Members of Congress over the years have introduced bills that would prohibit senators, representatives, and their senior staff from owning securities of individual publicly traded companies. Neither the House nor the Senate has passed such a law. As we urged in a letter we sent to House and Senate leadership recently , Congress should do so, making this good-government measure one of the first bills signed into law by President Biden.
2020—a year in which many Americans suffered with financial, emotional and health consequences of the Covid-19 pandemic—brought yet more evidence of congressional profiteering in the stock market. At least one senator, Richard Burr (R-NC), is being investigated for large-scale securities trading at the beginning of the pandemic, apparently at the same time as he had access to confidential briefings.
Other senators, including Dianne Feinstein (D-Calif.), Jim Inhofe (R-Okla.), Kelly Loeffler (R-Ga.), and David Perdue (R-Ga.) were also scrutinized for stock trading at the beginning of the pandemic. Perdue is reported by the New York Times to have made 2,596 separate securities trades during his most recent term in office.
There are likewise many prolific securities traders in the House. Rep. Chris Collins (R-N.Y.) in 2019 resigned and went to prison for sharing with his son confidential information that he learned while a board member of an Australian biotech company in which he was also heavily invested. He recently received a presidential pardon notwithstanding his guilty plea and acknowledgment that “I violated my core values and there is no excuse, none whatsoever.”
In 2012, before passage of the Stop Trading on Congressional Knowledge (STOCK) Act, the Senate considered a divestment requirement in an amendment co-sponsored by Sens. Sherrod Brown (D-Ohio) and Jeff Merkley (D-Ore.). Their amendment was defeated in part because divestment was viewed as unnecessary in light of the act’s mandate for more timely reporting of securities purchases and sales.
But now, eight years and many securities trading scandals later, we know that mere disclosure of securities trades is not enough. The need for a stricter rule is abundantly clear.
Disclosure Rules Are Not Enough
One problem with congressional stock holdings is conflict of interest. A criminal statute, 18 U.S.C. § 208, prohibits financial conflicts of interest for every executive branch official other than the president and vice president. The statute makes it a crime for a federal official to participate personally and substantially in any particular matter that has a direct and predictable effect on the financial interest of the official or a spouse or minor child.
But this statute does not apply to members of Congress or their staff. A Senate rule imposes some restrictions on securities holdings and conflicts of interest for committee staffers, but senators themselves are allowed to invest as they please. The House and Senate conflict-of-interest rules are so loose—for example only prohibiting a member from sponsoring legislation solely in order to enrich himself or his family—as to be virtually meaningless.
The argument that disclosing financial conflicts of interest is an adequate remedy is wrong for several reasons. First, requiring disclosure only is not the standard that Congress applies to executive branch officials who are subject to 18 U.S.C. § 208’s criminal financial conflict of interest prohibition and at higher levels of seniority also are required to disclose publicly their financial holdings.
Second, financial conflicts of interest in Congress affect the entire country whereas only voters in a representative’s district or a senator’s state decide whether the conflict of interest warrants removal from office.
Third, many representatives and senators have “safe” seats and know that they can invest and trade as they please with electoral impunity.
Insider Trading Difficult to Prove
Insider trading is another problem with congressional stock holdings. Illegal insider trading involves the use in securities trading of material nonpublic information that is misappropriated from the source of the information in violation of a relationship of trust and confidence.
The STOCK Act provides that a member of Congress “owes a duty arising from a relationship of trust and confidence to Congress, the United States Government, and the citizens of the United States with respect to material, nonpublic information derived from such person’s position…or gained from the performance of such person’s official responsibilities.”
Insider trading is sometimes difficult to prove. Discerning whether a member of Congress had nonpublic information requires investigators to obtain and review emails, phone logs, and testimony of witnesses who know what information was disclosed to the member and when. Such an investigation, among other problems, raises difficult questions under the Speech or Debate Clause of the Constitution, and even if constitutionally permissible is likely to encounter strong pushback from congressional leadership.
Suspicion, however, will not go away simply because investigation is difficult. This is all the more reason for members of Congress to forgo ownership of publicly traded securities while in office.
Appearances foster corrosive perceptions that personal finances are placed ahead of the public interest. Even if representatives or senators are not engaged in insider trading, and are not influenced by their investments in sponsoring bills or casting votes, their ownership of securities affected by legislation creates an appearance of corruption.
Instilling public confidence in Congress requires lawmakers to impose upon themselves rules of ethical behavior—and that includes a rule prohibiting ownership of publicly traded securities while in office.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Donna M. Nagy is the C. Ben Dutton Professor of Business Law at Indiana University Maurer School of Law. She testified in Senate and House committee hearings on the STOCK Act and has written extensively about congressional securities trading and financial conflicts of interest.
Richard W. Painter is the S. Walter Richey Professor of Corporate Law at the University of Minnesota Law School and was the chief White House ethics lawyer for President George W. Bush.