Congress takes stock of insider trading

In February 2020, Sen. Richard Burr, R-N.C., and his wife sold more than $1.6 million in stocks after Burr attended a congressional briefing on the pandemic. About a week later, the stock market plunged as COVID-19 spread in the United States.

The Securities and Exchange Commission is still investigating whether inside information drove Burr’s stock sales, though the Department of Justice has dropped its inquiry. But suspicion about Burr’s trades and those of other members of Congress has inspired a recent burst of bills that would limit how members of Congress and their families trade stocks. Americans like the idea and congressional leaders have agreed to consider it, but lawmakers will have to reconcile competing proposals.

Insider trading—when stock owners use nonpublic information to make stock trading decisions—is already illegal, including for lawmakers. It gives traders an unfair advantage and motivates business leaders or lawmakers to make decisions based on personal financial interest instead of what’s best for customers or constituents. Insider trading is difficult to prove, even for lawmakers who regularly receive classified briefings about economically significant topics. Burr argued he sold stock because of reports he saw on the news.

The Stop Trading on Congressional Knowledge Act passed in 2012 requires members of Congress to report their trades within 45 days. The increased transparency appears to have made a difference. Before 2012, a study in The Financial Review found, the portfolios of powerful Republicans in Congress outperformed the market by more than 35 percent. Their advantage vanished after the STOCK Act passed. A paper in the National Bureau of Economic Research found senators’ stock sales underperformed the market from 2012 to 2020, and sitting on an industry-specific congressional committee didn’t improve lawmakers’ picks in that market.

But the media company Insider found 57 lawmakers who have recently failed to comply with the STOCK Act’s reporting requirements. Violators often receive a fine of $200. U.S. voters support beefing up limits on trades. In a Morning Consult poll, 63 percent approved of banning members of Congress from trading stocks, and 57 percent supported banning lawmakers’ family members.

Among the legislative proposals addressing the issue, Sens. Jon Ossoff, D-Ga., and Mark Kelly, D-Ariz., have introduced a bill that would require lawmakers and their spouses and dependent children to put stocks and investments into a blind, independently managed trust until they leave office. With a blind trust, stockholders don’t control trades but are notified yearly what stocks they’re invested in. Violators would forfeit their entire congressional salary. The bill mirrors a House proposal by Reps. Abigail Spanberger, D-Va., and Chip Roy, R-Texas. Another House bill, co-sponsored by more than four dozen representatives, would ban members and senior staff but exempt spouses and dependent children. Republican Sen. Josh Hawley of Missouri proposed a bill to ban trading by members and spouses and require violators to “return their profits to the American people.” Sen. Ben Sasse, R-Neb., wants to give violators a fine of up to $1 million, up to five years in prison, or both.

Reconciling competing proposals could prove a challenge, and lawmakers have noted the downsides of several options. Requiring lawmakers to sell stocks could leave them with sizable tax bills, while waiving the capital gains tax would create a financial windfall for major stockholders. A ban on spouses’ trades could shut out potential lawmakers whose spouses trade professionally.

Craig Holman, a lobbyist for the progressive consumer advocacy group Public Citizen, argues lawmakers should be required to move assets into mutual funds instead of blind trusts, where they could still have stocks concentrated in a particular market. “So if you’ve got all your investments in coal, you might be inclined to act in a certain way on climate change legislation,” Holman told Politico. Broad mutual funds invest in a broad chunk of the market, not a few specific industries, reducing that conflict of interest.

But economist David Bahnsen noted blind trusts would still be helpful. “Their awareness of what they own is not the key issue,” Bahnsen said. “The major issue is their ability to act on it and benefit from real-time information.”

Sen. Tommy Tuberville, R-Ala., said adding restrictions could disincentivize running for Congress. “I think it would really cut back on the amount of people that would want to come up here and serve,” Tuberville told The Independent. According to Insider’s report, he has violated the STOCK Act several times.

Bahnsen called that argument disingenuous. “We’re not asking someone to not make money on their portfolio,” Bahnsen said. “It isn’t worth the marked cynicism and the distrust in public perception that it creates to allow some wealthy Congressperson in Georgia to day trade their account.”