Equality and Transparency: Revising Congressional Stock Trading Regulations
With outrage building over recent investment-trading scandals in early 2020 before the COVID-19 pandemic, Senator Jon Ossoff (D-GA) introduced the Ban Congressional Stock Trading Act in the early months of January 2022.[1] The bill required all members of Congress to either divest or place in a blind trust any investments made by themselves, their spouse, and their dependents. After this bill stalled in both the House of Representatives and the Senate, Representatives Abigail Spanberger (D-VA) and Chip Roy (R-TX) reintroduced the TRUST in Congress Act, which requires all members of Congress and their close relatives to place their investments in qualified blind trusts managed by independent third parties to prevent conflicts of interest.[2] These bills demonstrate the growing appetite of both Congress and the public to address this issue. In the 177th Congress (2021-2023), 53 percent of lawmakers owned stock, 49 percent owned both stock and widely held investment funds, 40 percent only owned widely held investment funds, and only seven percent did not own stock or widely held investment funds.[3] While merely owning stock or widely held investment funds may not be inherently concerning, at least 97 current lawmakers (or their spouses or dependents) transacted stocks, bonds, or other financial assets that came into direct conflict with their congressional work.[4] And these numbers do not even include the additional, less quantifiable information shared behind closed doors or more informally through meetings, discussions, and calls.
In 2012, following a series of investment scandals involving lawmakers, Congress passed the Stop Trading on Congressional Knowledge (STOCK) Act that explicitly prohibits members of Congress from using nonpublic information (gained through their positions) for private benefit or other purposes.[5] The STOCK Act also required all legislators to disclose any securities transactions over $1,000 within 45 days. And yet, legislators from both major political parties continue to take advantage of these relaxed regulations. As mentioned earlier, at least 97 current lawmakers or their close relatives transacted financial assets that conflict with their congressional work.[6] Several legislators—such as Democratic Re. Tom Suozzi of New York, who failed to file reports on around 300 transactions—have violated the disclosure clause of the STOCK Act with little more than a $200 fine as punishment.[7] With blatant violations being addressed with little more than a slap on the wrist, the STOCK Act has clearly failed to resolve conflicts of interest, and, as such, lawmakers continue to flout its disclosure requirements. As a result, stricter and more explicit regulation is necessary. Indeed, just as company executives, investment bankers, and other individuals privy to nonpublic information are subject to strict stock investment and disclosure rules, members of Congress should not be permitted to make investments without forceful, effective, and transparent regulation. On one hand, future regulations should not comprehensively ban stock investments, as members of Congress should still retain some access to the market. On the other hand, future regulations should explicitly and specifically prevent members of Congress from investing in companies and sectors influenced by their legislative work, institute strict disclosure standards and deadlines, and restrict the types and durations of stock investments. Addressing the issues of conflicts of interest and insider trading before they occur will help mitigate the previous issues of enforcement and restore public faith in government.
Effective regulation of congressional investments is necessary to increase government efficiency and restore public trust through transparency. Allowing members of Congress to freely invest in stocks induces conflicts of interest, permits ethical violations, and erodes trust in the government. Furthermore, without suitable regulations, congressional representatives make decisions not for the benefit of their constituents or the nation but instead for their own personal financial gains, decreasing the overall efficiency of the government. Furthermore, when members of Congress make investments into specific companies and industries they directly regulate or oversee and routinely make large profits from those investments, they significantly weaken public trust in government. Public trust in the U.S. government has continued to wither after the COVID-19 pandemic and the January 6th insurrection, and while that loss of trust may not have been the fault of the government or lawmakers, it would seem extremely imprudent to further alienate the American public.[8]
A strict and transparent set of regulations on congressional stock investments presents an ideal balance between unregulated trading and an absolute ban and also avoids many of the issues that plague current regulation. There are three main goals that future regulations should achieve. First, these regulations should prevent members of Congress from investing in companies and sectors influenced by their legislative work. By definition, investing in a company and sector in which a member of Congress is actively engaged is a conflict of interest. That is, they are not only reaping personal financial benefits from the privileges and duties as members of Congress, but they are also putting their personal interests at odds with the interest of their constituents. Without a complete ban on these types of investments, it would be nearly impossible to distinguish between trades made from public and nonpublic information. Second, these regulations should institute strict disclosure standards and deadlines with punishments significantly harsher than those currently in place. As mentioned earlier, despite the disclosure standards and deadlines imposed by the STOCK Act, members of Congress have routinely violated these rules with little to no punishment. Future regulations should punish violations significantly more heavily and display such violations publicly and prominently. Finally, these regulations should restrict the types and durations of stock. In order to deter insider trading, future regulations should impose minimum holding periods on stocks (i.e., an investor may only sell their stock after a certain period of time). These regulations should consider limiting members of Congress to purchasing funds like exchange-traded funds (ETFs) that aggregate many different stocks from a variety of sectors and industries. By banning investments in industries in which members of Congress legislate, instituting strict disclosure standards and deadlines, and restricting the types and durations of investments, future regulations can deter Congressional insider trading as well as detect it at an earlier stage. In that way, they can help prevent members of Congress from exploiting a significant loophole of insider trading investigations: collecting evidence.
Many legal scholars have lamented the inability of the Securities and Exchange Commission (SEC)—the primary market regulatory body in the U.S.—to investigate and prosecute lawmakers for insider trading and conflicts of interest despite the broad reach of Rule 10b-5, a general antifraud rule which the SEC uses to prosecute insider trading.[9] This rule states that it is unlawful to:
“(a) employ any device, scheme, or artifice to defraud, (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made…not misleading, or, (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, [all] in connection with the purchase or sale of any security.”[10]
The inefficiency in prosecuting Congressional insider trading has been primarily attributed to the Speech and Debate Clause, a Constitutional protection that states, “for any Speech or Debate in either House, [lawmakers] shall not be questioned in any other Place.”[11] As established in United States v. Johnson (1966), the Speech or Debate Clause protects lawmakers from interviews, testimony, and records relating to legislative duties as part of an investigation.[12] In theory, there are two ways to bypass this Constitutional protection when investigating Congressional insider trading. First, the Speech or Debate Clause may not even apply to investigations relating to insider trading. In United States v. Brewster (1972), the Supreme Court held that the Speech or Debate Clause could not be invoked to protect a former U.S. Senator charged with the solicitation and acceptance of bribes because “although [the Speech or Debate Clause] protects Members of Congress from inquiry into legislative acts of the motivation for performance of such acts, it does not protect all conduct relating to the legislative process…in this case, prosecution of the bribery charge does not necessitate inquiry into legislative acts or motivation.”[13] Second, in addition to the first method, the ability to prove with a significant amount of evidence that a lawmaker was knowingly in possession of nonpublic information by means of their Congressional duties at the time of an investment would render the Speech or Debate clause largely irrelevant.[14] However, even if the Speech or Debate Clause in and of itself may not protect lawmakers, it may hinder the collection of evidence to such a degree that an investigation and prosecution become infeasible.[15] Indeed, the SEC itself points to this as a primary factor in its reluctance to investigate lawmakers: “[W]hile trading by Members of Congress or their staff is not exempt from the federal securities laws, including the insider trading prohibitions, there are distinct legal and factual issues that may arise in any investigations or prosecutions of such cases.”[16] This article’s proposed regulations strictly necessitate the disclosure of detailed reports on conflicts of interest and stock investments and would thus provide this “preponderance” of evidence and assist tremendously in investigations.
Some scholars have been reluctant to support additional regulations on congressional stock investments due to the fear of narrowing current regulations and making enforcement more difficult. For example, law professor Donna Nagy posits in her paper, “Insider Trading, Congressional Officials, and Duties of Entrustment,” that the general belief of “congressional immunity” is incorrect since the SEC already has the authority to investigate and prosecute lawmakers based on Rule 10b-5.[17] Nagy argues that lawmakers who utilize nonpublic information gained through legislative work for private profit engage in deception and thus violate Rule 10b-5, exposing themselves to prosecution. Nagy’s argument is sound. The SEC does have the authority to prosecute members of Congress for insider trading, and it is likely true that Rule 10b-5 already bans Congressional insider trading. Furthermore, Nagy warns against adding specificity to the current insider trading regulation. Nagy suggests enacting an “exclusive restraint” such as the STOCK Act on Congressional stock trading would encourage and cause evasion through hypothetical loopholes.[18] This fear that more specific regulations will narrow current regulations is unwarranted, though, because the courts have already been narrowing Section 10(b) (wherein Rule 10b-5 is contained) for several decades. In Chiarella v. United States (1981), the Supreme Court rejected the government’s expansive view of Section 10(b), arguing that merely trading with nonpublic information was not enough to convict and that the government had to prove that the suspect violated a fiduciary duty between parties in a transaction to not disclose sensitive information.[19] In Dirks v. SEC (1983), the Supreme Court emphasized that the sine qua non of insider trading is when insiders breach their fiduciary duty only if they utilize confidential information for their own benefit (i.e., cash, reciprocal information, etc.).[20] It also insisted that tippees—those receiving the nonpublic information from an insider—could inherit the insider’s duty to not trade only if they know of the insider’s breach of duty.[21] However, the Supreme Court did acknowledge that its decisions may negatively impact the ability of the SEC and government to prosecute insider trading, “it is important…to focus on policing insiders and what they do…rather than on policing information per se and its possession….”[22] Even if only some of these restrictions apply directly to Congressional stock investments, it demonstrates the decades-old objective of the courts to restrict the coverage of Section 10(b) and require increasing amounts of evidence, thus contradicting the belief that current regulations are somehow more flexible. The courts have continuously reinforced the need to provide significant, highly conclusive evidence about the nature, motivations, and benefits of stock trades. These restrictions only further emphasize the importance of the strict disclosure requirements outlined in this article’s proposed regulations. Thus, the fear that additional regulation will drastically undercut the broad applicability of current regulations is unjustified.
Some may also argue that restricting or banning the ability of members of Congress to invest in stocks excludes them from the free market and infringes on their rights as U.S. citizens. While the U.S. is a free market, those with exclusive information have an unjustifiable leg-up in trading and investments. For example, US senators’ stock portfolios outperformed the market by an average of 12 percent per year from 1993 to 1998, while U.S. households averaged 1.44 percent per year and corporate executives averaged around 5 percent per year from 1991 to 1996, a difference inexplicable by anything other than illegal use of unequal and private information.[23] Lawmakers are clearly leveraging their exclusive information to increase their personal profits, hurting their constituents and the nation in the process. The argument that restricting congressional investments infringes on lawmakers’ rights as U.S. citizens to engage in the free market is equally untenable, as those with nonpublic information in other sectors such as finance and consulting have been severely regulated for decades. Indeed, those individuals are required to disclose their investments and are subject to strict restrictions on the types and durations of their investments. It seems illogical that the very people who regulate private citizens on their investments are not subject to the same restrictions. Moreover, lawmakers at such an important echelon should and cannot be viewed through the same lens as other professions. As described in United States v. Rostenkowski (1995), “Congress is not a job like any other, it is a constitutional role to be played upon a constitutional stage.”[24] Members of Congress should be subjected to a significantly higher standard and must be the example for the regulations that they impose on their fellow citizens.
Members of Congress are no different from any individual with nonpublic information about a company, industry, or nation. As such, the same regulations should apply to them as well. In fact, these regulations should be applied first and foremost to those in Congress before the public. The current law clearly does not apply as much to congressional officials as it does to private citizens. Indeed, Congress is a public entity, founded by and for the people, and a top-down approach is preferable because it sets an example for private citizens and legitimizes the government’s approach to tackling insider trading. A set of strict and clear regulations restricting the ability of members of Congress (and their spouses and dependents) to invest in companies and industries influenced by their legislative work, instituting strict disclosure guidelines, and imposing restrictions on the types and durations of investments should be crafted and passed by Congress as soon as possible. Crafting the specifics of these new regulations will require intense collaboration and discussion, but this article has set the background, motivations, and framework for these regulations moving forwards. And these regulations do not need to stop at stocks. Whether it be bonds, real estate, or cryptocurrency, it is imperative to maintain the integrity and transparency of the U.S. Congress.
References
[1] Congress.gov. "S.3494 - 117th Congress (2021-2022): Ban Congressional Stock Trading Act." January 12, 2022. https://www.congress.gov/bill/117th-congress/senate-bill/3494.
[2] Congress.gov. "H.R.345 - 118th Congress (2023-2024): TRUST in Congress Act." January 12, 2023. https://www.congress.gov/bill/118th-congress/house-bill/345.
[3] Campaign Legal Center. “CLC Complaint to OCE Regarding Rep. Thomas Suozzi.” Accessed November 15, 2022. https://campaignlegal.org/document/clc-complaint-oce-regarding-rep-thomas-suozzi.
[4] Parlapiano, Alicia, Adam Playford, Kate Kelly, and Ege Uz. “These 97 Members of Congress Reported Trades in Companies Influenced by Their Committees.” The New York Times, September 13, 2022, sec. U.S. https://www.nytimes.com/interactive/2022/09/13/us/politics/congress-members-stock-trading-list.html.
[5] STOCK Act, S.2038, 112th Cong. (2012). https://www.congress.gov/bill/112th-congress/senate-bill/2038.
[6] Parlapiano et al., “These 97 Members of Congress Reported Trades in Companies Influenced by Their Committees.”
[7] Campaign Legal Center. “CLC Complaint to OCE Regarding Rep. Thomas Suozzi.”
[8] Bell, Peter. “Public Trust in Government: 1958-2022.” Pew Research Center - U.S. Politics & Policy (blog), June 6, 2022. https://www.pewresearch.org/politics/2022/06/06/public-trust-in-government-1958-2022/.
[9] Nagy, Donna. “Insider Trading, Congressional Officials, and Duties of Entrustment,” 1111. Boston University School of Law, 2010. https://heinonline.org/HOL/P?h=hein.journals/bulr91&i=1111.
[10] 17 CFR § 240.10b-5.
[11] “Statement on the Application of Insider Trading Law to Trading by Members of Congress and Their Staffs.” U.S. Securities and Exchange Commission, December 1, 2011; U.S. Const. Art. I.S6.C1.3.1. https://www.sec.gov/news/testimony/2011/ts120111rsk.htm#P67_24236.
[12] United States v. Johnson, 383 U.S. 169 (1966).
[13] United States v. Brewster, 408 U.S. 501 (1972).
[14] Nagy, “Insider Trading, Congressional Officials, and Duties of Entrustment,” 1136.
[15] Ibid.
[16] “Statement on the Application of Insider Trading Law to Trading by Members of Congress and Their Staffs.”
[17] Nagy, “Insider Trading, Congressional Officials, and Duties of Entrustment,” 1111.
[18] Ibid. 1134-1135.
[19] Chiarella v. United States, 445 U.S. 222, 222-223 (1980).
[20] Dirks v. SEC, 463 U.S. 646, 647 (1983).
[21] Ibid.
[22] 463 U.S. 662-663 (1983).
[23] “Senators’ Stocks Beat the Market by 12 Percent.” The New York Times, February 24, 2004. https://archive.nytimes.com/www.nytimes.com/financialtimes/business/FT1075982783472.html?_r=0.
[24] United States v. Rostenkowski, 59 F.3d 1291 (D.C. Cir. 1995).