Photo Illustration by Thomas Levinson/The Daily Beast/Reuters/Getty
Introduction
Imagine you are a member of Congress. During an otherwise routine briefing, you receive information that could significantly impact your investments. What do you do? Would you hold your investments and accept the potential loss of hundreds of thousands of dollars or sell them, risking the appearance and reality of trading on insider information?
This issue is far too common among members of Congress. On March 10, 2023, Representative Jared Moskowitz (D-FL) sold between $65,000 and $150,000 worth of Seacoast Banking Corp. shares through an investment account owned by his children. This transaction occurred after he attended a bipartisan congressional briefing on the banking crisis. It was also just days before Seacoast’s shares dropped nearly 20%.
Rep. Moskowitz is not alone in facing questions about stock trades. On March 6, Rep. Dan Goldman (D-NY) sold up to $15,000 in PacWest Bancorp shares just before the collapse of Silicon Valley Bank. Upon the bank’s collapse, PacWest’s stock dropped from $27 to around $5. Similarly, Rep. John Curtis (R-UT) sold up to $15,000 in First Republic Bank shares on March 16, when the shares were valued at $34, only for the price to crash to $0.30 per share.
These are not isolated incidents contained to these three individuals; in fact, this paper could examine up to 100 members of Congress with similar stock trade anecdotes. These facts are not an allegation of insider trading but highlight an apparent conflict of interest or, at the very least, a coincidence. While these individuals may possess the financial acumen to “time the market” correctly, the old saying holds true—where there’s smoke, there’s often fire. Even if they are not trading on insider information, the perception that they are undermines public trust, which is crucial to the functioning of a democratic republic.
The STOCK Act: An Attempt at Reform
Since 2006, members of Congress have acknowledged the need for some form of legislation to deter insider trading within the house and senate. However, it wasn’t until 2012 when the “Stop Trading on Congressional Knowledge” (STOCK) Act was signed into law by President Obama with bipartisan support. The 2012 STOCK Act came about as a response to revelations that members of Congress had allegedly used insider information to trade during the Great Recession in 2008. The STOCK Act amends the Ethics in Government Act of 1978 and mandates electronic reporting and online availability of public financial disclosures. It requires government employees, including members of Congress, to report certain investment transactions within forty-five days and ensures that these disclosures are accessible through searchable, sortable databases on agency websites.
The purpose of the STOCK Act of 2012 is to prevent the appearance of corruption and to ensure that Congress prioritizes the public interest over personal gain. It prohibits U.S. senators and representatives from trading on information learned in their official capacities, requires frequent financial disclosures, and imposes new ethics requirements. The STOCK Act affirms that members and staff owe a duty to the citizens of the United States not to misappropriate nonpublic information for profit.
While members of Congress, along with their spouses and dependents, are allowed to buy and sell stocks, they must disclose any transactions over $1,000 within thirty days or forty-five days of receiving notice of a transaction made on their behalf. These disclosures, required under the 2012 STOCK Act, do not mandate real-time reporting but instead use periodic transaction reports (PTRs), which include a broad numerical range rather than exact transaction values.
A decade after its passage, the STOCK Act has faced heavy criticism and is widely regarded as a failed solution to combating insider trading. Despite requiring prompt reporting of improper conduct, such as suspiciously timed stock trades, the Act failed to achieve its intended level of disclosure, with numerous late or missing filings undermining its purpose. Additionally, no member of Congress has been prosecuted under the Act despite credible allegations. Finally, the enforcement and accountability measures built into the Act are lacking. There are minor penalties, such as a meager $200 fine for failing to report financial transactions, and no public records show whether fined members actually pay.
Due to widespread backlash against the STOCK Act of 2012 for failing to effectively limit insider trading, there is strong public support for an overhaul. Updating the STOCK Act and changing the current congressional stock trading status quo enjoys broad bipartisan backing. A 2022 New York Times analysis revealed that ninety-seven lawmakers or their families traded stocks directly related to their work on congressional committees. Polls show overwhelming support across party lines for stricter limitations, including banning members of Congress and their spouses from investing in the stock market for personal gain while in office. Additionally, elected officials from both Republican and Democratic parties are likely to oppose significant reforms.
Insider Trading Theories
Classical Theory: Insider trading under the classical theory occurs when company insiders, like employees or executives, trade securities using nonpublic, material information in breach of their duty of trust.
Misappropriation Theory: The misappropriation theory applies when outsiders, like attorneys or consultants, trade securities by misusing nonpublic information entrusted to them.
In the case of the congressional members, their potential insider trading aligns with the misappropriation theory. For example, Rep. Jared Moskowitz does not owe a fiduciary duty to the shareholders of Seacoast Banking Corp., so the classical theory does not apply. However, members of Congress often receive sensitive information through official briefings and meetings. If this information is both nonpublic and material, representatives using the information for personal financial gain could constitute insider trading under the misappropriation theory. As established in United States v. O’Hagan, individuals who receive such information owe a duty to the source of the information and must either disclose their intent to trade based on this information or abstain from trading altogether.
Moving Forward: New Legislative Efforts and Solutions
Since passing the STOCK Act of 2012, insider trading laws have expanded in response to public demand for greater transparency and accountability among lawmakers. In 2022, the Ban Congressional Stock Trading Act was introduced to ensure that elected officials prioritize their public duties over personal financial interests by prohibiting members of Congress, their spouses, and their dependent children from buying and selling individual stocks. In 2023, the Ban Stock Trading for Government Officials Act was introduced, aiming to strengthen disclosure and reporting requirements under the STOCK Act while imposing heavy penalties on violators in Congress and the executive branch. Most recently in July 2024, the Homeland Security and Government Affairs Committee approved the Ending Trading and Holding in Congressional Stocks Act (ETHICS Act), a bipartisan measure that would ban members of Congress and their spouses and dependents from trading individual stocks. The ETHICS Act also mandates the immediate divestiture of previously owned stocks. It prohibits the purchase of new individual stocks and is set to take effect at the start of the next congressional session in 2027. These legislative efforts reflect a growing commitment to curbing conflicts of interest and promoting ethical governance.
Critics argue that a complete ban on stock trading for members of Congress could deter talented individuals from seeking office due to a lack of financial incentive. Participating in the growth of the U.S. economy is a privilege that should theoretically be accessible to all Americans. However, given that members of Congress are often privy to sensitive and privileged information, a balanced approach could involve addressing this concern while maintaining public trust.
A potential middle ground would be prohibiting stock trading for Congress members while proportionally increasing their salaries to align with the stock market’s average return. This adjustment could acknowledge their inability to invest in individual stocks without raising suspicions of insider trading. For example, as of 2024, congressional members earn $174,000 annually. Adjusting this figure by approximately 10% to $191,000 could provide additional financial incentives while demonstrating a commitment to ethical governance and public trust.
Another proposed solution is implementing a blind trust requirement for lawmakers while in office. This approach would require them to relinquish direct control over their assets, transferring ownership and trading authority to an unaffiliated third party. This arrangement ensures that lawmakers have no knowledge of their holdings or the timing of trades, effectively mitigating conflicts of interest. While critics argue that blind trusts may be expensive, this raises an essential question: what value do we place on public trust and preventing corruption? Regardless of practical concerns, relinquishing direct control over financial assets appears to be a reasonable next step, one likely to garner widespread public support.
Regardless of the legislative solutions enacted, technology is already reshaping public engagement with financial transparency. For instance, the app Autopilot allows users to track and replicate the disclosed investments of politicians and top investors, such as Nancy Pelosi. By leveraging this data, the platform enables users to invest automatically based on these portfolios. This development highlights a critical issue: the varying levels of access to market-relevant information among participants. While the stock market generally corrects inefficiencies over time, disparities in the flow and timing of information can provide certain participants with significant advantages. Autopilot reflects both the potential for democratizing public information and the challenges of ensuring fairness and transparency in financial markets.
Reaffirming Public Trust in Government
While the solution remains unclear, it is essential to address the perceptions of insider trading. Passing a bill to further curtail congressional stock trading would require bipartisan support from both the House and Senate—ironically, the very individuals with a conflict of interest in stock trading—as well as the president’s approval. Nevertheless, it presents an opportunity to strengthen the STOCK Act and establish more effective legislation.
The issue is twofold: we must both increase transparency and prevent illegal activity. While this does not imply speculation about specific illegal acts, it is evident that the misuse of privileged information for insider trading is a crime. By eliminating this possibility and fostering public trust in those elected to represent “the People,” legislating against insider trading by members of Congress becomes a critical step to protect democracy and ensure ethical governance.
*The views expressed in this article do not represent the views of Santa Clara University.
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