bipartisan support, it can be hard to not want to pull out your shiny foil hat and conclude that this isn’t changing because enough of the Congressmembers like that they can use their position for personal financial gain. The growing public perception of distrust is extremely damaging and potentially has far-reaching consequences for the heart of our political system as a whole. 

While some believe that existing disclosure laws provide adequate safeguards, the potential for abuse and the resulting erosion of public trust suggest that stricter measures may be warranted. Ultimately, ensuring the integrity of the legislative process and maintaining public confidence in government institutions should be paramount, even if it means imposing additional restrictions on lawmakers' financial activities. If this is an important issue to you, let your representative know, especially while everyone’s paying more attention for the upcoming elections.

Works Cited

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