Members of Congress: Is it Time to Ban Congressional Stock Trading?
Members of Congress: Is it Time to Ban Congressional Stock Trading?
In 2023, it was reported that former Speaker of the House Nancy Pelosi (D-CA11) nearly tripled the S&P 500’s returns in 2023. Similarly, former Senator James M. Inhofe (R-OK) purchased tens of thousands of dollars in Raytheon Technologies, a defense contractor, just a week after he successfully lobbied the Trump administration to increase military spending. According to a 2022 analysis by the New York Times, 1 in 5 members of Congress bought and sold stocks that “directly intersect with their work on congressional committees.”
These actions represent a clear and pressing issue in our government: members of Congress are both partaking in a clear conflict of interest by purchasing stocks on the same issues they are voting on, as well as being given an unfair advantage on capital gains due to insider information compared to members of the general public. Despite repeated attempts to limit this sort of activity from taking place, it continues to occur and has even, at times, been made worse by policies intended to restrict congressional stock trading. However, in the past few days, Senators have announced a bipartisan agreement to be amended to an existing stock trading ban bill, titled the “Ending Trading and Holdings in Congressional Stocks (ETHICS) Act.”
Led by Senators Jeff Merkley (D-OR), Gary Peters (D-MI), Jon Ossoff (D-GA), and Josh Hawley (R-MO), the bill would forbid all members of Congress, including their spouses and dependent children, as well as the President and Vice President, from purchasing and selling stocks while in office. In order to understand where Congress stands today on this issue and analyze what can be done moving forward about the issue, let’s first look at the history of attempts to limit this sort of behavior in Congress and what it has led to.
A Brief History of Stock Trading Bans in the United States Government
The issue of congressional stock trading is one that dates back to the founding of this country. Dating back to 1789, Congress imposed a restriction on Alexander Hamilton and other future Treasury secretaries from buying or selling “government bonds” while in office, in an effort to prevent a conflict of interest. However, this restriction did not extend to Congress itself, setting the stage for how Congress would respond to allegations of conflict of interest to the present day. Attempts have been made at imposing such a restriction, yet, what has been found is that such attempts have usually been limited to “federal judges and executive branch officials.” An example of a different set of rules applying to the executive branch compared to the legislative branch is the 1978 “Ethics in Government Act.” mandated that members of Congress, their staff, and the executive branch disclose their assets yearly, which for the executive branch, worked smoothly. The Office of Government Ethics, created by the act, used these disclosures to “identify potential financial conflicts” and ordered individuals in the executive branch with such conflicts to divest from such investments. For example, Henry M. Paulson, the former Secretary of Treasury under George W. Bush, was ordered to divest himself from $500 million in Goldman Sachs before his appointment.
However, with regards to Congress, this same practice of forced divestment was not implemented in the 1978 law. Members of Congress were not ordered to divest from conflicts of interest, with the idea being that the voters would be the ones to decide if they felt that a certain member’s investments were a conflict with their work as a legislator.
In 2012, yet another attempt was made at limiting congressional stock trading, this time targeting insider trading rather than banning trading for members as a whole. Titled the “Stop Trading on Congressional Knowledge” (STOCK) it was designed to combat insider trading within Congress by preventing Congressional officials from “using nonpublic information for private profit.” While this act was certainly a step in the correct direction, it fell short on a number of fronts, with many policy analysts stating that the act did not seem to have much of an effect on insider trading in Congress due to a lack of enforcement. A 2022 analysis from Business Insider found that at least 75 members of Congress violated the STOCK act recently. Violators of the STOCK act face a fine, but the fine is only $200, which is largely irrelevant considering the extreme financial gains that could potentially be gained from insider trading. In addition, as mentioned previously, this bill actually exacerbated the issue of congressional stock trading rather than limited it. The STOCK act also amended the 1978 Ethics in Government Act to require members of Congress to disclose any trades for transactions over $1000 within 45 days. While this sounds like a good idea in theory, in practice, the reporting of stock trades led to the creation of what I would like to call “stock watchers,” those being individuals who track the stock trades of members of Congress in order to hopefully have positive gains on their own trades. Websites and tools have even been made to assist in this process, a popular one being “Unusual Whales,” which “offers investors tools to track market activity,” including the tracking of members of Congress using public data revealed as per the STOCK act. As a result, the price of each stock increases as those who track congressional trades invest into it, and members of Congress are indirectly rewarded for their participation in stock trading. According to Kedric Payne, a lawyer with the “Campaign Legal Center,” instead of “tamping down on trading by lawmakers,” as the STOCK act was intended to do, the law has led to “investors profiting off the trades, which also incentivizes the members of Congress to continue to make the trades because they, in fact, profit when other people invest.”
The Issue Today
Therefore, where are we today with this issue? As mentioned near the beginning of this article, a group of Senators has recently reached a bipartisan deal to completely ban stock trading for members of Congress, the family, and the President and Vice President. Will this finally solve the issue? The bill certainly solves some issues that were present in the STOCK act, namely the penalties for not adhering to the law. Under this new bill, a failure to divest from stocks “would result in fines of either the value of lawmaker’s monthly salary or 10% of the values of each asset that’s in violation of the law – whichever is greater.” Well, firstly, we don’t even know if the bill will pass in Congress. According to Senator Hawley, “there are a lot of members who don’t want to ban stock trading…they don’t want to vote against it, what they don’t want to do is to have to vote at all.” In addition Democratic congresspersons have also signaled their aversion to a ban on stock trading. Representative Pelosi, as stated previously, is an avid stock trader (through her husband, Paul Pelosi). She has been opposed to a trading ban but signaled support for changing the law around the 2022 midterms. However, she has not indicated whether she supports such a ban recently, indicating that perhaps support for the ban was only to increase support for Democrats during the 2022 election cycle. We cannot adequately predict if this bill would pass if it came to Congress, nor if the President would even sign it into law. Due to the number of members of Congress that are active in stock trading, I believe that such a bill would be dead on arrival in Congress. I wish I could say differently.
Additional Reading on the subject:
- https://www.npr.org/2024/07/10/g-s1-8989/bipartisan-stock-trading-ban
- https://www.washingtonpost.com/politics/congressional-rules-on-trading-had-their-start-in-1789/2012/06/23/gJQA1OvVyV_story.html
- https://www.npr.org/2024/06/06/nx-s1-4974720/congress-stock-trades-profits
- https://www.nytimes.com/2018/12/13/us/politics/james-inhofe-raytheon.html
- https://finance.yahoo.com/news/former-house-speaker-nancy-pelosi-095000785.html?guccounter=1
- https://www.congress.gov/112/plaws/publ105/PLAW-112publ105.htm
- https://www.businessinsider.com/congress-stock-act-violations-senate-house-trading-2021-9
- https://www.cnbc.com/2024/07/10/senators-strike-bipartisan-deal-for-a-ban-on-stock-trading-by-members-of-congress.html
- https://www.washingtonpost.com/business/2024/07/10/senate-ban-congressional-stock-trading/
- https://www.congress.gov/bill/117th-congress/senate-bill/3494